Dominic Gasbarro

Stochastic Dominance Analysis of iShares

Abstract Country indices as represented by iShares exhibit non-normal return distributions with both skewness and kurtosis. Earlier studies provide procedures for determining the statistical significance of stochastic dominance measures and the Sharpe Ratio. This present study uses these refinements to compare the performance of 18 country market indices. The iShares are indistinguishable when using the Sharpe Ratio as no significant differences are found. In contrast, stochastic dominance procedures identify dominant iShares. Although the results vary over time, stochastic dominance appears to be both more robust and discriminating than the CAPM in the ranking of the iShares.

The Changing Relationship Between CAMEL Ratings and Bank Soundness during the Indonesian Banking Crisis

During the recent Southeast Asian financial crisis, numerous banks failed quickly and unexpectedly. This study uses a unique data set provided by Bank Indonesia to examine the changing financial soundness of Indonesian banks during this crisis. Bank Indonesias non-public CAMEL ratings data allow the use of a continuous bank soundness measure rather than ordinal measures. In addition, panel data regression procedures that allow for the identification of the appropriate statistical model are used.We argue the nature of the risks facing the Indonesian banking community calls for the addition of a systemic risk component to the Indonesian ranking system. The empirical results show that during Indonesias stable economic periods, four of the five traditional CAMEL components provide insights into the financial soundness of Indonesian banks. However, during Indonesias crisis period, the relationships between financial characteristics and CAMEL ratings deteriorate and only one of the traditional CAMEL components—earnings—objectively discriminates among the ratings. The panel data results indicate systemic economy-wide forces must be explicitly considered by the rating system.

Market reaction to published and non-published corporate loan announcements

Prior research examining the role of financial intermediaries in reducing the problems of information asymmetry has reported that borrowers experience a positive share price reaction to credit agreement announcements. However, it is generally acknowledged that these studies have the potential for a reporting bias because they use only one source of information for credit agreement announcements. To examine this reporting bias, we distinguish between “published” and “non-published” announcements in Australia. We find that borrowers’ share prices react positively to announcements that are published in both the financial press and by a dedicated information provider. No statistically significant reaction is observed for the non-published credit agreements.

Evidence on the Mean-Reverting Tendencies of Closed-End Fund Discounts

Closed-end fund (CEF) discounts vary widely over time due to changes in share price, net asset value (NAV), or both. Prior studies suggest discounts are mean-reverting. We examine the mean-reversion issue by employing cointegration procedures. Specifically, we identify bond and equity CEFs that exhibit stationary time-series properties and find statistically significant error correction terms that quantify the speed of mean reversion. The results indicate that mean reversion is caused by changes in both share price and NAVs. However, CEFs can only provide excess returns when the discount narrows due to share price increases. Copyright 2003 by the Eastern Finance Association.

Underpricing and Aftermarket Performance of IPO Firms in Mauritius

Initial public offering (IPO) financial strength measures are created to examine both the initial underpricing and aftermarket performance of firms in an emerging market. We find that the initial underpricing is positively related to financial strength as proxied by cash flow and sales. Since bond ratings do not exist in Mauritius, a return-to-risk meas ure and Altmans z-score serve as proxies for financial strength. Using these measures, the aftermarket performance results indicate that net income is more higbly valued for strong firms. When net income is separated into dividends and earnings retained, we find dividends are valued more highly than earnings retained for firms in Mauritius.

The impact of monetary policy candidness on Australian financial markets

In January 1990, the Reserve Bank of Australia (RBA) changed from a covert disclosure policy to an overt disclosure policy. Using a sample from January 1986 to September 2001, this paper examines the reaction of Australian financial markets to rate target changes within each of these disclosure regimes. We find significantly different announcement day responses between the two disclosure regimes for both short-term and long-term treasury securities, and equity indices. Overall, the results indicate that when monetary policy is more transparent, the market reaction is less pronounced and, therefore, we conclude that fuller disclosure of monetary policy allows investors to more optimally manage their portfolios.

The Relation between Financial Development, Energy Consumption and Economic Growth: Empirical Evidence for the United States

This paper examines the relation between financial development, energy consumption and economic growth in the United States (U.S) for the period 1966-2011. We use a vector error correction model (VECM) to investigate the effect of financial development and energy consumption on economic growth in the U.S. In addition to examining the relation in the long run of the aforementioned variables using Johansen co-integration analysis, we also examine the short-run and long-run causalities between them. In addition to economic growth, financial development and energy consumption variables, we also examine the impact of real interest rate, gross fixed capital formation and trade openness on economic growth. We find that there is at least one co-integrating relation among the variables. There is some evidence that in the long run financial development causes economic growth; however, there is no evidence that economic growth causes financial development. Neither do we find evidence that financial development positively affects energy consumption either in the short- or long-run. However, in the short run, we find some evidence of two-way causality between economic growth and financial development.

Mutual Fund Trades: Timing Sentiment and Managing Tracking Error Variance

We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks’ sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.

Loan Loss Provisions and Bank Lending Behavior: Do Information Sharing and Borrowers’ Legal Rights Matter?

We examine the roles of information sharing and borrower’s legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and, hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, not private credit bureaus managed by the private sector, might substitute for the role of dynamic provisioning systems in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights for borrowers temper the procyclical effect of non-discretionary provisions. However, these findings hold only for small banks. This suggests that the implementation of dynamic provisioning systems to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks.

Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?

In this paper, we examine the role of information sharing and borrower legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, but not private credit bureaus managed by the private sector, might substitute the role of a dynamic provisioning system in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights of borrowers may temper the procyclical effect of non-discretionary provisions. However, these findings only hold for small banks. This suggests that the implementation of a dynamic provisioning system to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks, because such procyclicality cannot be offset by strengthening credit market environments through better information sharing and legal rights of borrowers.