Basis Point Increase Research Articles

Deposit Competition and Mortgage Securitization

AbstractWe study how deposit competition affects a bank's decision to securitize mortgages. Exploiting the state‐specific removal of deposit market caps across the U.S. as a source of competition, we find a 7.1 percentage point increase in the probability that banks securitize mortgage loans. This result is driven by an 11 basis point increase in deposit costs and corresponding reductions in banks' deposit holdings. Our results are strongest among banks that rely more on deposit funding. These findings highlight a hitherto undocumented and unintended regulatory cause that motivates banks to adopt the originate‐to‐distribute model.

Trading ahead of treasury auctions

I develop and test a model that explains the gradual price decline observed ahead of anticipated sales such as Treasury auctions. Risk-averse agents expect a noisy increase in the net supply of a risky asset. They face a trade-off between hedging the noise with long positions and speculating with short positions. As a result of hedging, the price is above the expected price. As the noise decreases, agents hedge less and speculate more, and the price falls. Consistent with these predictions, meetings between the Treasury and dealers and auction announcements explain a 2.4 basis point increase in the yield on Italian Treasuries.

Estimating the Effects of Monetary Policy in Australia Using Sign‐restricted Structural Vector Autoregressions*

I estimate the effects of Australian monetary policy using a structural vector autoregression identified using a variety of sign restrictions and a prior‐robust approach to Bayesian inference. Some identifying restrictions are not particularly informative. However, combining the restrictions allows us to draw useful inferences. The estimates suggest that an increase in the cash rate lowers output and consumer prices at horizons beyond a year or so. The results are consistent with the output response to a 100 basis point increase in the cash rate lying towards the upper end of the range of existing estimates.

Monetary policy transmission in India under the base rate and MCLR regimes: a comparative study

The paper estimates the degree of pass-through of monetary policy to bank lending rates under both the base rate and the marginal cost of funds-based lending rate (MCLR) regimes using dynamic panel data regression. Using nine different models for nine individual bank-specific variables, the study estimates that a 100 basis point increase in the policy rate leads to an increase in the weighted average lending rate on fresh rupee loans sanctioned by banks over the long run by 26–47 basis point-depending on the model specification- during the MCLR regime as against 11–19 basis point during the base rate regime. Hence, irrespective of the model chosen, transmission is higher during the MCLR regime than base rate regime. The alignment of liquidity management with the monetary policy stance, the introduction of the flexible inflation targeting (FIT) framework and the deceleration in economic activity reducing credit demand could be contributory factors for better transmission during the MCLR regime.

Are environmental lawsuits related to the cost of bank loans?

PurposeConsidering the importance of environmental lawsuits in the capital market specifically and society more generally, the authors examine whether environmental lawsuits are related to the cost of bank loans for the first time.Design/methodology/approachThis study uses a US sample of 7,684 loans from 1,409 individual borrowing firms over the 1995–2015 period. The hypothesis is tested using lagged data from the year before the start of a bank loan, and firm fixed effects panel regression analysis is applied to control for correlated omitted variable bias. To further address endogeneity concerns, the authors use a difference in differences analysis that exploits the Deepwater Horizon oil spill on April 20, 2010, to establish causality. Finally, the authors use the entropy balancing method as an additional endogeneity check.FindingsThe authors find a positive relationship between environmental lawsuits and firms' bank loan costs. The results are economically significant. In particular, a one standard deviation increase in environmental lawsuits is related to a 2.07 basis point increase in bank loan costs. The results are robust to various endogeneity checks. Cross-sectional analyses indicate that a poor information environment, weak corporate governance, and low corporate social responsibility (CSR) levels strengthen the positive relationship between environmental lawsuits and bank loan costs. Finally, additional analyses show that environmental lawsuits are significantly negatively related to the loan amount and maturity contract provisions.Originality/valueThe authors provide new empirical evidence that increasing understanding of the economic consequences of environmental lawsuits on bank loan costs.

