Counter-cyclical Strategy Research Articles

THE IMPACT MODEL OF INTEREST RATE LIBERALIZATION REFORM ON THE PROFITABILITY OF STATE-OWNED COMMERCIAL BANKS: A CASE STUDY OF BANK C OF CHINA

This paper explores the definition and development of interest rate marketization in China and its impact on the profitability of state-owned commercial banks. The reform, characterized by the People's Bank of China's gradual easing of interest rate controls and expansion of the benchmark interest rate's floating range, enhanced financial market flexibility and efficiency but challenged traditional banking profit models based on interest margins. Through qualitative case studies and thematic analysis of the Bank C (China), the study finds that Bank C effectively mitigated these challenges by optimizing asset-liability management, adjusting asset and liability structures, and employing proactive risk management. These measures improved its investment returns and profitability. Additionally, Bank C’s adoption of countercyclical strategies and advancements in digital transformation and process automation helped sustain its profit model. The research concludes that Bank C's strategic adjustments enhanced its profitability and competitive edge, offering insights for other banks in similar market conditions and aiding predictions of financial market trends.

Braking before the curve and accelerating inside? Exploration, countercyclical behavior, and SMEs’ resilience during economic downturns

Some studies have provided empirical evidence that firms’ high growth rates just before economic crises are negatively associated with resilience. Other authors have observed that firms that grow fast in the early phases of an external crisis are generally more resilient. This countercyclical behavior is less common in small- and medium-sized enterprises (SMEs), and literature has not delved into the underlying factors that facilitate SMEs’ countercyclical strategies. Firm exploration is defined as a firm’s willingness to experiment, take risks, be flexible, and accept variation. Our thesis is that exploration acts as a countercyclical factor by slowing down a firm’s growth before the external shock takes effect, favoring growth during the crisis, and providing better resilience outcomes. We find support for our hypotheses from a sample of 2,081 manufacturing medium-sized enterprises.Jel Classification: M10 GENERAL

Estratégias procíclicas e anticíclicas no desempenho de MPMes em contexto de crise: Um estudo a partir da pandemia do COVID-19

Objective: To investigate the impact of procyclical and countercyclical strategies on the performance of MSMEs in the context of the Covid-19 crisis. Methodology/approach: Quantitative sample, with 118 micro, small, and medium-sized companies in Minas Gerais, Brazil. Spearman's correlation analysis and multiple linear regression analysis were used. Main Results: In the period dominated by the pandemic (2020/2021), countercyclical strategies performed better than procyclical strategies. Theoretical/methodological contributions: Although the literature explores procyclical strategies, studies that associate the influence of procyclical and countercyclical strategies with organizational performance still need to be made available. This gap is even more evident when MSMEs in crisis contexts are considered. By associating still new dimensions, such as HR, marketing, and production, among others, this article helps to fill gaps associated with, even today, a lack of work that seeks integrated models capable of better understanding the impact that crises, such as COVID-19. Relevance/Originality: The article innovates by associating, in the context of the literature on the crisis, the two types of strategies (countercyclical and procyclical) in the elaboration and testing of an integrated analytical model composed of different variables, and capable of being used not only in new research as well as in the business context. Social/management contributions: By demonstrating that cuts in investments in marketing and other areas produce adverse effects on performance and that organizations benefit by keeping employees instead of firing them, this study sheds light on the relevance of countercyclical strategies, which still need to be explored.

Greek Banking Sector Stock Reaction to ECB’s Monetary Policy Interventions

Reacting to extreme uncertainty conditions caused by the global financial crisis, the European Central Bank implemented countercyclical strategy, combining conventional and non-traditional monetary policy tools to stabilize financial markets and euro area economies. We study the impact of the euro area monetary authority policy interventions on equity returns of four systemic Greek banks for the period January 2007 to August 2018. In the first step, we collect and classify interventions to several categories. Then, an event study analysis is carried out to evaluate cumulative abnormal returns. In the second step, a panel regression analysis is performed to identify Cumulative Abnormal Return (CAR) determinants. Our results suggest that expansionary conventional monetary policy interventions significantly affect equity returns of Greek banking institutions, assisting the regional banking equity stability. On the other hand, the harmful consequences of Greek debt crisis limited the effectiveness of non-standard measures.

