Provide Diversification Benefits Research Articles

Optimal portfolio selection of China's green bond and stock markets: Evidence from the multi-frequency extreme risk connectedness

This paper investigates the optimal portfolio of industry stocks with China's green bond (CBGB) at different time scales, through comparing minimum connectedness portfolio (MCoP1) and modified minimum connectedness portfolio (MCoP2) under the condition of minimizing extreme risk connectedness, as well as minimum VaR portfolio. First, we examine the ability of CBGB to provide diversification benefits for industry stocks at different scales, which employs extreme risk connectedness. Then, the portfolio performing optimally at each scale is explored by comparing specific performances of various portfolio methods. The empirical results show that: (1) CBGB is weakly related to industry stocks, whether in the time or frequency domain, and is the net receiver. (2) Most industry stocks play different roles (transmitter or receiver) in different scales, with time-varying characteristics. Therefore, industry stocks benefit highly from the diversification effects of CBGB, and their portfolio should possess frequency and time-varying characteristics. (3) Based on the comparison results of weight allocations, cumulative returns, and Sharpe ratios, the short-term optimal performance is achieved by MCoP2, while in medium- to long-term, MCoP1 outperforms MCoP2 and minimum VaR portfolio. This implies that considering extreme risk connectedness in the construction of portfolios can effectively enhance returns, but in the long term, market integration should also be taken into account.

Can Chinese investors manage climate risk domestically and globally?

Climate risk is increasing and poses a risk for investors in China’s traditional stock market. In this paper, we construct a TVP-VAR-DY model and use benchmark regression and asset portfolio to explore the impact of climate risk on the Chinese stock market and whether assets with risk aversion attributes or green and low-carbon features can effectively manage climate risk. In particular, we compare China’s climate risk with global climate risk and explore transition and physical risks separately. The results show that climate risk does affect the Chinese stock market and that Chinese climate risk has a greater impact on the stock market than global climate risk. However, the good news is that the metal assets, as well as the equity-type and bond-type green assets, are effective in reducing cross-market spillovers under China’s climate risk, indicating that these assets can provide diversification benefits against climate-driven risks domestically. We also find that the metals and the equity-type assets could dampen the spillover effect against global transition risk, and the bond-type ones serve this function against global physical risk. The results further show that, for China’s stock market investors, adding green bonds to their portfolios could reduce the downside risk, regardless of climate risk type or origin. In addition, we can infer that investors are suggested to use traditional safe-haven assets and bond-type green ones to manage climate risk.

The Impact of Cross-Border Banking on Financial Stability

The globalization of financial markets has ushered in an era of interconnectedness, where financial institutions increasingly operate across national borders. This phenomenon, known as cross-border banking, has both potential benefits and risks for financial stability. While it can enhance risk diversification and promote economic growth, it also poses challenges such as contagion effects and regulatory coordination issues. This study aims to comprehensively investigate the impact of cross-border banking on financial stability, particularly within the European Union (EU). By examining the costs and benefits, developing metrics to measure optimal integration, and applying these metrics to EU countries, this research seeks to provide policymakers and regulators with valuable insights into the management of cross-border banking activities. The study begins by analysing the costs and benefits of cross-border banking. While it can offer advantages like risk spreading and increased credit stability, it also introduces risks such as contagion and regulatory challenges. The research explores the interplay between these factors and their implications for financial stability. To quantify the optimal level of cross-border banking integration, the study develops forward-looking indicators. These metrics aim to measure the extent to which a country's banking system is integrated into international markets while minimizing risks. By applying these indicators to EU countries, the research identifies which countries are more susceptible to systemic risks and which ones demonstrate optimal practices. Furthermore, the study investigates the systemic risks associated with cross-border banking, particularly the risk of financial contagion. It examines how the interconnectedness of financial institutions can facilitate the spread of shocks across borders and explores the role of regulatory coordination in mitigating these risks. The research also evaluates the trade-off between cross-border banking integration and local financial stability. While integration can provide diversification benefits, it can also increase vulnerability to external shocks. The study seeks to determine the optimal level of integration that allows countries to benefit from international markets without compromising domestic stability. Finally, the study provides policy recommendations based on its findings. By identifying countries with imbalances or low diversification, the research offers guidance on how to improve financial stability through targeted interventions. The recommendations aim to enhance the resilience of cross-border banking systems and contribute to a more stable and efficient global financial landscape.