Capitalisation rates for commercial real estate investments: evidence from Australia

PurposeThe paper is motivated by the paucity of empirical research on the determinants of capitalisation rates/yield in the commercial property market. Compared to property price determinants, the capitalisation rate has received significantly less attention. This is somewhat surprising given that the capitalisation rate is a more insightful indicator for investors on commercial property market performance than merely price changes or trends. The capitalisation rate, measured as the ratio of net operating income to the property’s capital value, captures the asset’s overall ability to generate income which is crucial for investors who typically invest in property for their income-generating capacity. The purpose of this paper is to address these issues.Design/methodology/approachTo evaluate the determinants of capitalisation rates, time series analysis was used. The data capture performance in the Australian commercial property market between 2005 and 2018. All macroeconomic and financial data are freely available from official sources such as the Australian Bureau of Statistics and the nation’s central bank. Methodology wise, given the problematic nature of the data such as a mixed order of integration and the possibility of cointegration amongst some of the I (1) variables, the autoregressive distributed lag model was selected given its flexibility and relative lack of assumptions.FindingsBond rates, market risk premiums, stock market excess returns and other macroeconomic variables were found to drive capitalisation rates of Australian commercial properties. A 1% increase in the bond rate results in approximately 0.3–2.4% increase in capitalisation rates depending on the sub-market. Further, a 1% increase in excess market returns results in a 0.01–0.02% increase in capitalisation rates. Regarding risk premiums, a 100 basis point increase in the BBB spread results in approximately 0.92–1.27% reduction in cap rates in certain markets.Practical implicationsAsset managers will find these results useful in asset allocation strategies. Commercial properties offer attractive investment qualities such as yield stability in periods of economic uncertainty while allowing for the possibility of capital growth through appreciation of the underlying asset. By understanding the factors that affect the capitalisation rate, practitioners may predict emerging trends and identify threats to portfolio return and stability. This allows better integration of commercial property in the construction of portfolios that remain robust in a variety of market conditions.Originality/valueThe contribution to literature is significant given the lack of similar studies in the Australian market. The performance of real estate assets using cap rates as a comparative measure to equities and bonds influences decisions in asset allocation strategies. It provides crucial information for investors to estimate the performance of commercial property. This research supports the notion that both space and capital market indicators jointly affect capitalisation rates. The findings expand the knowledge base relating to commercial properties and validate the assessments of investors, developers and valuers who utilise yield as a performance benchmark for asset allocation strategies.

The origin of LYONs: A case study in financial innovation

The origin of LYONs: A case study in financial innovation

How sensitive is the economy to large interest rate increases? Evidence from the taper tantrum

The “taper tantrum” of 2013 represents one of the largest monetary policy shocks since the 1980s. During this episode, long-term interest rates spiked 100 basis points—a move unintentionally induced by policymakers. However, this had no observable negative effect on the overall U.S. economy. Output, employment, and other important variables, all performed either in line with or better than consensus forecasts, often improving considerably relative to their earlier trends. We conclude that, from low levels, a 100 basis point increase in long-term interest rates is probably too small to affect overall economic activity and discuss the implications for monetary policy.

Aging and public financing costs: Evidence from U.S. municipal bond markets

We examine the impact of population aging on municipal access to credit. A one standard deviation increase in a state’s population age leads to a 23 basis point increase in municipal bond issue spread. Three mechanisms drive this effect: income tax revenue, healthcare spending, and pension liabilities. Constitutional pension protections and securities with lower credit quality or longer maturity exacerbate the effect. To control for endogenous migration and mortality patterns, we exploit variation from historical state fertility trends. Our findings highlight the challenges municipalities face to cope with systemic demographic transition.