The Anomaly of Leading Indicator

The counter cyclical strategy used to deal with the Covid-19 pandemic is through fiscal policy, government expenditure by refocusing on the health sector and economic recovery. This policy is not only carried out in Indonesia but in other affected countries. In general, government expenditure has made positive impact on GDP, but during the COVID-19 pandemic this affect became negative. Using data from 137 countries, government health expenditure has a negative impact on GDP. If government expenditure policies continue to focus on health care, it will have an impact on other sectors, ultimately negative economic growth. In addition to refocusing on health expenditure, there are also assistance programs for affected communities. Higher aid should affect the GDP, but there is no difference in GDP growth between the two groups of countries based on the percentage of income support. Government expenditure policies in each country certainly aim to maintain the stability of the country, but the policy objectives should be allocated not only curatively but also preventively by taking into account the long-term impact post covid-19 Era.

Tracking market and non-traditional sources of risks in procyclical and countercyclical hedge fund strategies under extreme scenarios: a nonlinear VAR approach

The subprime crisis was quite damaging for hedge funds. Using the local projection method (Jordà 2004, 2005, 2009), we forecast the dynamic responses of the betas of hedge fund strategies to macroeconomic and financial shocks—especially volatility and illiquidity shocks—over the subprime crisis in order to investigate their market timing activities. In a robustness check, using TVAR (Balke 2000), we simulate the reaction of hedge fund strategies’ betas in extreme scenarios allowing moderate and strong adverse shocks. Our results show that the behavior of hedge fund strategies regarding the monitoring of systematic risk is highly nonlinear in extreme scenarios—especially during the subprime crisis. We find that countercyclical strategies have an investment technology which differs from procyclical ones. During crises, the former seek to capture non-traditional risk premia by deliberately increasing their systematic risk while the later focus more on minimizing risk. Our results suggest that the hedge fund strategies’ betas respond more to illiquidity uncertainty than to illiquidity risk during crises. We find that illiquidity and VIX shocks are the major drivers of systemic risk in the hedge fund industry.

The wisdom and madness of crowds: How information networks and board cognition help or hinder firm performance across the business cycle

We know little of why a minority of firms pursue counter-cyclical strategies and consequently outperform competitors during recessions. Based on the theory of institutional isomorphism, we hypothesize that these firms avoid the mimetic and normative pressures that promote strategic convergence during uncertainty. We demonstrate these effects at the board-level in a sample of 1,615 U.S. firms. Mimetic processes are evident, with firms' connectedness in board interlock networks attenuating profitability and decreasing firm value during recessions—a reversal of the positive effects during expansions. Normative pressures arise from homogeneity in directors’ educational and professional experience, with greater consequences for long-term performance. Overall, recessionary performance is improved when firms occupy relatively isolated positions in informational networks and appoint directors from a range of backgrounds.

Rethinking Countercyclical Financial Regulation

The 2008 financial crisis exposed a longstanding problem in financial regulation: traditional regulatory strategies tend to be procyclical. That is, regulatory tools—most notably, bank capital requirements—incentivize excessive credit growth during economic expansions and insufficient lending during contractions. The procyclicality of U.S. financial regulation was a key driver of the housing bubble in the mid-2000s and the massive credit crunch that followed. To combat this phenomenon, Congress and the federal banking agencies attempted to mitigate procyclical boom-and-bust cycles by implementing regulatory approaches that were explicitly countercyclical. The Dodd-Frank Act and related post-crisis reforms included several countercyclical features that were designed to become stricter during periods of economic growth and more lenient during contractions, with the goal of smoothing economic cycles. Less than a decade later, however, these countercyclical tools failed to prevent unprecedented financial stress during the COVID-19 recession. This Article is the first legal scholarship to revisit the design of countercyclical rules in light of the COVID-19 pandemic. It reveals weaknesses in Dodd-Frank’s countercyclical approach and the significant costs of failing to implement an effective countercyclical strategy. The Article also establishes a blueprint for strengthening the United States’ countercyclical framework going forward. The Article identifies three principles—automaticity, portfolio strategy, and market-wide coverage—that should guide countercyclical policymaking. It then applies these principles to five specific areas in which financial regulators should bolster countercyclical oversight: bank capital requirements, accounting standards, securitization rules, early remediation guidelines, and margin requirements. Taken together, these reforms are critical to making countercyclical financial regulation work and creating a more stable and prosperous financial system.

Partisan politics and fiscal policy in the Canadian provinces

AbstractThis article evaluates the impact of partisanship on provincial fiscal policies over business‐ and electoral‐cycles between 1981 and 2016. There were partisan differences between left‐wing governments (the New Democratic Party and the Parti Québécois), on the one hand, and conservative ones, on the other. The evidence is particularly strong for business‐cycles, where left‐wing parties pursued much more countercyclical strategies than conservatives. In contrast, there was little difference between most Liberal administrations and conservative ones. Left‐wing fiscal policies nevertheless lost their distinctiveness during the last third of the study period. The article concludes by discussing possible explanations for this change.

