Evi Kaplanis

The determination of foreign banking location

Abstract In this paper we examine the determinants of foreign bank location. We initially present some time series data on the postwar expansion of international banking. We show that foreign branching increased very rapidly from about 1960 to the mid-1980s and slowed significantly after 1985. One interpretation of this growth in foreign branching is that it largely paralleled the increase in trade and foreign direct investment, although it may also have been encouraged by the improvements in communications and the rapid financial innovation of the 1960s and 1970s. To assess the role of trade and foreign direct investment on bank expansion, we employ a cross-sectional analysis of the pattern of foreign bank offices. Whereas previous studies have focused on a single parent or host country, our study extends the existing literature by analyzing the location of nearly 2000 overseas offices across 37 patent and 82 host countries. Our results suggest a significant relationship between the pattern of bank location, trade and foreign direct investment. We define a banking centre as one in which there are more foreign banks than can be explained in terms of real business activity and we show that the USA, UK, Switzerland, Singapore and Indonesia most clearly qualify as banking centres. We also provide some evidence for a sample of host countries that the abnormal number of bank offices is related to capital market activities.

Stability and forecasting of the comovement measures of international stock market returns

Abstract The potential benefits to international diversification may be less if the comovement structure of international equity returns is non-stationary than if it is. This paper examines the intertemporal stability of the correlation and the covariance structure of the returns of ten major stock markets. Whilst empirical evidence supports the hypothesis that the correlation structure is stable over time, the empirical support for the stability of the covariance matrix is much weaker. Alternative forecasting models of the comovement structure are examined.

Costs to Crossborder Investment and International Equity Market Equilibrium

In this paper we first proposed a way of measuring home bias based on portfolio holdings of investors compared with global market weights that would hold under the ICAPM. We inferred the costs to cross-border investment and compared them to actual costs and restrictions, thus identifying the home bias puzzle. Since the collection of articles in which the paper appeared is no longer available, we are making the paper available on SSRN.

Hedge Funds and Financial Stability: An Analysis of their Factor Exposures

In recent years, hedge funds and other highly leveraged institutions have attracted considerable criticism and have been accused of accentuating economic crises by taking large speculative positions in emerging markets. This paper examines how much information about hedge fund exposures can be inferred from fund returns. We provide supporting evidence that factor exposures are not constant and that funds exhibit herding. However, there are important difficulties in using returns data to identify speculative portfolio shifts and we show that considerable caution is needed in drawing inferences about hedge fund activities during crisis periods. Copyright 2001 by Blackwell Publishers Ltd.

Discrete exchange rate hedging strategies

Abstract In this paper we compare the effect of alternative currency hedging strategies on the variance of the terminal value of the firm. The main focus is on the time at which the hedge is put down and the frequency with which it is adjusted. We show that commonly used strategies, such as one-period cash flow hedges and long-term fixed hedges may leave them firm very exposed to foreign exchange risk. One possible explanation for the popularity of one-period cash flow hedges is that the firm may shift its operations in response to an exchange rate change. We argue that the opportunity for such shifts may help to explain the use of short term hedges.

International Propagation of the Credit Crisis

We use a large sample of non-US banks to examine the propagation of the 2007-2009 crisis. Using both stock market and structural variables we test whether the relative incidence of the crisis was better explained by crisis models or by the VaR-type analysis of the Basel system. Consistent with crisis models, we find that comovement, interbank linkages, leverage, and fragility of funding structure are related to crisis impact. Contrary to the assumptions of the Basel system, we find that asset risk, measured by the risk weightings of the Basel, has a perverse relationship with crisis impact when considered alone and no relationship when other variables are included. We provide evidence of both a direct linkage between banks and an indirect linkage which could either represent linkages in the real economy or common demands by investors for liquidity. We also investigate whether the relative impact of the crisis on banks was related to a shift in correlations and find that it was not. We discuss the implications of our findings for regulation.

The Behaviour of Sentiment-Induced Share Returns: Measurement When Fundamentals are Observable

We test the effect of sentiment on returns using a sample of upstream oil stocks where we have a good proxy for fundamental value. For this sample, the influence of sentiment is highly time-varying, appearing only after the post-2000 increased interest in oil-related assets. Contrary to the hard-to-arbitrage hypothesis, sentiment affects returns on these stocks principally through their fundamentals rather than through deviations from fundamentals. Retail investor sentiment predicts short-term momentum of fundamentals and Baker–Wurgler sentiment predicts mean reversion of fundamental factors. These effects appear in a portfolio that is long hard-to-arbitrage stocks and short easy-to-arbitrage stocks, but only because this portfolio has net exposure to fundamentals.

A Test of International Equity Market Integration using Evidence from Cross-border Mergers

We examine the changes in betas resulting from international mergers. We find that the beta with respect to the acquirers home market rises and that with respect to the targets home market falls. This effect is robust with respect to controls for changes in the operations of the companies involved and other robustness tests. It is consistent with the location of primary affecting betas with respect to different international equity markets. Such an effect can occur only if international equity markets are not fully integrated, and the risk that is generated by the stochastic discount factor in each country depends on the location of the primary listing of a company.

The Effect of Mergers on US Bank Risk in the Short Run and in the Long Run

We examine changes in risk following US bank mergers in the period 1981-2014. Short-run increases in acquirer risk following mergers occur only in the first few mergers undertaken by the same acquirer, and only in systematic risk. The equity volatility of acquirers does not increase. Using a new approach to measure the long-run effect we find that these results persist, consistent with banks maintaining a constant level of total equity risk in the long run. Constant acquirer risk means that all diversification benefits of the mergers are dissipated. We measure the loss of diversification associated with mergers and find it to be 40% of the risk level in 1981. Almost all of this occurred prior to 2004. In addition, there has been a large increase in correlations between the largest banks, much of which has come from sources other than mergers. The results are inconsistent with these mergers being motivated by the ‘too big to fail’ put. They suggest that if one wanted to reduce the risk of the banking system by demerging major banks one would have to reach back to the structure that existed before 2004. Simply reversing recent mergers would not have much effect on stock market measures of risk.