Stock Loan Research Articles

Effect of collateral characteristics on bank performance: Evidence from collateralized stocks in Taiwan

Taiwanese law requires directors of listed firms to disclose their stocks collateralized at banks creating the possibility of examining the characteristics of collateralized stocks and their influence on bank performance. This study demonstrates that the risk (value) attributes of collateralized stocks increase (reduce) bank efficiency yet reduce (increase) bank profits. Government-owned banks but not private banks require sufficiently high margins to prevent stock loans from non-performing. Furthermore, banks charge higher interest to cover the non-performing risk. Directors who lack funds, hold high turnover stocks, and/or have weak relationships with their banks prefer to collateralize their stocks at private banks.

Republic of Kazakhstan

Kazakhstani banks continue to suffer from a high and rising stock of nonperforming loans. A centralized approach to asset resolution is warranted, and could be based on a reinvigorated Distressed Asset Fund. A robust and transparent public financial management system should be an integral part of any effective fiscal framework. Deeper and sophisticated domestic financial markets will help decline in dollarization and the associated risks. A sound medium-term fiscal framework, supportive monetary and exchange rate policies, and overall financial sector reform is required.

Stock loan valuation under a regime-switching model with mean-reverting and finite maturity

Stock loans are business contracts between borrowers and lenders in which the borrower uses shares of stock as collateral for the loan. Since the value of the collateral is subject to wide and frequent price swings, valuing such a transaction behaves more like an option pricing problem than a debt valuation problem. This paper will list, prove, and analyze formulas for stock loan valuation with finite horizon under various stock models, including classical geometric Brownian motion, mean-reverting, and two-state regime-switching with both mean-reverting and geometric Brownian motion states. Numerical examples are reported to illustrate the results.

Capped stock loans

In this paper we study a kind of financial product, stock loans, in which there is a capped limit for the stock price when it exceeds a predetermined barrier. Loans with two types of cap are analyzed: constant caps and caps with a constant growth rate. We build the pricing models of the contracts by analyzing the form of the optimal stopping time and derive the formulas of the value functions. We present the numerical results and make an analysis of fair values of related parameters. A comparison between capped stock loans and uncapped ones is also given. We find that capped loans have their own advantages such as more flexibility and lower cost.

Funding Liquidity, Market Liquidity and TED Spread: A Two-Regime Model

We investigate the effect of market liquidity on equity-collateralized funding accounting for endogeneity. Theory suggests market liquidity can affect funding liquidity in stabilizing and destabilizing manners. Using the average fee on stock loans as a proxy for equity-collateralized funding liquidity, we confirm the existence of these two regimes over the period of July 2006 – May 2011. Furthermore, we show that we can separate the two regimes using the yield spread of Eurodollars over T-bills (TED spread) and that a regime switch seems to occur near a TED spread of 48 basis points.

Connecting Two Markets: An Equilibrium Framework for Shorts, Longs and Stock Loans

We analyze a framework for understanding the impact of the equity lending market on share prices. Using very few assumptions, we show that the effect of shocks to the supply or demand for share ownership, the fraction of shares made available to short sellers by shareholders, short sale regulations, and disagreement among investors depends critically on whether a stock is hard to borrow or freely available. Empiricists analyzing the effect of these shocks or short sale regulations will find that an effect exists largely among hard to borrow stocks. We confirm empirically these equilibrium predictions. For example, we find that when shares are removed from the equity lending market around dividend dates (due to tax considerations), prices of stocks on special increase 1.1%. Those prices then return to pre-dividend levels as shares are again made available to shorts.

Risque de crédit à travers les cycles d'activité: une analyse sur un panel de banques de dépôt tunisiennes

AbstractThe aim of this work is to analyze the effect of business cycles on the non-performing loans for a panel of 10 Tunisian deposit banks during 1978-2005. A dynamic model was estimated. The results showed that a recession tends to increase the stock of non-performing loans in the banks. The macroeconomic environment has a negative effect on banks in times of recession. The results generated were used to analyze the effect of four scenarios on the level of non-performing Loans. The stress tests showed that financial supervision should be higher during downturns when banks become fragile. If the reaction of banks to macroeconomic shocks accentuate the effects of recessions, it would be appropriate to establish rules to limit the pro cyclicality of banking activities.

Convertible Unsecured Loan Stocks

This case concerns an analyst who must value a new type of derivative. Three versions of the derivative are described in the case, each requiring a different valuation approach. The case is an exercise in thinking about what the payoff of a derivative is and, based on that, how it should be valued.

Bank Lending to the Production Sector: Credit Crunch or Extra - Credit?