Entry‐Timing Advantages in Renewable Natural Resources Industries

AbstractIn this paper, we explore the conditions of entry‐timing advantages in renewable natural resource industries. Drawing from behavioural theory of the firm, we classify firms in two groups depending on the different heuristics used to make entry decisions when facing the cyclical endogenous nature of these industries: crowd firms are procyclical, making decisions based on the current phase of the industry cycle, whereas anti‐crowd firms follow a countercyclical strategy, making uncertain, and risky decisions by estimation of the next phase of the cycle. Therefore, anti‐crowd firms anticipate the deployment of resources each cycle, potentially gaining entry‐timing advantages beyond those provided by traditional competitive isolating mechanisms. Through a mathematical simulation of a performance feedback model, we reveal that the entry‐timing advantage of the anti‐crowd group becomes possible when the rivalry in the industry and the price sensitivity of competitors are high, and when the time required to deploy the resources is short.

Polycyclic Portfolio Rebalancing via an Economy's Relative Information Processing Ratio

Procyclical assets tend to rise in value when the economy is expanding and fall with the advent of a recession. Countercyclical assets are instead negatively correlated with the state of the economy. Despite the use of optimization methods, hedging, and ad hoc rebalancing techniques most portfolios are procyclical in behavior and tend to lose value as the economy slows and equity markets fall. In this paper, a new portfolio rebalancing technique is introduced which has the potential to favorably and systematically pivot a portfolio between pro and counter cyclical strategies before regime changes in the economy. This “polycyclic” approach offers potential portfolio returns well above those of traditional methods. This technique can be implemented independently or in conjunction with other portfolio optimization methods.

Public Investment in R&D in Reaction to Economic Crises - A Longitudinal Study for OECD Countries

The paper investigates the reaction of public R&D spending on economic crises. We are interested in two counteracting motives: On the one hand, public R&D spending can be seen as a means to fight the crisis, and governments may decide to increase their R&D budgets. On the other hand, a crisis reduces public income and urges governments to cut spending, which may negatively affect public R&D budgets. Using panel data from 26 OECD countries over the period 1995 to 2015, we investigate how public R&D expenditure changes over the business cycle for different types of government R&D expenditure. On average, we find evidence for a strong pro-cyclical effect on public R&D investments. But country heterogeneity matters. Whereas European innovation leaders and non-EU countries pursue a counter-cyclical strategy, innovation followers and moderate innovators behave pro-cyclical. This leads to an increasing innovation gap in Europe. Short-run and long-run financing conditions (budget surplus and government debt levels) also significantly affect public R&D spending. However, there is no evidence that economic crises systematically affect the composition of public R&D spending along different thematic areas or by beneficiaries.

THE BEHAVIOR OF FISCAL POLICY IN INDONESIA IN RESPONSE TO ECONOMIC CYCLES

The current general wisdom regarding fiscal policy in response to fluctuations in economic cycles is to adopt countercyclical strategies: contractive during a boom to avoid overheating the economy and expansive during a recession to stimulate economic activity. This paper attempts to investigate the practical behavior of fiscal policy in Indonesia in response to economic cycles to establish whether it follows general fiscal wisdom (countercyclical) or amplifies the cycle (procyclical). An error correction model (ECM) and an alternative model to deal with the possible endogeneity problem are utilized. This paper shows that fiscal policy in Indonesia tends to be procyclical. Observations of some other ASEAN countries, namely Malaysia, the Philippines, Singapore and Thailand, indicate that Singapore could be the only country in ASEAN that is able to implement a countercyclical fiscal policy.

Positive Alpha and Negative Beta (A Strategy for Counteracting Systematic Risk)

Undiversifiable (or systematic risk) has long been an enemy of investors. Many countercyclical strategies have been developed to counter this. However, like all insurance types, these strategies are generally costly to implement, and over time can significantly reduce portfolio returns in long and extended bull markets. In this paper, we discuss an alternative technique, founded on the premise of physiological bias and risk-aversion. We take a behavioral discussion in order to contextualize the insurance like characteristics of option pricing and discuss how this can lead to a mispricing of the asymmetric relationship between the VIX and the S&P 500. To test this, we perform studies in which we find statistical inefficiencies, thereby making it possible to implement a method of hedging index option premium in a way that has displayed no monthly drawdowns in bullish periods, while still providing large returns in major sell-offs. The three versions of the strategy discussed have negative betas to the S&P 500, while exhibiting similar risk-adjusted excess returns over both bull and bear markets. Further, the performance generated over the entire period, for all three strategies, is highly statistically significant. The results challenge the weak form of the Efficient Market Hypothesis and provide evidence that the methods of hedging could be a valuable addition to an equity rich portfolio for the purpose of counteracting systematic risk.