Bank Lending Channel of Monetary Policy: Dynamic Panel Data Evidence from Sierra Leone

The purpose of this study is to investigate the presence of a bank lending channel of monetary policy in the Sierra Leone. This study uses a dynamic panel data method namely generalized method of moments (GMM) procedure, employing quarterly bank-level data spanning the period 2014-2018, to empirically investigate whether or not changes in the monetary policy in Sierra Leone influence bank lending behaviour, i.e., existence of a bank lending channel. It also examines the extent to which bank-level characteristics-size, liquidity and capital-affect the effectiveness of the monetary policy. Our result revealed that the monetary policy rate significantly and negatively influences banks’ loan supply. Specifically, a 100 basis point increase in the monetary policy rate leads to a 0.43 percent decrease in loan supply to the economy. This lends support for the existence of the bank lending channel of monetary policy transmission in Sierra Leone and that banks do play a role in Sierra Leone’s monetary transmission mechanism. In addition, the interaction term between monetary policy variable and size has the positive sign and is statistically significant. The positive sign of the interaction term with size is consistent with the theoretical explanation of the bank lending channel, which assumes that lending volumes of larger banks are less sensitive to monetary policy conditions than that for smaller banks. Furthermore, commercial banks’ loan supply in Sierra Leone is also explained by past loan supply, economic activity (Real GDP) and inflation. However, we find that liquidity and bank capital do not influence banks’ loan supply. The statistical insignificance of the interaction term with capital and liquidity suggests that bank capital and liquidity are not a source of asymmetric response of banks to monetary policy stance. The main policy implications that can be gleaned from this study are that, in assessing the stance of the monetary policy, beside the Monetary policy rate, it is important for the Central Bank to monitor the micro-dynamics of individual bank characteristics, as it relates to size, in order to enhance the efficacy of monetary policy impact on the real sector in Sierra Leone.

Risk and The Market’s Reaction to M&A Announcements

We estimate how an acquiring firm’s risk changes depending on whether the market initially judges the acquisition to be neutral, strongly negative, or strongly positive for the shareholders of the acquiring firm. We find that for an average neutral acquisition, the annualized standard deviation of an acquiring firm’s total return declines by 5%. In contrast, acquisitions judged negatively by the market result in a 5% increase in total risk, while acquisitions judged positively by the market feature a 30 basis point increase in total risk. We find the median acquisition to be value creating, not value destructive. Value destruction tends to be concentrated among large firms, and to be associated with extreme negative outliers. Acquiring firms with longholder CEOs are more prone to undertake acquisitions, and more prone to take on risk, but are less prone to engage in value destructive acquisitions than acquiring firms with non-longholder CEOs. In this respect, acquiring firms with non-longholder CEOs are more apt to undertake risky bad acquisitions, especially when their prior returns lie above the industry average. In addition, acquiring firms with non-longholder CEOs are less prone to take on good acquisitions that are high in risk. As a general matter, firms with longholder CEOs are less risk-sensitive to changes in prior returns than firms with non-longholder CEOs.

Partisan conflict and corporate credit spreads

I document a positive relationship between partisan conflict and corporate credit spreads. A one standard deviation increase in partisan conflict is associated with a 2.61 basis point increase in the next one-month corporate credit spreads after controlling for bond issue information, firm characteristics, macroeconomic variables, uncertainty measures, and sentiment measures. The result holds when using instrumental variable to resolve endogeneity concerns. I further find that partisan conflict has a greater impact on corporate credit spreads for firms that actively engaged in political activities. Intensified partisan conflict affects excess bond premium and influences credit spreads primarily via discount rates.

How economic policy uncertainty affects the cost of raising equity capital: Evidence from seasoned equity offerings

Economic policy uncertainty (EPU) increases the cost of raising equity capital, especially when the economy is weak. A one standard deviation increase in the EPU index developed by Baker, Bloom, and Davis (2016) is associated with a 43 basis point increase in the price discount of seasoned equity offerings (SEOs) during the 2000−2014 period. The cross-sectional analysis shows that the EPU effect on SEO discounts is stronger for firms with greater dependence on government spending, less informative stock price, or a smaller EPU beta. Moreover, there are fewer SEO activities in periods when there is a high degree of policy uncertainty.