This paper provides empirical evidence to support the theory that, in Italy, over the course of the past two years, even though a considerable slowdown in bank lending has been recorded, there has not been a credit crunch. After a first section dedicated to a descriptive analysis of the data, the paper presents an econometric estimation of the production sector’s demand for bank loans. An Error Correction Model (ECM) is used – estimated for the pre-crisis period (1998.Q2 – 2007.Q2) and applied both with the one and two step procedure – which considers lending as a function of the added value of the private sector, of the gross operating margin to nominal added value ratio (a proxy for self-financing) and of the real interest rate applied to loans. To test the robustness of the results obtained in the first specification of the model, we remove the assumption of weak exogeneity of the independent variables of the single equation model and construct a multivariate multi-equation model (VECM). All of the different approaches and methods adopted provided similar results: as expected, the demand for credit increases as real added value increases and decreases as the cost of lending and self-financing increase. The dynamic out-of-sample forecast of the model, relating to the two-year period of economic and financial crisis (2007.Q3 – 2009.Q2), shows that the actual loan stock remained well above the “theoretical” level forecasted on the basis of the functional relationships estimated before the crisis. This delta (which can be defined as “extra-credit”) is interpreted as the outcome of a rightward shift of the credit supply curve, rather than a leftward shift as would have happened in a credit crunch scenario.

Macroeconomic Fluctuations and Bank Lending: Evidence for Germany and the Euro Area

Abstract This paper analyzes the dynamic response of loans to the private sector and of economic activity to aggregate supply, demand and monetary policy shocks in Germany and the euro area based on a standard macroeconomic VAR using sign restrictions to identify the structural shocks. The main results of this analysis are that (i) with the exception of the response to the supply shock in Germany, the response of loans to the three macroeconomic shocks is rather weak and in most cases insignificant; (ii) the 2000-05 credit slowdown and weak economic performance in Germany were primarily driven by adverse supply shocks; and (iii) the marked slowdown in credit creation in Germany over this period actually represents a realignment of the outstanding stock of loans with its deterministic level. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we further perform counterfactual simulations and analyze the dynamic responses of German loan subaggregates in order to test the distributional implications of potential credit market frictions. These exercises do not indicate that credit market frictions play an amplifying role in the transmission of macroeconomic fluctuations.

Sunstruck: Accounting for Corporate Stock Loan Agreement Costs - Energy Conversion Devices and SunPower Cases (Addendum to Evergreen Solar Study)

An earlier report suggested that counterparty risk exposure be added to the litany of misgivings on the economic efficiency, absolute performance, and governance of accelerated stock repurchase agreements (ASRs). In that study, Evergreen Solar in July 2008 issues a convertible, enters into an offsetting, broker-backed long call-spread, and signs a stock loan/collateral agreement. Two months later, the underwriter (Lehman) files for bankruptcy. The Evergreen case did not include a conventional ASR, but its three components together shared many convertible-funded ASR features, a commonality that raised the question of whether, similarly, the counterparty risk of complex ASRs might be routinely underestimated. The current study, a work in progress, briefly reviews two additional solar companies who, like Evergreen, engage in stock loan transactions. Evergreen exposed itself to 18.7% dilution through its stock loan agreement, a risk quickly realized. In the case of Energy Conversion Devices, the firm shoulders 7.5% potential dilution, and SunPower countenances 5.5% potential dilution (a portion of which has been realized). In all three instances, the companies receive zero benefit from the stock loan other than the promise of facilitating the issuance of a convertible. The data collected here is a first step towards answering three questions: * How prevalent is the practice of corporations entering into stock loan agreements in conjunction with convertible or other security offerings? * Accounting treats stock loans as free (no EPS effect). Is that reasonable? * What is the economic value to the counterparty (the brokerage), who receives stock in a stock loan agreement? Contributions of additional histories of corporate stock loan transactions are invited.

Valuation of Stock Loans with Regime Switching

This paper is concerned with stock loan valuation in which the underlying stock price is dictated by geometric Brownian motion with regime switching. The stock loan pricing is quite different from that for standard American options because the associated variational inequalities may have infinitely many solutions. In addition, the optimal stopping time equals infinity with positive probability. Variational inequalities are used to establish values of stock loans and reasonable values of critical parameters such as loan sizes, loan rates, and service fees in terms of certain algebraic equations. Numerical examples are included to illustrate the results.

Preventing a Repeat of the Money Market Meltdown of the Early 1930s

This paper analyzes the meltdown of the commercial paper market during the Great Depression, and relates those findings to the recent financial crisis. Theoretical models of financial frictions and information problems imply that lenders will make fewer noncollateralized loans or investments and relatively more extensions of collateralized finance in times of high risk premiums. This study investigates the relevance of such theories to the Great Depression by analyzing whether the increased use of a collateralized form of business lending (bankers acceptances) relative to that of non-collateralized commercial paper can be econometrically attributable to measures of corporate credit/financial risk premiums. Because commercial paper and bankers acceptances are short-lived, they are more timely measures of the availability of short-term credit than are bank or business failures and the level or growth rate of the stock of bank loans, whose maturities were often longer and were renegotiable. In this way, the study adds to the literature on financial market frictions during the Great Depression, which aside from analyzing securities prices, typically investigates the behavior of credit-related variables that lag current conditions, such as bank failures, bankruptcies, the stock of money, or outstanding bank loans. ; In particular, the real level of bankers acceptances and their use relative to noncollateralized commercial paper were strongly and positively related to spreads between corporate and treasury bond yields. Also significant were short-run events, such as the October 1929 stock market crash and the 1933 bank holiday episode that sparked flights to quality in the bond market and a flight to collateral (BAs) in the money market and perhaps away from the loan market. Furthermore, these shifts in the composition of external finance were large, supporting the view that financial frictions and reduced credit availability may have played an important role in depressing the U.S. economy during the 1930s. ; The paper also relates these findings to the current financial crisis by examining how the relative use of commercial paper reacted to yield spreads during the current crisis, taking into account Federal Reserve actions to improve liquidity conditions in the money markets. Results suggest that these efforts may have, at least so far, helped prevent the commercial paper market from melting down to the extent seen during the early 1930s.

