GFC Period Research Articles

Dependence risk analysis in energy, agricultural and precious metals commodities: a pair vine copula approach

ABSTRACT We apply pair vine copulas, specifically the C-vine and R-vine copulas, to examine the conditional multivariate dependence pattern/structure and R-vine copula-based value-at-risk (VaR) to assess financial portfolio risk. We examine the co-dependencies of 13 major commodity markets (which include three energy commodities, six agricultural commodities and four precious metals prices) from 2 January 2003 to 19 December 2016. Dividing our sample into three sub-periods, namely pre-GFC, GFC and post-GFC, we find that the dependencies among commodities undergo changes in a complex manner, changing in different financial conditions, and that the Student-t copula appears on the maximum number of occasions, especially during the GFC period, signifying the existence of fatter tails in the distributions of returns. We further show that the co-dependencies computed using R-vine copulas are best suited to compute the portfolio VaR during the considered time period.

Time-varying asymmetric volatility spillover between global markets and China’s A, B and H-shares using EGARCH and DCC-EGARCH models

This paper investigates the volatility spillover and dynamic conditional correlation between three types of China’s shares including A, B and H-shares with 12 major emerging and developed markets from 2002 to 2017 using EGARCH and multivariate DCC-EGARCH models. Both models found that Chinese equities are more related with their neighbouring countries such as Singapore, Japan, Australia and ASEAN-5 than with US, Germany and UK. The EGARCH model, with an auxiliary term added to capture the volatility spillover, found no volatility spillover between A-share markets and other advanced and emerging markets during the GFC and extended-crisis periods while this behaviour is not observed for B-share and H-share markets. However, the multivariate DCC model found strong evidence of contagion effect in both return correlations and volatility spillover for all China’s markets. In addition, both models found increased regional and global integration in A-share and B-share markets but not the H-share market. Finally, the results from both models provide clear evidence of distinct behaviours associated with return and volatility spillover in these three share types, suggesting foreign investors should consider the heterogeneity in volatility spillover and return correlations of these Chinese share types when forming investment strategies.

The global financial crisis and the mutual fund flow–performance relationship

AbstractExisting research shows mutual fund flow is highly correlated with past performance in an asymmetric way, namely flow–performance convexity. Fund managers pursue incentives to manipulate fund characteristics to invoke future fund inflows. Given this body of evidence, how has the global financial crisis impacted on fund volatility and fee structures with respect to the flow–performance relationship? Using data for the period 1999 to 2011 (disaggregated into three sample periods) for US mutual equity funds, empirical analysis in this study shows mutual funds adopt a low‐risk strategy resulting in the greatest flow–performance sensitivity. An incremental dampening effect is observed on flow–performance convexity due to increasing riskiness of portfolios, more significant in the GFC period. In addition, the results indicate that pure operating expense weakens the flow–performance sensitivity, especially in the post‐GFC period. Advertising effects trigger greater investor response to past performance, particularly throughout the GFC. It is also documented that front‐end load is not a statistically significant in determining the flow–performance relationship; nevertheless, back‐end load on average dampens investor response to past performance, and this dampening impact is more evident in the post‐GFC period.

Risk and capital in Indonesian large banks

PurposeThe purpose of this paper is to examine the behavior of banking risk in the emerging economies, particularly Indonesia and contribute to the discussion on the existing policy debate regarding the impact of capital on bank risk.Design/methodology/approachThis study investigates the relationship between bank risk and capital using data on 15 Indonesian large banks between 2008 and 2015, using z-score and Delta-CoVaR to measure both idiosyncratic and systemic risks.FindingsThe empirical investigation suggests that capital has a negative and significant relationship with these risk measures. The authors also find that higher systemic risk encourages banks to increase their capital. However, similar evidence is not found in the idiosyncratic risk models. Finally, the role of capital in reducing risk is considered robust only during the normal periods, as banks may increase their assets risk during times of financial distress.Originality/valueSystemic risk (CoVaR) is used to represent bank risk. This study focuses on the Indonesian banking sector (capture institutional arrangements and regulatory environment). It covers the period of 2008 GFC and post-crisis period.

