Times Of Financial Distress Research Articles

Mapping fear in financial markets: Insights from dynamic networks and centrality measures

Investor sentiment, particularly fear sentiment, significantly influences financial markets by increasing uncertainty and triggering extreme judgments during volatile periods. This study delves into the impact of fear sentiment on market dynamics and interdependencies between various financial assets, focusing on implied volatility indices for stocks, oil, gold, foreign currency, and bonds. The COVID-19 pandemic created an unprecedented economic shock in 2020, necessitating an examination of how fear sentiments propagated across these assets during times of crisis. By analyzing network dependencies and centralities, this research provides novel insights into financial market fear spillovers. It distinguishes itself by employing implied volatilities instead of historical volatilities and investigating these dynamics during the pandemic. The fear indices, specifically stock and Eurocurrency (stock and gold), exhibited the highest dependency effects during COVID-19 (Russia-Ukraine war), with clustering effects among these indices. We notice also that stock and Eurocurrency (Stock and gold) played a central role in connecting various fear indices, during extreme market conditions. The study also uncovers time-varying dependencies among the fear indices of the considered variables in this study, offering a comprehensive understanding of how extreme events like the pandemic impact financial market fear. This research contributes to the literature on financial market interdependencies during periods of fear, helping investors and policymakers make informed decisions about asset allocation, policy development, and risk assessment in times of financial distress.

Penerapan Model Log-Logistik Proporsional Hazard Untuk Menentukan Faktor yang Mempengaruhi Kondisi Financial Distress

<p class="AbstractEnglish">Every company is likely to experience an up or down phase in its financial performance. A decline in financial performance is a condition of financial distress. Financial distress is an event of a continuous decline in a company's financial performance over a certain period of time. The variables in this research are the response variable in the form of the time of company experiences financial distress, while the covariates are the solvency ratio, liquidity ratio, growth ratio, profitability ratio, company size and activity ratio. The aim and objective of the research is to obtain the property and significance of covariates when a company experiences financial distress. How to determine covariates that are significant to financial distress. The model used is a log-logistic proportional hazard regression model. The log-logistic model is a regression model in the form of a maximum extreme function with right asymptotics and non-negative random variables, while the Cox proportional hazards model is a survival model with the independent variables being time and covariates, between time and covariates being independent. The results of this research are that companies in the infrastructure, utilities and transportation sectors experience financial distress, influenced by solvency ratios, liquidity ratios and profitability ratios. The solvency ratio and profitability ratio have a positive effect, while the liquidity ratio has a negative effect on the timing of financial distress. The contribution of these factors to companies experiencing financial distress is 1.1% (for liquidity ratio), 3.4% (for solvency ratio), and 95.5% (for profitability ratio).</p><p class="AbstractEnglish"><strong>Keywords: </strong>financial distress; log-logistic; portional hazard; profitability ratio</p>

Global uncertainty and potential shelters: gold, bitcoin, and currencies as weak and strong safe havens for main world stock markets

This article investigates five safe-haven asset responses from 2014 to 2022, including the unprecedented COVID-19 crisis, Russian invasion of Ukraine, and sharp US interest rate increases of 2015 and 2022. We apply the unique approach of the multivariate factor stochastic volatility (MSV) model, which is extremely efficient for financial market analysis and allows us to conduct dynamic factor analysis of safe-haven relationships that cannot be observed directly. The research sample consists of five prospective safe-haven assets—gold, bitcoin, the euro, the Japanese yen, and the Swiss franc—and five primary world stock market indices—the S&P 500, Financial Times Stock Exchange (FTSE) 100, DAX, STOXX Europe 600, and Nikkei 225. Our findings are useful for investors searching for the best safe-haven assets among gold, bitcoin, and currencies to hedge against financial turmoil in global stock markets. Our unique findings suggest that safe-haven effects work differently for gold and the yen; that is, the Japanese yen acts as the strongest safe haven across all stock indices. Bitcoin is not a strong safe-haven currency since it has zero days of negative correlations with the considered stock indices, but it is a weak safe-haven during times of financial distress. Consequently, we state that strong and weak safe-haven properties vary across time and place. The novelty of our study lies in the methodological complexity of the MSV model (used for the first time to find the best safe-haven asset properties), dynamic factor analysis, a long-term research sample covering the Russian invasion of Ukraine in 2022, and an international investor perspective focusing on the world’s leading stock markets. We extend earlier studies by analyzing the interrelations of the world’s leading stock market indices with five potential safe-haven assets during the long period of 2014–2022 and using a unique dynamic factor analysis to show the differentiated behaviors of the Japanese yen and gold. Additionally, the main innovative contribution is a new framework of weak and strong safe-haven asset classifications not previously applied in the literature.

