Jacob Antoon Bikker

Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium

The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium to infer the degree of competition. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample containing more than 100,000 bank-year observations on more than 17,000 banks in 63 countries during the years 1994 to 2004.

Pension fund sophistication and investment policy

This paper assesses the sophistication of pension funds’ investment policies using data on 748 Dutch pension funds during the 1999–2006 period. We develop three indicators of sophistication: gross rounding of investment choices, investments in alternative sophisticated asset classes and ‘home bias’. We find that pension funds’ strategic portfolio choices are often based on coarse and possibly less sophisticated approaches. Most pension funds, particularly the medium-sized and smaller ones, round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative asset classes besides equities and bonds, resulting in limited asset diversification. Third, medium-sized and smaller pension funds favor regional investments and as such not fully employ the opportunities of international diversification. Finally, we show that pension funds using less sophisticated asset allocation rules tend to opt for investment strategies with a lower risk-return profile.

The Implementation Shortfall of Institutional Equity Trades

This paper is the first to analyze the price effects of equity trading by a pension fund. We find that, on average, these effects are nonxadnegligible: 20 basis points for buys and 26 basis points for sells. Furxadthermore, we show that (relative) trade size and market capitalization, commonly found to play an important role, have only limited influxadence on the price impact of a trade. The most important determinants of the price effect are investment style, trade type (agency, single, or principal), momentum, stock price volatility, and trading venue.

The Panzar-Rosse Revenue Test: To Scale or Not to Scale

The Panzar-Rosse model is a widely applied method to assess competitive conduct. In particular, it has been extensively used to analyze the competitive climate in the banking industry. To correct for differences in firm size, many empirical papers estimate a Panzar-Rosse revenue function with total assets (or another proxy of firm size) as a control variable. Other studies estimate a Panzar-Rosse price function instead of a revenue equation, in which the dependent variable is total revenue divided by total assets. This paper shows that both a scaled Panzar-Rosse revenue equation and a Panzar-Rosse price function cannot be used to infer the degree of competition. Only an unscaled revenue equation yields a valid measure for competitive conduct. Furthermore, we show that the appropriate Panzar-Rosse test, based on an unscaled revenue equation, generally requires additional information about costs and market equilibrium to allow meaningful interpretations. Our theoretical findings are confirmed by an empirical analysis of competition in the banking industry, based on a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during the period 1986-2004.

Mean Reversion in Stock Prices: Implications for Long-Term Investors

This paper discusses the implications of mean reversion in stock prices for longterm investors such as pension funds. We start with a general definition of a meanreverting price process and explain how mean reversion in stock prices is related to mean reversion in stock returns. Subsequently, we show that mean reversion makes stocks less risky for investors with long investment horizons. Next, we consider a mean-variance efficient investor and show how mean reversion in stock prices affects such an investor’s optimal portfolio weights. Finally, we discuss the implications of our findings for the investment decisions of long-term investors.

Real Pension Rights as a Control Mechanism for Pension Fund Solvency

This paper models policy responses to changes in solvency by Dutch occupational pension funds using a unique panel dataset containing the balance sheets of all registered pension funds in the Netherlands over a period of 15 years (1993–2007). The model describes how nominal pension rights are expanded, by e.g. indexation or backservice, or, on the contrary, how the current pension accumulation is skimmed, e.g. by setting the pension premium over its actuarially fair price to build buffers. Policy responses are explained by the funding ratio and other pension fund characteristics such as pension funds´ size and type, and participants’ ages. We find that pension rights are expanded in line with the funding ratio, but that the pension funds’ response function exhibits two sharp and significant behavioural breaks, close to the minimum funding ratio of 105% and the target ratio of around 125%. These levels also play a pivotal role in current supervisory regulation. We further find that large pension funds and grey funds are relatively generous to participants.

Bank Profitability and Risk-Taking Under Low Interest Rates

The aim of this paper is to investigate the impact of the unusually low interest rate environment on the soundness of the US banking sector in terms of profitability and risk-taking. Using both dynamic and static modeling approaches and various estimation techniques, we find that the low interest rate environment indeed impairs bank performance and compresses net interest margins. Nonetheless, banks have been able to maintain their overall level of profits, due to lower provisioning, which in turn may endanger financial stability. Banks did not compensate for their lower interest income by expanding operations to include trading activities with a higher risk exposure.

Determinants of Interest Rates on Time Deposits and Savings Accounts: Macro Factors, Bank Risk, and Account Features

Using a novel dataset from the Netherlands banking sector, we examine how macroeconomic, bank†specific, and account†specific characteristics affect the interest rates of banking products. Our results show that interest rates have become more sensitive to bank risk since the onset of the global financial crisis. More generally, we show that time deposits reflect more closely the economic environment than bank interest rates on savings accounts do. Interest rates on deposit products vary not only across, but also within banks (i.e., across account of individual banks). We find that maturity†increasing conditions (i.e., withdrawal fees for savings accounts and product maturity for time deposits) positively influence a products interest rate.

X-efficiency and economies of scale in pension fund administration and investment

ABSTRACT Pension funds’ operating costs impair pension benefits, so it is crucial for pension funds to operate at the lowest cost possible. In practice, we observe substantial differences in costs per member for Dutch pension funds, both across and within pension fund size classes. This article presents new estimates of scale economies of pension funds and is the first that also measures pension fund X-inefficiency. We use a unique supervisory data set which distinguishes between administrative and investment costs and apply various approaches and models. Our estimates show large economies of scale for pension fund administrations, but modest diseconomies of scale for investment activities. We also found that many pension funds have substantial X-inefficiencies for both administrative and investment activities. The two kinds of inefficiency differ across types of pension funds. Therefore, most pension funds should be able to improve their cost performance, and hence increase pension benefits.

Bank switching and deposit rates: Evidence for crisis and non-crisis years

Using a sample of annual deposit data in the Netherlands for the 2004 – 2014 period, we study the fraction of deposits transferred per year by 718 individuals. Controlling for demographic factors, we find that deposit rate differences across banks significantly explain the extent to which depositors reallocate their savings. This effect is predominantly present in non-crisis years, while depositors seemingly exhibited flight-to-safety behavior during the financial crisis. As this behavior holds for fully insured household deposits as well, we conclude that the effect of deposit insurance was muted during the past financial crisis.