U.S. monetary policy and income inequality in small open economies

We examine the impact of changes in U.S. monetary policy stance on income inequality of open economies. Using a Heterogeneous Agents New Keynesian model with price and wage rigidities, we show that in an expansionary (contractionary) monetary shock by Fed increases (decreases) income inequality in open economies. This impact is much higher in inflation targeting regime than in pegged exchange rate regime. We also find that while the impact of U.S monetary shock on inequality in pegged exchange rate regime is critical function of wage rigidity in the economy, it is independent of wage rigidity in inflation targeting economies. Our analysis indicate that in presence of hand to mouth households, an increase in wage flexibility certainly reduces welfare in in a pegged exchange rate economies. Our empirical estimates confirm our model prediction. More precisely, the estimates produce robust evidence that 100 basis point increase in Fed Fund Rate lower income inequality in open economies by nearly 0.15% over two years.

A Non-Random Walk Down Hollywood Boulevard: Celebrity Deaths and Investor Sentiment

Media communication scholars document that the general public exhibits a psychological attachment to celebrities and may emotionally react to their death. In this paper, I take advantage of this insight and I adopt an event study approach to test the impact of exogenous and incidental negative affect (i.e. grief, proxied by the death of Hollywood Walk of Fame celebrities) on people’s willingness to invest in risky assets (proxied by the daily performance of the U.S. stock market). Using a sample of 1,374 celebrity deaths over the period 1926-2009 and controlling for seasonalities, economic/environmental factors, and market liquidity, I find that the death of popular and beloved celebrities is immediately followed by a 16 basis point increase in stock returns, which is consistent with a rise in the net demand for risky instruments. I also find evidence that the size of this celebrity-death effect is increasing in the popularity/media coverage of the celebrity in question, and is larger for stocks that are more affected by investor sentiment. Overall, my findings are consistent with the lab research on the affect management model, which maintains that incidental negative affect promotes risk-prone behavior.

Corporate Balance Sheets and Sovereign Risk Premia

This paper studies sovereign debt pricing in the presence of corporate debt. We find that foreign currency (FC) corporate external debt empirically explains sovereign credit spreads in emerging countries, even after controlling for sovereign debt and global factors. Decomposing sovereign credit spreads into their default premium (default probability) and risk premium components, we find that a 1% increase in FC corporate external debt is associated with a 5 basis point increase in the sovereign risk premium but a small and insignificant change in the sovereign default premium. We incorporate a productive corporate sector and risk-averse foreign lenders into a quantitative sovereign default model. An increase in FC corporate external debt has three effects on tax revenue, and thus sovereign spreads. It increases the mean of tax revenue due to higher investment, increases the variance of tax revenue due to higher exposure to exchange rate risk, and changes the covariance of sovereign defaults and the state of foreign lenders due to the safe currency property of FC. The first two effects counteract each other and help explain the insignificant change in the sovereign default premium, while the third effect results in a higher sovereign risk premium. Corporates do not internalize their effect on sovereign debt pricing, leaving room for policy improvement.

The devil is in the detail? Investors’ mispricing of proxy voting outcomes on M&A deals

AbstractShareholders’ approval rates on M&A deals are informative because they are predictive of the acquirer's post‐merger operating performance. Since the passing of the deal is salient information while the specific approval rate is not, investors may misprice the detailed voting outcome due to their limited attention. We find that post‐merger abnormal stock returns are significantly higher for acquirers receiving higher approval rates: a one percentage point increase in the approval rate is associated with a 48 basis point increase in the market‐adjusted stock return in the year after the merger is completed. Consistent with mispricing, the voting outcome reliably predicts post‐merger earnings announcement returns and analyst forecast errors. What's more, the association between the voting outcome and post‐merger stock returns is stronger when investors’ attention to the voting outcome is distracted by same‐day earnings announcements, when the marginal investor is less likely to be sophisticated, and when investors have greater pre‐merger disagreement. Short sale constraints do not seem to explain our findings. Overall, our results suggest that detailed proxy voting outcomes are neglected by investors.

Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections

We use close elections in parliamentary democracies as natural experiments to estimate public debt levels’ effects on real interest rates. We first estimate that an election in which no party achieves a parliamentary majority causes the debt-to-GDP ratio to increase by 21 percentage points over the following five years relative to an election in which one party barely secures a majority. We next estimate that real interest rates rise by a relative 119 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.6 basis point increase in real rates. That effect is larger than most previous estimates in the literature, suggesting the potential importance of simultaneity in the determination of real rates and government debt levels.

Local Bankruptcy and Geographic Contagion in the Bank Loan Market*

Abstract We examine whether corporate bankruptcies influence bank loan characteristics of geographically proximate firms. Controlling for industry contagion and local economic conditions, firms headquartered near a bankruptcy event experience a 7 basis point increase in loan spreads. The effect is transitory and cannot be fully explained by local correlated information or lenders’ financial health. Instead, the effect is more pronounced for informationally opaque bankruptcies and borrowers, and weakened among loans with relationship lenders and lenders with significant local presence.

Issues in Mutual Fund Soft-Dollar Trades

The purposes of this article are to explain the nature, use, and costs of mutual fund soft-dollar trading, including the legal “safe harbor,” “soft dollars,” “bundled commissions,” trade disclosure, agency conflicts, and empirical trading costs. The safe harbor protects investment managers from liability for a breach of fiduciary duty solely on the basis they paid more than lowest commission rates to receive brokerage and research services. “Soft dollars” are the incremental commissions funds pay for research produced or provided by brokers. The SEC and Congress (as to Section 28(e)) should “unbundle” soft dollar commissions by requiring separation of soft dollars from total trade commissions.Opaque soft dollar commissions and former bundled distribution commissions exacerbate agency conflicts between fund advisers and shareholders. The conflicts include excessive and more costly soft dollar commissions that bring financial benefits to both fund advisers and brokers.Fund advisers are motivated to use soft dollar commissions to increase complexity and to obfuscate research payments. Soft dollar commissions are opaque and have a positive impact on investor inflows, but at the expense of lower fund performance. Expensed research and distribution payments are significantly less detrimental to fund performance, but their greater transparency has a negative impact on investor inflows.With or without unbundling and until prohibition of soft-dollar trades, the SEC should require mutual funds to disclose two sets of information in the statement of additional information (SAI), the shareholder annual report, and for SEC online files: (1) payments to non-soft-dollar brokers for (a) brokerage commissions and (b) trade execution costs (inclusive); (2) payments to soft-dollar brokers for (a) brokerage commissions and (b) trade execution costs (inclusive); and (c) broker soft-dollar payments to fund advisers.Agency conflicted soft-dollar trades may be characterized as higher-cost trades that provide financial benefits both to mutual fund advisers and brokers, and reduce fund assets and shareholder returns.Soft-dollar trades have higher implicit (market impact trade execution costs), and higher explicit (brokerage commissions) and total trade costs than full-service broker trades. The larger difference in implicit trade costs is the major cause of the difference in total trade costs. Explicit costs of soft-dollar broker trades are only one basis point higher than costs of full-service broker trades for both buys (sells), but implicit costs are 29 (24) basis points higher. Total soft-dollar trade costs are 30 (25) basis points higher than costs of full-service broker trades for buys (sells).The average mutual fund pays 27 basis points in brokerage commissions per dollar of assets with an expense ratio of 134 basis points. A one basis point increase in brokerage commissions is associated with a decline of five to six basis points in fund returns. The negative effect of brokerage commissions on fund returns is four times as large as the effect of expense ratios.