For better or worse: Governing healthcare organisations in times of financial distress.

Due to processes of financialisation, financial parties increasingly penetrate the healthcare domain and determine under which conditions care is delivered. Their influence becomes especially visible when healthcare organisations face financial distress. By zooming-in on two of such cases, we come to know more about the considerations, motives and actions of financial parties in healthcare. In this research, we were able to examine the social dynamics between healthcare executives, banks and health insurers involved in a Dutch hospital and mental healthcare organisation on the verge of bankruptcy. Informed by interviews, document analysis and translation theory, we reconstructed the motives and strategies of executives, banks and health insurers and show how they play a crucial role in decision-making processes surrounding the survival or downfall of healthcare organisations. While parties are bound by legislation and company procedures, the outcome of financial distress can still be influenced. Much depends on how executives are perceived by financial stakeholders and how they deal with threats of destabilisation of the network. We further draw attention to the consequences of financialisation processes on the practices of healthcare organisations in financial distress.

Are REITS hedge or safe haven against oil price fall?

This paper studies the hedge against falling oil prices and the safe haven properties of fourteen major country-specific real estate investment trusts (REITs) indices for the Asian, American, European, and worldwide geographies. Our analyses are performed from both, returns and conditional volatility perspectives. Our sample spans from January 2016 until August 2022, covering the COVID-19 pandemics and the ongoing Russia-Ukraine military conflict. We find that during COVID-19, only the Japan REITs, in terms of both returns and volatility, act as a hedge for oil whereas the only hedge during the Russia-Ukraine conflict is the Netherland REITs. In addition, we document diverse degrees of safe-haven and diversifiers properties for REITS from diverse geographies along the full sample and the respective sub-samples for both bearish conditions and elevated volatility in the oil market. Our results imply that market regulators should focus on controlling volatility in crude oil and REITs markets, especially throughout times of financial distress, as daily return volatility monitoring is a pivotal requirement for optimized investment management. Our study provides important knowledge for investors, policymakers, and market regulators.

Are green cryptocurrencies really green? New evidence from wavelet analysis

With growing attention and concern regarding green instruments, in this paper, we test for the dynamic connectedness of green cryptocurrencies, green investment, conventional commodities and equities using wavelet coherence and the effect of uncertainty on their co-movements from 2018 to 2023. Contrary to previous research, our findings reveal that green cryptocurrencies do not exhibit hedge or safe haven properties, instead behaving no differently than diversifiers. Furthermore, we show a significant influence of financial uncertainty on the interconnectedness between green cryptocurrencies and other assets, indicating heightened exposure during market turmoil. As a result, less emphasis on green cryptocurrencies portfolio weightings should be placed and greater emphasis on green bonds and gold at time of financial distress. Their limited risk-reducing potential should also be considered for regulatory frameworks. Additionally, we note the similarities between green cryptocurrencies and conventional counterparts, evidenced by their dynamic homogeneity with Bitcoin and Ethereum, suggesting synchronization. Consequently, conventional cryptocurrencies could serve as proxies for green counterparts in portfolio management strategies. These findings contribute to the understanding of green cryptocurrency dynamics and have implications for investment decision-making and risk management strategies in sustainable finance.