Interaction between housing prices and household borrowing: The Finnish case

Employing time series econometrics this study shows that there has been a significant two-way interaction between housing prices and housing loan stock in Finland since the financial liberalization in the late 1980s. Before the financial deregulation the interaction was substantially weaker. Furthermore, housing appreciation has a notable positive impact on the outstanding consumption loan stock. It appears that there is no similar relationship between stock prices and credit. Understanding the two-way interaction between housing prices and credit is of importance, since the interdependence is likely to augment boom–bust cycles in the economy and increase the fragility of the financial sector.

Risk and return in convertible arbitrage: Evidence from the convertible bond market

Abstract In this paper, we identify and document the empirical characteristics of the key drivers of convertible arbitrage as a strategy and how they impact the performance of convertible arbitrage hedge funds. We show that the returns of a buy-and-hedge strategy involving taking a long position in convertible bonds (“CBs”) while hedging the equity risk alone explains a substantial amount of these funds' return dynamics. In addition, we highlight the importance of non-price variables such as extreme market-wide events and the supply of CBs on performance. Out-of-sample tests provide corroborative evidence on our model's predictions. At a more micro level, larger funds appear to be less dependent on directional exposure to CBs and more active in shorting stocks to hedge their exposure than smaller funds. They are also more vulnerable to supply shocks in the CB market. These findings are consistent with economies of scale that large funds enjoy in accessing the stock loan market. However, the friction involved in adjusting the stock of risk capital managed by a large fund can negatively impact performance when the supply of CBs declines. Taken together, our findings are consistent with convertible arbitrageurs collectively being rewarded for playing an intermediation role of funding CB issuers whilst distributing part of the equity risk of CBs to the equity market.

Potentials in Financing Heliculture under the Agricultural Credit Guarantee Scheme in Imo and Rivers\' States of Nigeria: A Comparative Analysis.

This study assessed the relative potentials in financing snail farming (Heliculture) under the Agricultural Credit Guarantee Scheme in Imo and Rivers' States of Nigeria. It derived from the need for measures to bridge the reported shortfall in protein supply and consumption from animal sources within the populace. It specifically sought to ascertain whether farmers face similar potentials and constraints in these two States, establish their performance and relative efficiency in resource use. Results showed that beneficiaries in the two States face similar potentials and constraints, although those in Rivers' State are more efficient in resource use. It was recommended, among others, that underutilized resources in both areas such as loan capital, labour and stock of snails should be increased by 99.7%, 14.42% and 17.01% respectively in Imo state while, in Rivers' State, they should be increased by 99.8%, 27.88% and23.45% respectively in order to attain allocative efficiency in resource use in each area. Floor space, which is being over-utilized in both states, should be reduced by 23.60% in Imo State and by 20.04% in Rivers' State in order to realize the full potentials in financing Heliculture in these areas. Keywords : Potentials; Financing Heliculture; Agricultural Credit; Guarantee Scheme; Imo State; Rivers' State; Nigeria. International Journal of Agriculture and Development Vol. 9 2007: pp. 48-54

Supply and Demand Shifts in the Shorting Market

ABSTRACTUsing proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.

STOCK LOANS

This paper introduces a mathematical model for a currently popular financial product called a stock loan. Quantitative analysis is carried out to establish explicitly the value of such a loan, as well as the ranges of fair values of the loan size and interest, and the fee for providing such a service.

The Changing Investment Behavior of U.S. Seniors

Over the next quarter century there will be a dramatic shift in the percentage of the U.S. population that is retired. This will strain entitlement programs such as social security and will potentially impact capital markets. In this paper I present evidence of changes in the asset holdings of investors over the age of 65 during the last two decades. The percentage of seniors with stock investments and loans collateralized by their primary residence increased, and among participants the stock share of financial assets and loan balances increased. I find evidence that these trends are the result of decreasing risk aversion, both over time and for successive birth-year cohorts.

Bank Interest Rates in a Small European Economy: Some Exploratory Macro Level Analyses Using Finnish Data

This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term.The monetary union has benefited customers by decreasing the average rate on new loans.Credit and interest rate risk premiums are clearly observable in banks' lending rates.The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found. Key words: banking, interest rates JEL classification numbers: G21, E43, E44