Returns and volatility of water investments

This study analyzes the stock returns and volatility of the global water industry in different (full, pre-GFC, GFC and post-GFC) periods. The study estimates ARMA (1, 1)-GARCH (1, 1) and EGARCH (1, 1) models on the World Water index (WOWAX), S-Network Global Water Index (S-Net), S&P Global Water Index (S&P), and MSCI ACWI Water Utilities Index (MSCI ACWI), the Asia, Europe, Latin America and US water markets, Pictet Global Water Fund (Pictet), and KBC Eco Water Fund (KBC Eco) for the period 2004–2014. In this study, the EGARCH (1, 1) model results suggest the existence of persistence of volatility from four water indices, four water markets and two water funds in different periods and asymmetric volatility (leverage) for Asia and US, S-Net and Pictet in full, pre-GFC and GFC periods and for WOWAX in GFC and post-GFC periods. The WOWAX is not highly correlated with water markets and water funds, which suggests that it may provide a possible opportunity for portfolio diversification in different periods.

Risk Measurement and Risk Modelling Using Applications of Vine Copulas

This paper features an application of Regular Vine copulas which are a novel and recently developed statistical and mathematical tool which can be applied in the assessment of composite financial risk. Copula-based dependence modelling is a popular tool in financial applications, but is usually applied to pairs of securities. By contrast, Vine copulas provide greater flexibility and permit the modelling of complex dependency patterns using the rich variety of bivariate copulas which may be arranged and analysed in a tree structure to explore multiple dependencies. The paper features the use of Regular Vine copulas in an analysis of the co-dependencies of 10 major European Stock Markets, as represented by individual market indices and the composite STOXX 50 index. The sample runs from 2005 to the end of 2013 to permit an exploration of how correlations change indifferent economic circumstances using three different sample periods: pre-GFC (January 2005–July 2007), GFC (July 2007– September 2009), and post-GFC periods (September 2009–December 2013). The empirical results suggest that the dependencies change in a complex manner, and are subject to change in different economic circumstances. One of the attractions of this approach to risk modelling is the flexibility in the choice of distributions used to model co-dependencies. The practical application of Regular Vine metrics is demonstrated via an example of the calculation of the VaR of a portfolio made up of the indices.

Trade of goods and services and risk sharing ability in international equity markets: Are these substitutes or complements?

This paper shows that changes in risk sharing ability in international financial markets have implications for the trade of goods and services. The ability to share risk in international financial markets is captured as time varying correlations between stock markets in the US and 11 Asian countries. We find that trade in the 11 Asia and their ability to share risk in US equity market are mostly substitutes over the full sample (1993:01 to 2014:01) and in extreme market conditions (such as a financial crisis). However, once we account for the decoupling-recoupling hypothesis during the GFC period, we only find strong evidence of complementarity between Asian trade and risk sharing in the US stock markets. We find further support for this complementary link between the real and financial markets in our analyses of when we examined the relationship between US stock market spillovers and Asian trade during the full sample, the GFC period, and under bearish market conditions. We explain our approach and results making connections with several related areas of research and evaluate the results against cases where international risk sharing is with equity markets in China and Japan.

Deal Making in Stormy Capital Markets

The volatility of global capital markets in early 2016 takes one back to the GFC period. For CEOs & Boards of Directors the challenges of leading the Company can be many. This paper reviews a number of the lessons learned from the Global Financial Crisis, and recommends pro active planning in the event that the current volatile conditions continue across 2016.

CREDIT DEFAULT SWAPS: HAS THE GFC INFLUENCED PERCEPTIONS OF THEIR UTILITY FOR BANKS?

AbstractCredit Default Swaps (CDSs) are considered as one of the most versatile financial innovations of the 21st century. Since its inception, the credit derivatives market has grown to a peak of $64 trillion in 2008 in terms of gross notional values (Cont, ). However, after the onset of the GFC, this market has decreased to a large extent. While there is evidence that promotes the risk reduction properties of CDSs, there is a growing body of research post GFC that identifies destabilising effects of these instruments. In this paper, I review the relevant scholarly literature and provide evidence of how the views on CDSs have changed post GFC due a deeper investigation of issues such as systemic risk, regulatory arbitrage, information asymmetry and risk‐taking, among others, in the banking industry. This paper provides a survey of the literature of views ‘for’ and ‘against’ the use of CDSs during pre and post GFC periods and finally concludes that in comparison to the pre GFC period, post GFC there is a significant increase in the literature that highlights the detrimental nature of CDSs.