Interaction of Credit and Market Risks and Impact on Banks’ Economic Capital

Banks often measure the magnitudes of credit and market risks separately, and then add up the two to estimate economic capital. This approach ignores the complex interactions between the two risk types. We develop a model in which these risks are estimated jointly. We used both Value at Risk (VaR) and Conditional Value at Risk (CoVaR) risk measures to analyze the relation between market and credit risks interconnectedness among banks during financial stress. Our model is based on the market returns and total provisions in 37 banks in Asia, Europe, and North America. The results show that deliberately ignoring the interaction between these types of risk leads to either an under or overestimation of the sum of the magnitudes of the two risks, and hence, results in an over or underestimation of economic capital. It was concluded that during times of financial distress, an increase in a bank’s provision would lead to an extreme loss in stock returns that were higher than the VaR value. This proves that underestimating credit risk can lead to an increase in the market risk faced by banks during financial distress.

The effect of financial distress on capital structure: The case of Brazilian banks

This study investigates the effect of financial distress on capital structure, considering banking performance variables and the economic environment. The analysis is based on balanced panel data for Brazilian listed banks, using accounting and non-accounting information on a quarterly basis from September 2009 to December 2016. This study uncovers evidence that the effect of financial distress on capital structure is context-dependent. During normal times, the findings support the argument for higher bank capital in times of financial distress. However, in periods of economic recession, the effect of bank distress on capital was found to be negative, indicating that the impact of banks’ risk on capital is especially important during such periods of market uncertainty. The findings are robust to alternative estimation methods and to alternative measures of risk. This study provides insights for the design of prudent regulation and the supervision of banks, especially for emerging markets economies, considering their highly uncertain environment with widely varying rates of growth and inflation.

Dynamic optimal restructuring policies under debt renegotiation with positive externalities

AbstractThis paper develops a debt renegotiation model with positive externalities using the Nash bargaining game and explores dynamic optimal downward debt restructuring policies in times of financial distress. We derive closed‐form expressions for the optimal restructuring policies. Moreover, we provide theoretical support for the advantages of debt renegotiation with positive externalities. In addition, our model could explain the violation of the absolute priority rule for firms in financial distress. Finally, we find that debt renegotiation is facilitated among firms with relatively low risk and a high leverage ratio, as documented by empirical evidence.

Stock market flexibility during COVID-19 pandemic: evidence from Pakistan

PurposeThe authors examine the impact of coronavirus disease 2019 (COVID-19) pandemic on the stock market, forex market and gold market of Pakistan.Design/methodology/approachBy using the daily data of COVID-19 confirmed cases, stock index, foreign currency rates and gold prices for the period 10 March 2020 to 16 October 2020, the authors explore that the stock index negatively responds to the corona pandemic.FindingsAdditionally, the authors observe the price hikes in gold and foreign currency corresponding to the number of COVID-19 positive cases.Practical implicationsThe study analysis unveils that the stock market adversely responds to a pandemic, whereas, forex and gold markets serve as a safe haven for investors at the time of financial distress.Originality/valueThis study complements the literature and provides empirical evidence of the stock market, the gold market and foreign currency market, in the perspective of Pakistan.

Measuring real–financial connectedness in the U.S. economy

We analyze the connectedness between the real and the financial sectors of the U.S. economy. Using the weekly ADS index of the Philadelphia Fed (the widely used business conditions indicator) to represent the real side, we find that during times of financial distress and business cycle turning points, the direction of connectedness runs from the real sector to financial markets. The ADS index is derived from a model containing a measure of term structure along with real variables. Therefore, it might not be the best representative of the real activity used in the connectedness analysis. As an alternative, we derive a real activity index (RAI) from a dynamic factor model of the real sector variables only. The behavior of RAI over time is quite similar to that of the ADS index. When we include RAI to represent the real side, connectedness from the real side to financial markets weakens substantially, while the connectedness from financial markets to the real side becomes more pronounced.

