James W. Kolari

Predicting large US commercial bank failures

Abstract The present study applies empirical methods to the problem of predicting large US commercial bank failures. Due to sampling limitations, scant research has examined the feasibility of using computer-based early warning systems (EWSs) to identify pending large bank failures. In the late 1980s and early 1990s numerous large banks failed in the US enabling us to collect adequate samples of large banks with more than

Stock Market Integration and Financial Crises: The Case of Asia

250 million in assets for empirical analyses. Both the parametric method of logit analysis and the nonparametric approach of trait recognition are employed to (1) develop classification EWS models based on original samples and (2) test the efficacy of these models based on their prediction accuracy using holdout samples. Both logit and trait recognition performed well in terms of classification results. However, with regard to the prediction results using holdout samples, trait recognition outperformed logit in most tests in terms of minimizing Type I and II errors. Other results from the trait recognition models reveal that complex two- and three-variable interactions between financial and accounting variables contain additional information about bank risk not found in the individual variables themselves. We conclude that computer-based EWSs can provide valuable information about the future viability of large banks.

Commercial bank mutual fund activities: Implications for bank risk and profitability

This study examines long-run relationships and short-run dynamic causal linkages among the US, Japanese, and ten Asian emerging stock markets, with the particular attention to the 1997-1998 Asian financial crisis. Extending related empirical studies, comparative analyses of pre-crisis, crisis, and post-crisis periods are conducted to comprehensively evaluate how stock market integration is affected by financial crises. In general, the results for the case of Asia show that both long-run cointegration relationships and short-run causal linkages among these markets were strengthened during the crisis and that these markets have generally been more integrated after the crisis than before the crisis. Detailed country-by-country analyses are provided, which yield a variety of new results concerning the roles of individual countries in international stock market integration. An important implication of our findings is that the degree of integration among countries tends to change over time, especially around periods marked by financial crises.

Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?

Abstract This paper examines the risk structure of bank holding companies and the effect of mutual fund activities on bank risk and profitability over the period 1987–1994. Findings from structural change tests indicate a significant decline in bank risk occurred near the mid-point of the study. Results from a confirmatory factor analytic model employed to examine the impact of mutual fund activities on banks suggest that mutual fund activities moderated bank industry systematic risk during the sample period. Mutual fund activities also increased the profitability of banks. These results suggest that mutual funds represent a productive avenue of expansion for bank holding companies.

Branch office economies of scale and scope: evidence from savings banks in Finland

This paper employs stochastic frontier cost and profit models to estimate economies of scale as well as X-efficiency for multi-billion dollar European and U.S. banks in the period 1995-1999. Empirical results with respect to separate analyses of large European and U.S. banks are strikingly similar with decreasing (increasing) cost (profit) returns to scale. We find that large banks in Europe and the U.S. have cost and profit functions that are similar with increasing returns to scale and decreasing (increasing) scope economies for the cost (profit) model. Further analyses evaluate the reasonableness of estimating a combined cost or profit frontier for European and U.S. banks. We find that, while a single profit frontier may exist, separate cost frontiers are implied. Although profitability in absolute terms is equal, large U.S. banks tend to exhibit higher average profit efficiency than European banks on average. Moreover, banks in the U.S. are more profit efficient than banks in most individual European countries. We conclude that the empirical results tend to support the notion that potential efficiency gains are possible via geographic expansion of large European and U.S. banks.

House Prices and Inflation

Abstract The present paper provides empirical estimates of economies of scale and scope for 615 branch offices representing 43 savings banks in Finland at year-end 1988. A translog cost model is employed with detailed branch office level data for operating costs and outputs. Input prices are measured at the bank level. The results indicate that the cost curve for branch offices is downward-sloping regardless of whether or not the number of branches in the organization is included in the analyses. Also, the operating costs of individual branch offices decline as the number of branches in the branch bank organization increases, with most cost savings obtained at around five branches. Scope economies are negative but statistically insignificant. These findings suggest both that large branch offices operate more efficiently than smaller offices and that operating costs can be further reduced by membership in a branching organization with at least five offices.

The Effects of Securitization on Mortgage Market Yields: A Cointegration Analysis

The present paper examines the long-run impact of inflation on homeowner equity by investigating the relationship between house prices and the prices of nonhousing goods and services, rather than return series and inflation rates as in previous empirical studies on the inflation hedging ability of real estate. There are two reasons for this methodological departure from prior practice: (1) while the total return on housing cannot be accurately measured, the total return on housing is fully reflected in housing prices, and (2) given that using returns or differencing a time series leads to a loss of long-run information contained in the series, valuable long-run information can be captured by using prices. Also, unlike previous related studies, we exclude housing costs from goods and services prices to avoid potential bias in estimating how inflation affects housing prices. Monthly data series are collected for existing and for new house prices as well as the consumer price index excluding housing costs for the period 1968-2000. Based on both autoregressive distributed lag (ARDL) models and recursive regressions, the empirical results yield estimated Fisher coefficients that are consistently greater than one over the sample period. Thus, we infer that house prices are a stable inflation hedge in the long run. Copyright 2002 by the American Real Estate and Urban Economics Association.

Foreign Exchange Risk and the Cross-Section of Stock Returns

Securitization of the residential mortgage market has completely transformed the process of financing home loans in the U.S. over the last two decades. We examine the effects of securitization on yield spreads in the primary mortgage market. Cointegration techniques are employed to test the relationship between the increasing volume of mortgage securities over time and the yield spread on mortgage loan rates. We find that a 10% increase in the level of mortgage securitization as a proportion of total mortgage originations decreases yield spreads on home loans by as much as 20 basis points. Other results indicate that, while prepayment speed has a significant effect on mortgage yield spreads, default risk does not. We conclude that securitization of the residential mortgage market plays an important role in decreasing the cost of home loans. Copyright American Real Estate and Urban Economics Association.

Deriving weights from general pairwise comparison matrices

We examine the relation between the cross-section of US stock returns and foreign exchange rates during the period from 1973 to 2002. We find that stocks most sensitive to foreign exchange risk (in absolute value) have lower returns than others. This implies a non-linear, negative premium for foreign exchange risk. Sensitivity to foreign exchange generates a cross-sectional spread in stock returns unexplained by existing asset-pricing models. Consequently, we form a zero-investment factor related to foreign exchange-sensitivity and show that it can reduce mean pricing errors for exchange-sensitive portfolios. One possible explanation for our findings includes Johnsons [2004. Forecast dispersion and the cross-section of expected returns. Journal of Finance, 59, 1957-1978] option-theoretic model in which expected returns are decreasing in idiosyncratic cashflow volatility.

Is Bancassurance a Viable Model for Financial Firms

The problem of deriving weights from pairwise comparison matrices has been treated extensively in the literature. Most of the results are devoted to the case when the matrix under consideration is reciprocally symmetric (i.e., the i, j-th element of the matrix is reciprocal to its j, i-th element for each i and j). However, there are some applications of the framework when the underlying matrices are not reciprocally symmetric. In this paper we employ both statistical and axiomatic arguments to derive weights from such matrices. Both of these approaches lead to geometric mean-type approximations. Numerical comparison of the obtained geometric mean-type solutions with Saatys eigenvector method is provided also.