What Drives the Global Interest Rate

In this paper we study the drivers of global interest rate. Global interest rate is defined as a principal component for the largest developed and developing economies’ discount rates (the US, Japan, China, Euro area and India). A structural global factor-augmented error correction model is estimated. A structural change in the global macroeconomic relationships is found over 2008:09-2008:12, but not pre or post this GFC period. Results indicate that around 46% of movement in central bank interest rates is attributed to changes in global monetary aggregates (15%), oil prices (13%), global output (11%) and global prices (7%). Increases in global interest rates are associated with reductions in global prices and oil prices, increases in trade-weighted value of the US dollar, and eventually to reduce global output. Increases in oil prices are linked with increase in global inflation and global output leading to global interest rate tightening indicated by increases in central bank overnight lending rates.

What Drives the Global Interest Rate

In this paper we study the drivers of global interest rate. Global interest rate is defined as a principal component for the largest developed and developing economies’ discount rates (the US, Japan, China, Euro area and India). A structural global factor augmented error correction model is estimated. A structural change in the global macroeconomic relationships is found over 2008:09-2008:12, but not pre or post this GFC period. Results indicate that around 46% of movement in central bank interest rates is attributed to changes in global monetary aggregates (15%), oil prices (13%), global output (11%) and global prices (7%). Increases in global interest rates are associated with reductions in global prices and oil prices, increases in trade-weighted value of the US dollar, and eventually to reduce global output. Increases in oil prices are linked with increase in global inflation and global output leading to global interest rate tightening indicated by increases in central bank overnight lending rates.

A Quantile Analysis of Default Risk for Speculative and Emerging Companies

Using quantile regression, this article examines default risk of emerging and speculative companies in Australia and the United States as compared to established investment entities. We use two datasets for each of the two countries, one speculative and one established. In the US we compare companies from the S&P 500 to those on the Speculative Grade Liquidity Ratings list (Moody's Investor Services, 2010). For Australia, we compare entities from the S&P/ASX 200 to those on the S&P/ASX Emerging Companies Index (EMCOX). We also divide the datasets into GFC and Pre-GFC periods to examine default risk over different economic circumstances. Quantile Regression splits the data into parts or quantiles, thus allowing default risk to be examined at different risk levels. This is especially useful in measuring extreme risk quantiles, when corporate failures are most likely. We apply Monte Carlo simulation to asset returns to calculate Distance to Default using a Merton structural credit model approach. In both countries, the analysis finds substantially higher default risk for speculative as compared to established companies. The spread between speculative company and established company default risk is found to remain constant in Australia through different economic circumstances, but to increase in the US during the GFC as compared to pre-GFC. These findings are important to lenders in understanding, and providing for, default risk for companies of different grades through varying economic cycles.Classification-JEL:

The relevance to firm valuation of research and development expenditure in the Australian health-care industry

The health-care industry requires large expenditure on research and development (R&D), with many projects undergoing long development cycles, usually with uncertain outcomes. Extant research has mainly concentrated on the health-care industry in the United States, where R&D costs are expensed as incurred. Previous Australian research has found mixed results in relation to R&D expenditure and changes in share price. This study investigates whether R&D expenditure reported in the health-care industry since the introduction of IAS 38 is significantly associated with share price. Results of the study show that expensed R&D is value-relevant, while a comparison of the pre and post-IAS 38 periods (including pre-global financial crisis (GFC) and GFC periods) shows a statistically significant improvement in the explanatory power of the regression model post-IAS 38, suggesting that R&D expenditure reported under the new standard IAS 38 is more useful for decision-making by investors compared with reporting under AASB 1011.