Corporate governance and risk-taking of Islamic banks: evidence from OIC countries

Purpose This paper aims to investigate the impact of corporate governance and other related factors on the risk-taking of Islamic banks. Risk-taking is defined according to credit risk, liquidity risk and operational risk. Design/methodology/approach The study uses the two step system generalized method of moment (2SYS-GMM) estimation technique by using a panel data set of 129 Islamic banks (IBs) from 29 countries in the Middle East, South Asia and the Southeast Asia regions covering from 2008 to 2017. Governance variables incorporated include board size, board independence, chief executive officer (CEO) power, Shariah board and audit committee, as well as other control variables. Findings This study provides evidence that board size and Shariah board are positively and significantly related to credit and liquidity risk. Board independence and CEO power are negative and significantly associated with credit and liquidity risk, but the audit committee has a mixed relationship with bank risk. Male CEOs take more risk compared to the female and more board meeting has an inverse relationship with Islamic banks risk. Bank size, however, does not influence the level of risk in Islamic banks, but leverage has an inverse relationship with bank risk. Research limitations/implications The present study sheds light on the risk-taking behaviour of the board of IBs, particularly the board independence and CEO power reducing the level of risk in IBs thereby contributing to the agency theory. Therefore, regulators and policymakers can use the findings of this study to strengthen the internal corporate governance mechanism to protect IBs at a time of financial distress. Moreover, it increases the trust of the shareholders and stakeholders in the effectiveness of governance reforms that have been pursued to reap long-term benefits. Originality/value To the best of the knowledge, this research is preliminary in examining the board behaviour on risk-taking of IBs from four different regions. The results are robust and suggest that the board of directors mitigate the level of risk in IBs.

Bank stockholders’ vs bank bondholders’ market discipline during crisis time: an investigation based on supervisory stress test information disclosure

PurposeThis paper aims to investigate how stockholders and bondholders react to the information disclosed on the financial markets during crisis periods. This paper considers the 2011 European Banking Authority’s stress test as it disclosed detailed information about banks.Design/methodology/approachIt was conducted during the European sovereign debt crisis, and this paper uses an event study methodology. This paper analyzes the average cumulative abnormal returns for different subsamples of banks. This paper compares the reactions of stockholders and bondholders to the stress test by considering pre-results announcements (signal generating process) to the publication of the results on the disclosure date, using quantitative data for each individual bank that participated in the stress test (the signal provided to the financial market).FindingsThis paper finds that stockholders’ reaction is more sensitive to idiosyncratic components of the disclosed information, whereas bondholders are more influenced by systematic risk. A deeper investigation shows that subordinated bondholders tend to behave quite similarly to stockholders. This specific reaction of stockholders during financial distress may make them more likely than bondholders to impose market discipline during troubled periods.Originality/valueThis paper brings several new insights to the behavior of stock and bond holders during times of financial distress and makes recommendations to regulators that may serve to refine communication to markets to reduce the shock of negative news.

Uncovered equity returns parity in non‐euro Central European EU member countries

AbstractThis paper examines a nexus between euro values of local currencies and returns to equities in non‐euro Central European countries (CECs) relative to returns in a global equity market. In essence, it analyses whether the uncovered equity returns parity (UERP) condition holds in these countries. In theory, the UERP condition holds if higher returns in a local equity market relative to the global market returns are offset by the local currency depreciation. The underlying UERP model examines the relationship between local currencies in euro and CEC equity returns relative to a global market index proxied by Wilshire5000 index. We assume that the UERP relationship is country‐sensitive, time‐dependent and state‐dependent, that is, it varies among countries and depends on economic and financial market conditions. The model is tested with the Bai–Perron multiple breakpoint regressions for structural breaks, as well as the two‐state Markov switching test for state dependence, during the January 4, 1999–February 25, 2020 sample period. We find that UERP condition holds in CECs mainly at times of financial distress, including the peak and the aftermath of the 2008–2010 global financial crisis.

Higher-Order Exposures

Traditional exposure measures focus on direct to evaluate the losses an institution is exposed to upon the default of a counterparty. Since the Global Financial Crisis of '07/'08, indirect via common asset holdings are increasingly recognized too. Yet direct and indirect fail to capture the losses that result from shock propagation and amplification following the counterparty's default. In this paper, we introduce the concept exposures to refer to these spill-over losses and propose a way to formalize and quantify them. Using granular data of the South African financial system, we show that higher-order make up a significant part of – particularly during times of financial distress when matter most. We also show that higher-order cannot simply be extrapolated from direct or indirect exposures, since they depend strongly on the network structure and the robustness of individual institutions. Our findings suggest that higher-order should inform the design and calibration of those tools in the regulators' arsenal where matter -- including large exposure limits, capital requirement calibration, stress test design and resolution. Failure to do so may result in both lax ex-ante regulation and ill-informed ex-post handling of financial crises.