Comparing the hedge and safe haven properties of individual commodities for China and United States equity sectors

PurposeThe purpose of this paper is to scrutinize the safe haven benefits of 13 individual commodities for the USA and Chinese equity sectors during the financial turmoil period. Therefore, sectoral investors in the USA and China could invest in those specific commodities that provide stable returns during the health crisis and financial turmoil periods.Design/methodology/approachThe daily data spans from February 1, 2015, to July 28, 2022. The present study applies several different approaches to analyzing the data set. The author apply the cross-quantilogram (C.Q) methodology to capture the lead-lag bivariate quantile interdependence between two stationary time series variables during the bearish, bullish and normal periods. Then the study used the hedging effectiveness (HE) and conditional diversification benefits (CDB) approaches to capture the hedging and diversification benefits of commodity classes and individual commodities.FindingsThe noteworthy findings of the quantilogram methodology reveal that livestock and agriculture commodities serve as better refuges as compared to the precious metals and energy index in both countries. On average, precious metals failed to serve as safe haven investments for the USA and Chinese equity market sectors. All energy commodities except soybean oil had strong comovements with China and the US equity sectors during bearish, bullish and normal periods. Lean hogs, fiddler cattle and live cattle are perfect hedging assets for both countries due to the presence of blue color at normal and bullish periods in all C.Q heat-maps. The HE table depicts that commodity indices and individual commodities failed to serve as hedging assets for the Chinese equity sectors. But commodities are semistrong hedging assets for the US equity sectors and the S&P 500 due to the average HE values being 0.7 and above. The CDB values depict that precious metals provide diversification benefits in both equity markets.Practical implicationsThe present study results have important implications for equity sector investors of the USA and China in suggesting particular commodity during the financial turmoil period. During the bearish market condition, risk averse equity sector investors can invest in livestock commodities and agriculture commodities, due to their relatively stable returns. In addition, policymakers can use the analysis insights to formulate policy tools and monitoring mechanisms, effectively mitigating the unfavorable effects arising from asymmetric dependence between commodities and equity sectors during the upper tail, middle and lower tail. Policymakers can suggest equity investors to invest in which commodity during extreme conditions.Originality/valueThe current study has the following points of originality. First, to the best of the author’s knowledge, this is the first study to investigate the individual commodities’ roles as safe havens taken from all four major commodity classes. More importantly, it is also noticeable that the safe haven abilities of commodities are usually tested for the stock market, but the equity sectors are ignored. Therefore, the present study used both stock market and sectoral indices data.

Do clean energy stocks diversify the risk of FinTech stocks? Connectedness and portfolio implications

The FinTech sector is growing rapidly, prompting a need to explore effective investment diversification strategies for stocks in this sector. The existing literature has identified the benefits of using clean energy stocks to diversify stock portfolios and the purpose of this research is to estimate how useful clean energy stocks are for diversifying an investment in FinTech stocks. This study uses a QVAR model to estimate the dynamic return connectedness between FinTech stocks and clean energy stocks for the period September 2016 to April 2024. Total connectedness is time varying and is higher in the tails than at the median. The onset of the COVID-19 pandemic had a large but short-term impact on connectedness. Under normal market conditions, systemic risk increases by 3.5% per year. FinTech is a net transmitter of shocks to nuclear energy but is mostly unaffected by shocks from wind, solar, and nuclear energy stocks illustrating the diversification benefits of these sub-sectors. Portfolio analysis shows that adding solar, wind, and nuclear energy to a portfolio with FinTech can produce higher risk adjusted returns and lower drawdown than an investment solely in FinTech stocks. These results are robust across various portfolio rebalancing frequencies (daily, weekly, monthly). For example, a minimum connectedness portfolio rebalanced daily has an average annual return of 11% and a Sharpe ratio of 0.37. These values are higher than their respective values for an investment solely in FinTech stocks (5.4%, 0.11). Thus, clean energy stocks do provide diversification benefits for investments in FinTech stocks.