STRATEGIES FOR SUPERIOR PERFORMANCE IN RECESSIONS: PRO OR COUNTER-CYCLICAL?

Recessions are recurring events in which most firms suffer severe impacts while others are less affected or may even prosper. Strategic management has made little progress in understanding such performance differences. In a scenario of decreased demand, intensified competition, and higher uncertainty, most firms try to survive by pro-cyclically cutting costs and investments. But firms could take advantage of undervalued resources in the market to counter-cyclically invest in new business opportunities to overtake competitors. We survey Brazilian firms in various industries about the 2008-2009 recession and analyze data using PLS-SEM. We find that while most firms pro-cyclically reduce costs and investments in recessions, a counter-cyclical strategy of investing in opportunities created by changes in the market enables superior performance. Most successful are firms with a propensity to recognize opportunities, an entrepreneurial orientation to invest, and the flexibility to efficiently implement investments.

State budget periodicity and general expenditure volatility: an empirical analysis

This article aims to examine empirically the relationship between budget periodicity and expenditure volatility in state governments. Using a large panel dataset for fifty states over the years 1960-2012, after controlling for institutional, economic, and political factors, we find general expenditure of biennial states has been significantly less volatile than that of annual states. The finding suggests that a choice between annual and biennial budget period can emerge as a feasible and effective countercyclical strategy to overcome fiscal difficulties in the short run and promote fiscal stability in the long run.

Vulgarisation of Keynesianism in China's response to the global financial crisis

ABSTRACTWhen Keynesianism received renewed interest in the global financial crisis, some economists regarded China’s response as exemplary of effective Keynesian counter-cyclical strategy or even a non-crisis development strategy. At the same time, there have been critical voices against China’s Keynesian measures. This article therefore asks: To what extent was China’s response to the global financial crisis Keynesian? What factors determined the Chinese characteristics of Keynesian policy both in design and in implementation? It points out that China did follow a Keynesian formula in its crisis response, boosted infrastructure construction, GDP growth and created some employment. However, Chinese Keynesianism is a vulgarised version that is merged with its developmental state model. It simply boasted a big state and massive deficit spending, and socialised investment without really benefiting consumers or the private sector. This article also provides an analysis of how ideational and institutional politics in China vulgarised Keynesianism and exacerbated socio-economic problems. Ideational politics included the dominance of Keynesian discourse at the beginning of the crisis and an obsession with short-term results. Institutional factors included ‘firework’ local government politics, the state being captured by state-owned enterprises and a concentration of central distributive power without proper monitoring over implementation.

"Within Recession Strategy, Entrepreneurial Strategy Making, and Performance"

Under the umbrella of resource orchestration theory, this article examines the synergistic effects of countercyclical and procyclical strategies during a recession and entrepreneurial orientation (EO) in a growth industry. By combining survey data with archival measures of software SMEs, I find that countercyclical strategies intended to expand the firm’s resources and capabilities lead to higher performance, while prerecession EO had no linear or curvilinear effects. However, different curvilinear effects are observed for EO’s various dimensions, which are moderated by the firm’s within recession strategy. This highlights the joint importance of the firm’s strategic posture and within recession strategy.

Dynamic Portfolio Choice

The foundation for a long-term investment strategy is rebalancing to fixed asset class positions, which are determined in a one-period portfolio choice problem where the asset weights reflect the investor’s attitude toward risk. Rebalancing is a counter-cyclical strategy that has worked well even during the Great Depression in the 1930s and during the Lost Decade of the 2000s. Rebalancing goes against investors' behavioral tendencies and is also a short volatility strategy. When there are liabilities and asset returns vary over time, the long-term investor’s optimal portfolio consists of (i) a liability-hedging portfolio, (ii) a market (or myopic demand) portfolio that reflects optimal short-run asset positions, and (iii) an opportunistic (or long-term hedging demand) portfolio that allows a long-run investor to take advantage of changing investment returns.

AFRICAN DEVELOPMENT BANK: Counter‐Cyclical Strategies

Africa Research Bulletin: Economic, Financial and Technical SeriesVolume 46, Issue 6 p. 18310C-18312B AFRICAN DEVELOPMENT BANK: Counter-Cyclical Strategies First published: 30 July 2009 https://doi.org/10.1111/j.1467-6346.2009.02428.xRead the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Volume46, Issue6August 2009Pages 18310C-18312B RelatedInformation