Međuzavisnost između tržišta u razvoju i razvijenih berzi - slučaj makedonske, beogradske, "Six" švajcarske i "Euronext" pariske berze

The aim of the paper is to examine the level of interdependence between developing and developed stock markets. The correlation of the Macedonian (MBI10) stock exchange index with the Belgrade (BELEX15), the Six Swiss (SLI) and the Euronext Paris (CAC40) stock exchanges from November 2005 to October 2018 was studied. In order to assess the impact of the crisis on the interrelations between these equity markets, the analyzed period was we subdivided into three segments (pre-crisis, during crisis and post-crisis) and the data sets were subjected to linear regression analysis. The research results indicate an increased correlation of the Macedonian with Belgrade and Euronext Paris Stock Exchanges and decreased correlation with Six Swiss during the time of financial distress comparing to pre and post crisis periods. The findings of this study contribute to the overall picture of the relationship between stock markets in the time of Financial Crisis. Moreover, by investigating the interrelationship between developing and developed European stock markets, the results suggest that financial market integration is time-varying.

Can Euribor be fixed?

The manipulation of Euro Interbank Offered Rate (Euribor) is a problem with great impact on international financial markets. This paper focuses on two aspects of the Euribor benchmark rate for the period 2004–2018: the specific features that make the Index more vulnerable to manipulation and the potential for Index manipulation over the studied period. To address the first aspect, we examine the range and the standard deviation of daily quotes, as well as the panel banks’ quote submissions to the Euribor administrator, the maximum and minimum quotes and the daily variation of submissions. As a result, we found a group of five banks with similar and extreme submission patterns, which might be a sign of manipulation. Regarding the second aspect, changes are made in the quotes submitted by panel banks by switching minimum and maximum daily quotes. Thus, potential for Euribor manipulation is measured as the difference between the observed Euribor rate and the estimated rate recalculated with adjusted quotes. The results indicate that potential for Euribor manipulation is higher when the number of banks in the panel is lower, when there are many banks involved in the manipulation of the Index, and in times of financial distress.

The pricing of the illiquidity factor’s conditional risk with time-varying premium

We test the pricing of the conditional systematic risk (β) of IML, a traded liquidity factor of the return premium on illiquid-minus-liquid stocks, with its risk premium varying over time. We find a positive and significant risk premium on conditional βIML, which rises in times of financial distress, measured by the corporate bond yield spread or broker–dealer loans (including margin loans). The conditional βIML remains significantly priced across individual stocks after controlling for the unconditional and conditional βs of the Fama-French and Carhart factors, as well as some common liquidity-based factors.

Sovereign CDS Market: The Role of Dealers in Credit Events

In this paper, we study the credit default swaps (CDS) position of the main dealers in the CDS market close to credit events of sovereign countries. We focus on the credit events of three countries that have faced significant financial distress in the past decade: Argentina, Venezuela, and Ukraine. After introducing the historical background of each country, we find that CDS dealers, defined as the top ten traders of CDS in their respective countries, tend to sell sovereign CDS (hold more negative or less positive positions) when yields/CDS spreads go up. This finding suggests that dealers perform the role of liquidity providers in times of financial distress and take the credit risk that smaller traders want to unload into the market.

A critical reading of impression management in times of financial crisis and implications for business writing

This paper examines the use of linguistic devices in a Chairman’s Statement to foreground a positive self-image and background references to financial shortcomings in times of financial distress. Drawing on impression management theory and critical discourse analysis, we reveal the systematic use of language to portray an organization as a responsible entity caught up in uncertain times rather than one which is accountable for poor financial performance. The study draws attention to how business students may benefit from a critical reading course which heightens their awareness of how linguistic devices are used to shape reality for stakeholders while managing impression.