Evaluating the Efficiency of Alternative Investment Vehicles in Modern Portfolio

Abstract: The evolving global economic landscape has prompted investors to diversify their portfolios beyond traditional stocks and bonds, leading to the increasing prominence of alternative investments. This study examines the role and effectiveness of alternative investment options, such as private equity, hedge funds, real estate, and commodities, in modern investment portfolios. These non-traditional assets offer unique opportunities for risk management, diversification, and potential growth, making them appealing choices for investors seeking to enhance their portfolio's performance and stability. The research highlights the key factors driving the growing appeal of alternative investments, including their ability to provide diversification benefits by spreading risk across a range of assets with low correlation to traditional market indices. Additionally, these investments present opportunities for increased returns, particularly in low-interest rate environments, and enable investors to access emerging markets and industries, broadening their investment horizons

The risk-adjusted performance and drivers of French healthcare property

PurposeHealthcare property has become an important alternate property sector in recent years for many international institutional investors. The purpose of this paper is to assess the risk-adjusted performance, portfolio diversification benefits and performance dynamics of French healthcare property in a French property portfolio and mixed-asset portfolio over 1999–2020. French healthcare property is seen to have different performance dynamics to the traditional French property sectors of office, retail and industrial property. Drivers and risk factors for the ongoing development of the direct healthcare property sector in France are also identified, as well as the strategic property investment implications for institutional investors.Design/methodology/approachUsing annual total returns, the risk-adjusted performance, portfolio diversification benefits and performance dynamics of French direct healthcare property over 1999–2020 are assessed. Asset allocation diagrams are used to assess the role of direct healthcare property in a French property portfolio and in a French mixed-asset portfolio. The role of specific drivers for French healthcare property performance is also assessed. Robustness checks are also done to assess the potential impact of COVID-19 on the performance of French healthcare property.FindingsFrench healthcare property is shown to have different performance dynamics to the traditional French property sectors of office, retail and industrial property. French direct healthcare property delivered strong risk-adjusted returns compared to French stocks, listed healthcare and listed property over 1999–2020, only exceeded by direct property. Portfolio diversification benefits in the fuller mixed-asset portfolio context were also evident, but to a much lesser extent in a narrower property portfolio context. Importantly, this sees French direct healthcare property as strongly contributing to the French property and mixed-asset portfolios across the entire portfolio risk spectrum and validating the property industry perspective of healthcare property being low risk and providing diversification benefits in a mixed-asset portfolio. However, this was to some degree to the loss or substitution of traditional direct property exposure via this replacement effect. French direct healthcare property and listed healthcare are clearly shown to be different channels in delivering different aspects of French healthcare performance to investors. Drivers of French healthcare property performance are also shown to be both economic and healthcare-specific factors. The performance of French healthcare property is also shown to be different to that seen for healthcare property in the UK and Australia. During COVID-19, French healthcare property was able to show more resilience than French office and retail property.Practical implicationsHealthcare property is an alternate property sector that has become increasingly important in recent years. The results highlight the important role of direct healthcare property in a French property portfolio and in a French mixed-asset portfolio, with French healthcare property having different investment dynamics to the other traditional French property sectors. The strong risk-adjusted performance of French direct healthcare property compared to French stocks, listed healthcare and listed property sees French direct healthcare property contributing to the mixed-asset portfolio across the entire portfolio risk spectrum. French healthcare property’s resilience during COVID-19 was also an attractive investment feature. This is particularly important, as many institutional investors now see healthcare property as an important property sector in their overall portfolio; particularly with the ageing population dynamics in most countries and the need for effective social infrastructure. The importance of French direct healthcare property sees direct healthcare property exposure accessible to investors as an important alternate real estate sector for their portfolios going forward via both non-listed healthcare property funds and the further future establishment of more healthcare REITs to accommodate both large and small institutional investors respectively. The resilience of French healthcare property during COVID-19 is also an attractive feature for future-proofing an investor’s portfolio.Originality/valueThis paper is the first published empirical research analysis of the risk-adjusted performance, diversification benefits and performance dynamics of French direct healthcare property, and the role of direct healthcare property in a French property portfolio and in a French mixed-asset portfolio. This research enables empirically validated, more informed and practical property investment decision-making regarding the strategic role of French direct healthcare property in a portfolio; particularly where the strategic role of direct healthcare property in France is seen to be different to that in the UK and Australia via portfolio replacement effects. Clear evidence is also seen of the drivers of French healthcare property performance being strongly influenced by healthcare-specific factors, as well as economic factors.