Volatility interdependence in European real estate securities markets

PurposeThis paper aims to investigate the interdependence of daily conditional volatility in seven FTSE‐NAREIT‐EPRA European developed real estate securities markets – the United Kingdom, France, Germany, The Netherlands, Italy, Sweden and Switzerland, from January 1990 to December 2011.Design/methodology/approachThis paper employs the multivariate GARCH and the generalized VAR volatility spillover index methodologies.FindingsThe author finds that each of the seven European developed real estate securities markets is relatively endogenous and interacts well with the other markets. In particular, the French real estate securities market has the most dominant volatility impact on other markets over the full sample period. The introduction and implementation of the euro is associated with a moderate increase of the total volatility spillovers around the three‐year (January 1999‐January 2002) period among the sample markets. Moreover, these markets have experienced an increase in their volatility correlation, as well as becoming more open around the GFC period. Around this crisis period, the German real estate securities market emerges as the “volatility leader” in transmitting the conditional volatilities to other markets in the European region.Originality/valueThis is the first paper to examine whether each of the sample European real estate securities markets has influenced or has been more influenced by others from the conditional volatility spillover perspective in the context of economic globalization, monetary integration and financial crisis. Since international investors incorporate into their portfolio selections not only the return correlation structure but also the market volatility interaction, the results of this study can shed light on the extent to which investors can benefit from international real estate securities diversification in the European developed countries.

Bank Risk: Does Size Matter?

The size of banks is examined as a determinant of bank risk. A wide range of banks are examined across four regions, including Australia, Canada, Europe and the USA. Four risk metrics are considered including Value at Risk (VaR), Conditional Value at Risk (CVaR, which measures risk beyond VaR), Probability of Default (PD) using Merton structural methodology, and Conditional Probability of Default (CPD, the author’s own model which measures risk based on extreme asset value fluctuations. Daily equity and asset value fluctuations are included in the analysis, including pre-GFC and GFC periods. In addition to examining size in isolation as a determinant of bank risk, the paper uses fixed effects panel data regression to examine the significance of size as a risk determinant in conjunction with a range of other independent variables. The study finds mixed results among the four regions with no conclusive evidence of significant association between size and risk.

Regional and global contagion in real estate investment trusts

PurposeThe purpose of this paper is to investigate contagion between real estate investment trusts (REITs) within and across three geographical regions: North America, Europe and Asia‐Pacific. The paper also examines excess comovement between the considered national REIT markets on the one hand, and broad equity indices on the other. In particular, the authors are interested in contagion between the considered markets during the 2007‐2009 GFC period in comparison to the entire 2004‐2011 sample period.Design/methodology/approachUsing an international factor pricing framework similar to Bekaert, Harvey and Ng, the paper defines contagion as excess comovement between two financial markets, after removing the effects of the underlying economic fundamentals, i.e. risk factors, and time‐changing volatility. Controlling for economic factors is important for distinguishing between pure contagion and information spillovers, which may transmit through existing economic channels. The authors then analyse excess correlations between the derived standardized residuals, for REITS and equity markets in order to investigate excess comovement between the indices during the whole sample and GFC period.FindingsThe paper finds no evidence of excess comovement between the considered REIT and equity indices during non‐crisis sample intervals. However, the paper finds contagion between several national REITs and regional or global equity markets during the GFC period. The paper reports statistically significant excess correlations between national REITs and regional and world real estate markets during the entire sample period, while there is only limited evidence to suggest that the correlation amongst REIT markets has increased during the GFC period. The paper concludes that a similar degree of dependence persisted among national REIT markets over the crisis and non‐crisis sample periods for most markets.Originality/valueDespite the ongoing debate on contagion in financial markets, there is only a small body of literature investigating contagion specifically for property or real estate markets. This is even more surprising, since the GFC originated from a subprime mortgage crisis and was, therefore, heavily related to real estate. The paper extends the literature by testing for contagion between REITs considering eleven national markets across three geographical regions. In contrast, the existing literature is typically constrained to a significantly smaller number of markets. The paper also explicitly takes into account the impact of the recent GFC, and tests for contagion over this period.

