Lead arranger reputation and the structure of loan syndicates

This study explores the effects of information asymmetry and arranger reputations on syndicated loan structures. The moral hazard problem arising from information asymmetries between borrower and syndicate can be overcome only by the most reputable arrangers. Both moral hazard and adverse selection problems appear when arrangers have an information advantage over other syndicate participants. However, the adverse selection problem arises only when low-reputation arrangers lend to opaque borrowers

Clustered pricing in the corporate loan market: Theory and empirical evidence

Existing theories explaining security price clustering as well as clustering in the retail deposit and mortgage markets are incompatible with the clustering in the corporate loan market. We develop a new theoretical model that the attitude of the lender toward the uncertainty about the quality of the borrower leads to the clustering of spreads. Our empirical results support our theoretical model and we find that clustering increases with the degree of uncertainty between the lender and the borrower. In contrast, clustering is less likely when the uncertainty about the quality of the borrower has been reduced through repeated access and through prior interactions of the lender and the borrower

Business and financial cycles in the Eurozone: synchronization or decoupling

This paper proposes a novel approach, based on probit framework, towards measuring business cycle synchronization for 9 eurozone economies. We find strong cross-country synchronization in both business cycles and financial cycles. Moreover, financial synchronization dominates business cycle synchronization in the eurozone, especially after the introduction of the single currency. For some peripheral country pairs, we even find some evidence of "de-coupling" business cycles relative to the core countries but the majority of marginal business cycle effects do not change much over time. The former observation supports the often heard plea for more Europe-wide macro-prudential regulation whereas the latter observation gives ammunition to those economists that always stressed that the euro zone architecture is unfinished business and that the conditions for an optimum currency area are not fulfilled. JEL Classification: C25, E32, F4

“Risky” monetary aggregates for the UK and US

We extend the scope of monetary aggregation beyond capital certain assets that make up central bank data sets and identify groups of assets that form monetary aggregates composed of both capital certain and risky, capital uncertain, assets. We construct monetary aggregates for the US and UK using a superlative index and relax a key assumption of the Consumption Capital Asset Pricing Model (CCAPM), a one year planning horizon, by using forecasted returns on risky assets. Our new risky monetary aggregates perform well in VAR tests. We recommended exploring risky assets as providers of liquidity services in future research on this topic

Scotland as an optimal currency area

The June 2016 UK referendum on continued EU membership where the people of Scotland voted to remain, while the rest of the United Kingdom voted to leave, once again makes the issue of whether Scotland is an optimal currency area very topical. England voted strongly to leave Europe while Scotland backed remain by 62% to 38%. The Scottish government published its draft bill on a second independence referendum in October 2016. The move does not mean another referendum will definitely be held, but this does raise the possibility that Scotland might choose independence and staying in the EU without the rest of the United Kingdom. If Scotland charts a course of independence from the rest of the United Kingdom, then they would likely either issue their own currency or join or form another currency area. In this paper, we test the microeconomic foundations of a common currency area for Scotland, United Kingdom, and the rest of the United Kingdom without Scotland. We find that the United Kingdom, Scotland, and the United Kingdom without Scotland all meet the microeconomic criteria for a common currency area. In contrast, banking data suggest that lending in Scotland is different from lending in the rest of the United Kingdom, adding some doubt to the issue of whether or not Scotland is a common currency area with the United Kingdom.</p

Do stock markets play a role in determining COVID-19 economic stimulus? A cross-country analysis

This paper makes an innovative contribution to the extant literature by analysing the determinants of economic stimulus packages implemented by governments in response to the COVID-19 pandemic. In particular, we explore whether stock market declines observed in many countries can predict the size of COVID-19 stimulus packages. Moreover, we explore whether a country's level of income can augment the underlying relationship between stock market declines and stimulus packages. The findings reveal that a larger stock market decline results in a larger stimulus package; however, this effect is only observed in countries that have an income level greater than the mean and/or median per capita gross domestic product (GDP). Moreover, our results show that monetary policy is more responsive to a stock market decline than fiscal policy. Thus, our results underscore the importance of international donor agencies such as the World Bank and International Monetary Fund (IMF) in supporting less affluent countries in coping with the adverse impacts of the COVID-19 pandemic on their economies