Non-Financial Markets and Interconnectedness between US and Emerging Financial Economies: Evidence from Covid-19 Financial Crisis

During times of financial turmoil, when traditional assets experience significant volatility, commodity markets provide diversification benefits to investors. The objective is to investigate the factors influencing financial contagion between the United States and emerging Asian equity markets (China and India). The study analyzes the influential impact of the volatility index, gold, oil, and USD index on financial contagion among the markets. The dynamic conditional correlation analysis is utilized to explore the correlations during the US subprime and Covid-19 crises, and quantile regression analysis is conducted at different levels of time-varying correlations. The study's results suggest that financial contagion becomes more pronounced during periods of financial turmoil, and global financial crises contribute to alterations in the dependence structure between financial contagion among equity markets and global macroeconomic risk factors. The effect of financial contagion can be abridged through altering portfolio reallocation strategies according to investors’ risk appetite during high market volatility.

Green cryptocurrencies and portfolio diversification in the era of greener paths

The shift towards cleaner fuels from hydrocarbons has influenced nearly all market types and asset classes, and cryptocurrencies are no exception. The complex mechanism of blockchain and mining consumes high levels of electricity and surges environmental footprints in electronic waste generation. Existing studies that examine green and sustainable investments are limited to sustainable equities or green bonds; therefore, this study opens up a new research direction by considering green (energy-efficient) cryptocurrencies. First, this study develops a four-step screening process to systematically select cryptocurrencies that are greener than others. A comprehensive set of green and non-green assets and a battery of empirical tests are then employed to examine the diversification benefits of selected green cryptocurrencies against several well-diversified equity portfolios at the global, regional, and country levels. The diversification benefits of green cryptocurrencies are compared with non-green cryptocurrencies using (i) the four-moment modified value at risk and conditional value at risk, (ii) four different portfolio optimization strategies, and (iii) dynamic correlation-based hedge and safe-haven regression analyses. The results show that green cryptocurrencies provide diversification benefits that are at least comparable to, and in some cases, superior to, non-green (energy-intensive) cryptocurrencies. Cardano and Tezos are identified as green cryptocurrencies offering the most diversification benefits to investors, followed by EOS, Steller, and IOTA. This study provides valuable insights to investors and policymakers, specifically those concerned with achieving sustainability and ESG-compliance (environmental-social-governance) goals and seeking green assets to hedge and diversify various traditional investments.

Comovement and spillover among energy markets: A Comparison across different crisis periods

We compare the comovement and spillover between returns of six developed energy markets during different crisis periods using wavelet multiple correlation and wavelet multiple cross-correlation. The considered countries include Canada, France, Italy, Japan, the UK, and the US for a period from July 5, 1999 to July 3, 2021. The results reveal strong correlations between the markets of France, Italy, the US, and the UK across different scales. More specifically, the energy markets of France and Italy show pronounced correlation across lower frequencies, while the energy market of Canada is a prominent net transmitter, with it having the most influence on the connectedness of all other markets. However, the Japanese and Canadian energy markets can provide diversification benefits when combined with other markets. These findings have significant implications for policymakers and investors in terms of how best to invest during various crisis periods.