Tail Risk for Australian Emerging Market Entities

Whilst the Australian economy is widely considered to have fared better than many of its global counterparts during the Global Financial Crisis, there was nonetheless extreme volatility experienced in Australian financial markets. To understand the extent to which emerging Australia entities were impacted by these extreme events as compared to established entities, this paper compares entities comprising the Emerging Markets Index (EMCOX) to established entities comprising the S&P/ASX 200 Index using four risk metrics. The first two are Value at Risk (VaR) and Distance to Default (DD), which are traditional measures of market and credit risk. The other two focuses on extreme risk in the tail of the distribution and include Conditional Value at Risk (CVaR) and Conditional Distance to Default (CDD), the latter metric being unique to the authors, and which applies CVaR techniques to default measurement. We apply these measures both prior to and during the GFC, and find that Emerging Market shares show higher risk for all metrics used, the spread between the emerging and established portfolios narrows during the GFC period and that the default risk spread between the two portfolios is greatest in the tail of the distribution. This information can be important to both investors and lenders in determining share or loan portfolio mix in extreme economic circumstances.

Comparative Value-Relevance of GAAP, IBES, S&P Core, Cash Earnings and Cash Flows

This study examines the impact the global financial crisis had on the value relevance of GAAP and non-GAAP earnings. We adopt the Ohlson (1995) valuation and CAR models to test the value relevance and information content of alternative earnings measures. We use six different earnings measures comprising IBES earnings, Standard & Poor’s (S&P) core earnings, cash earnings, cash flows from operations, earnings from operations adjusted to exclude special items under GAAP and income before extraordinary items under GAAP. We draw our sample from US publicly traded firms between 2002 and 2010. Our sample is partitioned into Financial and non-Financial firms, and S&P 500 and non-S&P 500 firms. The results show that investors place greater value relevance on GAAP earnings during the GFC period relative to the pre-GFC period.

The direct costs of raising external equity capital for US REIT IPOs

PurposeThe purpose of this paper is to investigate the total direct costs of raising external equity capital for US real estate investment trust (REIT) initial public offerings (IPOs).Design/methodology/approachThe study provides recent evidence on total direct costs for a comprehensive dataset of 125 US REIT IPOs from 1996 until June 2010. A multivariate OLS regression is performed to determine significant factors influencing the level of total direct costs and also underwriting fees and non‐underwriting direct expenses.FindingsThe study finds economies of scale in total direct costs, underwriting fees and non‐underwriting expenses. The equally (value) weighted average total direct costs are 8.33 percent (7.52 percent), consisting of 6.49 percent (6.30 percent) underwriting fees and 1.87 percent (1.22 percent) non‐underwriting direct expenses. The study finds a declining trend of total direct costs for post 2000 IPOs which is attributed to the declining trend in both underwriting fees and non‐underwriting direct expenses. Offer size is a critical determinant for both total direct costs and their individual components and inversely affects these costs. The total direct costs are found significantly higher for equity REITs than for mortgage REITs and are also significantly higher for offers listed in New York Stock Exchange (NYSE). Underwriting fees appear to be negatively influenced by the offer price, the number of representative underwriters involved in the issue, industry return volatility and the number of potential specific risk factors but positively influenced by prior quarter industry dividend yield and ownership limit identified in the prospectus. After controlling for time trend, the paper finds REIT IPOs incur higher non‐underwriting direct expenses in response to higher industry return volatility prior to the offer.Originality/valueThis paper adds to the international REIT IPO literature by exploring a number of new influencing factors behind total direct costs, underwriting fees and non‐underwriting direct expenses. The study includes data during the recent GFC period.

Characteristics of A-Reit and Listed Property Company Rights Issues

Rights issue capital raisings are common amongst Australian listed property entities (including A-REITs) with 71 of them having raised over $22 billion during 2001 to 2009 by this method. This study examines some of the characteristics of these rights issues. The study finds the amount of equity sought during the GFC period by rights issues was around 2.5 times that of before, the volatility of returns was 2.5 times that of before and the discounts offered to induce investors was around 2.5 times that of before. While the rights offerings raise important equity capital for the issuers, this study also investigates whether subscribing investors have profited from taking up their right to buy more equity. The theoretical ex-rights share price is calculated for these issuers to find that over 60% of subscribers have actually suffered a decrease in wealth.