Tail risk, systemic risk and spillover risk of crude oil and precious metals

The relationship between oil prices and metal prices has been extensively investigated. However, the tail risk, systemic risk and spillover risk of oil prices have not been investigated via extreme value theory (EVT). We use this novel approach to determine the tail risk of oil, precious metals, how much risk they pose to the financial system and to what extent a shock in oil prices spill over to other precious metals as well as from the financial system. We use long time series of daily data from 1st January 1987 to 31st December 2021 as long time series is required for the EVT. The data is based on the total return index (RI) of four precious metals including gold, platinum, palladium and silver. Our results show that the tail risk of these metals is lower during the crisis period except the Covid-19 pandemic crisis. Most importantly, gold is a safer asset due to the lowest tail risk among four precious metals, indicating the claim that gold is a precious asset to mitigate the returns during market downturns and acts as a ‘safe haven’. Moreover, we also find that extreme systemic risk (tail-β) for crude oil and selected precious metals reduces during crisis period. This is also recognising the fact that these commodities act as a prospective asset for portfolio diversification to hedge against financial assets' volatility. Finally, the spillover risk among crude oil and selected precious metals varies over time, especially during the crisis period and crude oil is an important stimulator of the spillover risk for precious metals. By using our findings, financial market investors can improve their investment planning to attain the maximum advantage of portfolio diversification. Financial managers can further apply these results in forecasting to estimate future global oil market trends for improving their hedging skills and portfolio performance

Risk modelling of ESG (environmental, social, and governance), healthcare, and financial sectors

Climate change poses enormous ecological, socio-economic, health, and financial challenges. A novel extreme value theory is employed in this study to model the risk to environmental, social, and governance (ESG), healthcare, and financial sectors and assess their downside risk, extreme systemic risk, and extreme spillover risk. We use a rich set of global daily data of exchange-traded funds (ETFs) from 1 July 1999 to 30 June 2022 in the case of healthcare and financial sectors and from 1 July 2007 to 30 June 2022 in the case of ESG sector. We find that the financial sector is the riskiest when we consider the tail index, tail quantile, and tail expected shortfall. However, the ESG sector exhibits the highest tail risk in the extreme environment when we consider a shock in the form of an ETF drop of 25% or 50%. The ESG sector poses the highest extreme systemic risk when a shock comes from China. Finally, we find that ESG and healthcare sectors have lower extreme spillover risk (contagion risk) compared to the financial sector. Our study seeks to provide valuable insights for developing sustainable economic, business, and financial strategies. To achieve this, we conduct a comprehensive risk assessment of the ESG, healthcare, and financial sectors, employing an innovative approach to risk modelling in response to ecological challenges

Cultural differences and the structure of loan syndicates

Do cultural differences between lender and borrower affect the structure of the loan syndicate? Analyzing 8031 syndicated loans to US borrowers signed between 1986 and 2007, we find that lending shares are higher for foreign arrangers than domestic arrangers. Among foreign arrangers, lending shares further increase with cultural distance. We interpret this as a result of an increased moral hazard problem driven by higher information and effort costs faced by foreign arrangers. However, previous interactions between borrowers and arrangers can reduce moral hazard, hence culturally distant arrangers are able to form diffused syndicates

Tail risk and systemic risk of US and Eurozone financial institutions in the wake of the global financial crisis

We evaluate multiple market-based measures for US and eurozone individual bank tail risk and bank systemic risk. We apply statistical extreme value analysis to the tails of bank equity capital losses to estimate the likelihood of individual institutions' financial distress as well as individual banks' exposure to each other (“spillover risk”) and to global shocks (“extreme” systematic risk). The estimation procedure presupposes that bank equity returns are “heavy tailed” and “tail dependent” as identifying assumption. Using both US and eurozone banks allows one to make a cross-Atlantic comparison of tail risks and systemic stability. We also assess to what extent magnitudes of tail risk and systemic risk have been altered by the global financial crisis. The results suggest that both tail risk and systemic risk in the US are higher than in the eurozone regardless of the considered sample period