Cryptocurrency puzzles: a comprehensive review and re-introduction

Purpose This study reviews existing cryptocurrency research to provide answers to three puzzles in the literature. First, is cryptocurrency more like gold (i.e., a commodity) or should it be classified as a new financial asset? Second, can we apply our knowledge of the traditional capital market to the emerging cryptocurrency market? Third, what might be the future of cryptocurrency?Design/methodology/approach Bibliometric analysis is used to assess 2,098 finance-related cryptocurrency publications from the Web of Science (WoS) Core Collection database from January 2009 to April 2022. Three key research streams are identified, namely, (1) cryptocurrency features, (2) behaviour of the cryptocurrency market and (3) blockchain implications.Findings First, cryptocurrency should be viewed and regulated as a new asset class rather than a currency or a new commodity. While it can provide diversification benefits to the portfolio, cryptocurrency cannot work as a safe haven asset. Second, crypto markets are typically inefficient. Asset bubbles exist and are exacerbated by behavioural finance factors. Third, cryptocurrency demonstrates increasing potential as a medium of exchange and store of value.Originality/value Extant review papers primarily study one or two particular research topics, overlooking the interaction between topics. The few existing systematic literature reviews in this area typically have a narrow focus on trend identification. This study is the first study to provide a comprehensive review of all financial-related studies on cryptocurrency, synthesising the research findings from 2,098 publications to answer three cryptocurrency puzzles.

Influence of oil price fluctuations on the network connectedness between oil, GCC Islamic and conventional financial markets

PurposeThis paper aims to examine the dynamic spillover effects and network connectedness between the oil prices and the Islamic and conventional financial markets in the Gulf Cooperation Council countries. The focus is on network connectedness during the 2008–2009 global financial crisis, the 2014–2016 oil crisis and the COVID-19 pandemic. The authors use daily data covering the period from January 1, 2007 to April 14, 2022.Design/methodology/approachThis study applies a spillover analysis and connectedness network to investigate the risk contagion among the Islamic and conventional stock–bond markets. The authors rely on Diebold and Yilmaz’s (2012, 2014) methodology to construct network-associated measures.FindingsThe results suggest that overall connectedness among financial market uncertainties increased during the global financial crisis, the oil price collapse of 2014–2016 and the COVID-19 crisis. In addition, the authors show that the contribution of oil shocks to the financial system is limited, as the oil market was a net receiver during the 2014 oil shock and the COVID-19 crisis. On the other hand, the Islamic and conventional stock markets are extensive sources of network effects on the oil market and Islamic and conventional bond markets. Furthermore, the authors found that the Sukuk market was significantly affected by the COVID-19 pandemic, whereas the conventional and Islamic stock markets were the highest transmitters of shocks during the COVID-19 pandemic outbreak. Moreover, oil revealed a weak connectedness with the Islamic and conventional stock markets during the COVID-19 health crisis, implying that it helps provide diversification benefits for international portfolio investors.Originality/valueThis study contributes to this field by improving the understanding of the effect of fluctuations in oil prices on the dynamics of the volatility connection between oil and Islamic and conventional financial markets during times of stress through a network connectedness framework. The main results of this study highlight the role of oil in portfolio allocation and risk minimization when investing in Islamic and conventional assets.

Interdependence of clean energy and green markets with cryptocurrencies

The adverse effects of the high-power energy consumption by cryptocurrencies on the environment and sustainability have raised the interest of a large body of policymakers and market participants. We apply a network approach to investigate the dependency across clean energy, green markets, and cryptocurrencies from 1 January 2018 to 30 November 2021. Our results indicate that sustainable investments, particularly DJSI and ESGL, play a pivotal role in the network system during the COVID-19 crisis. We find that green bonds are the least integrated with the other financial markets, suggesting their significant role in providing diversification benefits to investors. Rolling windows estimation shows that the dependency across the examined marked increased sharply during the COVID-19 crisis, especially between March 2020 and March 2021, after which it faded and became weak and stable until the end of the sample period. Results of the centrality network are consistent with the dependency network analysis.

