International Momentum Strategies

How Big Is the Premium for Currency Risk

Mutual Fund Herding and the Impact on Stock Prices

https://www.nber.org/system/files/working_papers/w16780/w16780.pdf

The Consequences of Financial Innovation: A Counterfactual Research Agenda

This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks’ funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.

Funding liquidity and bank risk taking

Basel III will force banks to shift their business model from liability management, in which business decisions are made about asset volumes, with the financing found in short term wholesale markets as necessary, to asset management, in which asset volumes are constrained by the availability of funding. We find, contrary to what many have argued, that once there is a full adjustment, the costs of credit to low risk bank borrowers – the majority of customers – will be only moderately affected; but that there will a reduction in availability and higher cost at the riskier end of the credit spectrum. Alternative arrangements are therefore needed for financing of risky exposures if a fall in economic growth is to be avoided. In this context securitisation (broadly defined to include all forms of bank sponsored collateralised instrument, including covered bonds) will be of central importance. Re-establishing securitisation markets on a sounder footing appears essential, in order both to prevent a renewed credit contraction and to help prevent riskier borrowers from being cut off from credit. The shifts in bank balance sheets will also require substantial portfolio adjustments amongst long term institutional investors, from short term to long term debt and from debt to equity. The associated adjustment of both market prices and required returns can be accommodated but poses a substantial co-ordination problem and could take a long time. Finally the new liquidity rules could create new unintended systemic risks. In particular the proposed definition of eligible liquid assets is dangerously over-concentrated on government debt. The definition of should be broadened to give banks more scope to hold liquidity in the form of commercial claims; and central banks should clarify in what circumstances they will provide emergency liquidity assistance.

Basel III: Is the Cure Worse than the Disease?

Theory suggests that securitization provides financial institutions with an opportunity to lower the cost of funding; improve credit risk management and increase profitability. In practice, as evidence during the recent crisis, it might lead to adverse consequences through a number of indirect channels. Therefore, the net impact of securitization on bank performance is ambiguous. This study aims to evaluate whether banks improve their performance through the use of securitization markets by applying a propensity score matching approach. In other words, we build a counterfactual group of banks to assess what would have happened to the securitizing banks had they not securitized. Using US commercial banking data from 2001 to 2008, univariate analysis indicates that securitizing banks are, on average, more profitable institutions, with higher credit risk exposure and higher cost of funding. However, the propensity score matching analysis does not provide evidence of significant causal effects of securitization on the performance of banks. Therefore, securitization does not seem to outperform alternative funding, risk management and profitability improvement techniques. Our evidence raises important questions about banks motives for increasing securitization activities and consequent implications for banking systems.

/pdf/securitization-and-bank-performance-1ltul96gvt.pdf

Securitization and Bank Performance

https://www.city.ac.uk/__data/assets/pdf_file/0007/36079/Is-the-Cure_AllenChanMilneThomasVersion6..pdf

Basel III: is the cure worse than the disease?

This study investigates the impact of securitization on the credit risk-taking behavior of banks. Using US Bank Holding Company data from 2001 to 2007, we find that banks with a greater balance of outstanding securitized assets choose asset portfolios of lower credit risks. Examining securitizations by the type of underlying assets, we find that the negative relationship between outstanding securitization and risk taking is primarily driven by securitizations of mortgages, home equity lines of credit, and other consumer loans. Securitizations of all other types of assets, on the other hand, seem to have no significant impact on bank credit risk-taking behavior. We attribute these results to the recourse commonly provided in securitization transactions, as it might alter the risk-taking appetite of the issuing banks across asset classes. Therefore, we conclude that the net impact of securitization on the risk-taking behavior of issuing banks, and consequently on the soundness of the banking system, is ambi...

/pdf/does-securitization-reduce-credit-risk-taking-empirical-36yjjnp0np.pdf

Does securitization reduce credit risk taking? Empirical evidence from US bank holding companies

In this paper we compare a variety of technical trading rules in the context of investing in the S&P500 index. These rules are increasingly popular both among retail investors and CTAs and similar investment funds. We find that a range of fairly simple rules, including the popular 200-day moving average trading rule, dominate the long only, passive investment in the index. In particular, using the latter rule we find that popular stop loss rules do not add value and that monthly end of month investment decision rules are superior to those which trade more frequently: this adds to the growing view that trading can damage your wealth. Finally we compare the MA rule with a variety of simple fundamental metrics and find the latter far inferior to the technical rules over the last 60 years of investing.

/pdf/breaking-into-the-blackbox-trend-following-stop-losses-and-1mtbxdi5so.pdf

Steve Thomas

Papers

Basel III: Is the Cure Worse than the Disease?

Securitization and Bank Performance

Basel III: is the cure worse than the disease?

Does securitization reduce credit risk taking? Empirical evidence from US bank holding companies

Breaking into the Blackbox: Trend Following, Stop Losses, and the Frequency of Trading: The Case of the S&P500