Market integration and volatility spillover across major East Asian stock and Bitcoin markets: an empirical assessment

PurposeThis paper aims to provide new perspectives on the integration of East Asian stock markets and the dynamic volatility transmission to the Bitcoin market utilising daily data from 2014 to 2020.Design/methodology/approachThe authors undertake comprehensive analyses of the dependency dynamics, systemic risk and volatility spillover between major East Asian stock and Bitcoin markets. The authors employ a vine-copula-CoVaR framework and a VAR-BEKK-GARCH method with a Wald test.Findings(a) With exception of KS11 and N225; HSI and SSE; HSI and KS11, which have moderate dependence, dependencies among other markets are low. In terms of tail risk, the upper tail risk is more significant in capturing strong common variation. (b) Two-way and asymmetric risk spillover effects exist in all markets. The Hong Kong and Japanese stock markets have significant risk spillovers to other markets, and quite notably, the Chinese stock market is the largest recipient of systemic risk. However, the authors observe a more significant risk spillover from the Chinese stock market to the Bitcoin market. (c) The VAR-BEKK-GARCH results confirm that the Korean market is a significant emitter of volatility spillovers. The Bitcoin market does provide diversification benefits. Interestingly, the Chinese stock market has an intriguing relationship with Bitcoin. (d) An increase in spillovers in East Asia boosts spillovers to Bitcoin, but there is no intuitive effect of Bitcoin spillovers on East Asian spillovers.Originality/valueFor the first time, the authors examine the dynamic linkage between Bitcoin and the major East Asian stock markets.

How resilient are Islamic financial markets during the COVID-19 pandemic?

The COVID-19 pandemic has posed a massive disruption to the finance sector. Islamic financial markets are no exception. We explore the resilience of Islamic financial markets to the COVID-19 pandemic vis-à-vis conventional markets. A comparative analysis of the impact of the first and second waves of COVID-19 is also conducted. We use five Dow Jones Islamic stock indices and two bond indices and their conventional counterparts as proxies of Islamic and conventional financial markets. Using wavelet, wavelet-based Granger causality, hedge ratio, optimal weights, and hedging effectiveness methods from January 1, 2019, to February 26, 2021, our empirical estimates indicate that both Islamic and conventional stock indices are almost similarly affected by the extreme market turbulence triggered by COVID-19. Hence, Islamic stock markets fail to provide diversification benefits. We also unveil no significant differences between the first and second waves of COVID-19 in the case of dependency. Conversely, Islamic bonds exhibit low dependence on their conventional counterparts, indicating their diversification benefits. We further demonstrate that Islamic and conventional bond pairs could be utilized as a strong portfolio mix because the least hedging cost and highest hedging effectiveness are observed in those portfolios, especially during COVID-19. Overall, our results suggest that global Sukuk offers more resilience in times of extreme market turmoil than other instruments considered in this study. Our findings present global investors and regulators with new insights on diversification and hedging strategy with Islamic finance during a worldwide, severe economic crisis. We present some policy recommendations in creating a more sustainable financial system post-COVID-19.

Portfolio diversification impact of oil and asymmetric interaction between oil, equity and bonds in the global market: fresh evidence from alternative approaches

PurposeIn addition to the seminal approach of Markowitz (1952) that is based on finding the optimal budget shares for minimizing risk, the authors also make use of the approach developed by Hatemi-J and El-Khatib (2015), which is built on finding the weights as budget shares for maximizing the risk-adjusted return of the underlying portfolio. For testing the stability of the portfolio benefits, the asymmetric interaction between oil, equity and bonds is tested.Design/methodology/approachOil is a major investment commodity. The literature shows mixed results regarding oils' ability to provide diversification benefits. This paper re-examines this issue by applying a new portfolio optimization approach.FindingsThe authors find that oil still yields portfolio diversification benefits; contrary to the traditional Markowitz portfolio approach, the asymmetric causality test results show that oil does not cause bonds for either positive or negative changes; however, oil does cause stocks but only for stocks' negative changes. Hence, oil can still make the returns of a portfolio of stocks and bonds unstable through oil's effect on stocks.Originality/valueThis is the first attempt to investigate the potential portfolio diversification benefits of stocks, bonds and oil by using the combination of risk and return explicitly in the optimization problem. The new insights provided by this article might be valuable to the investors, financial institutions and policy makers.

The potential of alternative investments as an asset class: a thematic and bibliometric review

PurposeThis paper aims to review, systematize and integrate existing research on alternative investments. This study conducts performance analysis comprising production timeline, country-wise contributions, analysis of sources, affiliations, the geography of authors and citations of studies on alternative investments.Design/methodology/approachThis study adopts a thematic and bibliometric analysis methodology on 570 papers identified from mainstream literature on alternative investments. This study provides an analysis of science mapping, including co-citation analysis, bibliometric coupling, word analysis and trending topics on alternative investments. In addition, the study presents thematic analysis by classifying existing studies into nine themes.FindingsAlternative investments provide diversification benefits and play a critical role in portfolio construction, and the research on alternative investments has gained momentum in recent times. This study finds that hedge funds, private equity, artwork, collectibles, commodities, fine wine and venture capital have remained prominent themes in the field. Investments in cryptocurrencies are an emerging area in the research on alternative investments.Research limitations/implicationsThis study limits itself to the papers published in the area of finance and economics listed on the Scopus database.Originality/valueThis study provides quantitative bibliometric analysis and thematic analysis of the extant literature on alternative investments and identifies the areas that could be developed to advance research on alternative investments.

A Tale of Two Comonotonic Assets: Can They Provide Diversification Benefits?

A Tale of Two Comonotonic Assets: Can They Provide Diversification Benefits?

Bank complexity, governance, and risk

Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the costs of bank resolution when organizations fail, the effect of complexity on BHCs’ broader risk profiles is less well understood. Business, geographic, and organizational complexity can engender explicit tradeoffs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The balance of outcomes may depend on the strength of bank governance. We test these conjectures using data on large U.S. BHCs for the 1996–2018 period. Business, geographic, and organizational complexity provide diversification benefits and some reduced idiosyncratic and liquidity risk exposure. All forms of complexity tend to increase BHC systemic risks. A regulatory tightening focused on complexity reduced organizational complexity, while also curtailing systemic risk but increasing liquidity risk.

Impact of the COVID-19 outbreak and its related announcements on the Chinese conventional and Islamic stocks’ connectedness

In this paper, we assess the impacts of the COVID-19 counts (infected cases, deaths and recovered) and related announcements on the Islamic and conventional stocks interplays in the Chinese market. We test whether Islamic stocks are perceived as assets providing diversification benefits in time of COVID-19 pandemic. Doing so, we implement a multivariate GJR-GARCH model under dynamic conditional correlation (DCC) as well as multiple and partial wavelet coherence methods to recent Chinese daily data ranging from 2 December 2019 to 8 May 2020 and COVID-19 related announcement for the period. Our results from multivariate GJR-GARCH models reveal that COVID-19 infected cases and deaths do impact mean DCCs between Islamic and conventional stocks, number of recovered do not have such impact, while none of the above have any significant impact on the DCCs fluctuations. However, when we analyze the impact of COVID-19 related announcement on the variation of conditional correlation between two stocks (i.e. DCC volatility) our findings show that 7 out of 10 such announcements (mainly those with serious health treats or economic implications) do effect those volatilities in Chinese equity market. The empirical findings from partial and multiple wavelet coherences provide robust evidence of instability in the co-movement between Islamic and conventional indexes for different scales and over dissimilar sub-periods. Indeed, the weakening of co-movements is especially notable in the very short and short-run where operating the short-term investors. Our empirical findings offer several key propositions for policy makers and portfolio managers in China with broad implications applicable to other markets.