Articles
Golbabaei pasandi, A.,
Botshekan, M.,
Jalilvand, A.,
Rastegar, M.A.,
Rostami noroozabad, M. Publication Date: 2024
Journal of Risk and Financial Management (19118074)17(7)
Beyond the 2007–2008 financial crisis, the collapse of the Silicon Valley Bank and the acquisition of Credit Suisse by the Swiss investment bank UBS Group AG in 2023 have brought fresh attention to the need for new regulatory capital, liquidity risk management, and leverage requirements. To meet tightened capital requirements, banks have to increase their capital ratios either by increasing equity or by decreasing risk-weighted assets. Both options lead to banks’ performance deterioration. One remedy for banks to recover is raising their lending spread. A critical question is how much the lending spread should be increased to offset the drop in the bank’s financial performance level. In this study, we focus on the asymmetries and efficiency consequences of performance indices such as economic value added (EVA) and the more commonly used return on equity (ROE) in determining the loan spread. Using data on the largest U.S. banks over the period 2018–2022, our results show that the ROE rule significantly overestimates the magnitude of the lending spreads required to offset the negative financial consequences of increases in capital ratios. The EVA approach, on the other hand, prescribes on average a significantly lower lending spread of 0.4505 basis points against a lending spread of 21.0441 basis points associated with the use of the ROE approach. The efficiency and the level of lending spreads should enable banks to maintain their competitive advantages in the loan markets impacting overall economic productivity and growth. © 2024 by the authors.
Publication Date: 2024
Iranian Economic Review (10266542)28(3)pp. 730-753
This paper investigates whether the prior returns of value and glamour stocks can predict future value premiums using stocks listed on the Tehran Stock Exchange. In the spirit of Eleswarapu and Reinganum (2004), we focus on the exclusive predictive power of prior returns of style portfolios. We form three sets of value and glamour portfolios based on three different definitions. While we find that value premiums are predictable in both in-sample and out-of-sample tests, this evidence is not the same when using prior returns for each style. Glamour stock returns positively predict future value premiums while value stock returns predict them with a negative coefficient. Thus, we show that the prior underperformance of current value stocks can be a good candidate for predicting value premiums. We also show that this evidence of predictability can be exploited in the form of a style rotation strategy and can beat the buy-and-hold strategy as well as the usual value investing strategies. © Author(s).
Publication Date: 2022
Quarterly Review of Economics and Finance (10629769)85pp. 289-302
Using annual observations of insured US commercial banks, this paper investigates the possible asymmetric impacts of capital ratios on the interest rate spread where the asymmetry depends on the magnitude and also the channel the bank used to increase the capital ratio. To this end, we employ a panel threshold regression approach with one and two threshold variables, where the change in the capital ratio itself and the main components of change in the capital ratio, namely, change in the capital or change in risk-weighted assets have been used as the threshold variables. The results show a significant threshold effect. In the single threshold models, banks that correspond to regimes with a higher increase in the capital ratio, a higher contribution of capital to the increase in the capital ratio, and a higher contribution of risk-weighted assets to the increase in the capital ratio also show a higher impact of capital ratios on the interest rate spread compared to their counterparts. In the panel threshold regression model with two threshold variables and four regimes, we find similar results. Our baseline results also hold stable using the panel smooth transition regression approach as an alternative modeling approach, using alternative proxies as threshold variables and performing the main tests in different bank size categories. © 2022 Board of Trustees of the University of Illinois
Publication Date: 2017
Journal of Financial and Quantitative Analysis (00221090)52(5)pp. 2277-2303
We investigate whether long-term and short-term components of typical conditioning variables in asset pricing studies, such as the dividend yield or yield spread, have different implications for optimal asset allocation. We argue that short-term components relate mostly to momentum, and long-term components relate mostly to mean-reversion effects, respectively. Therefore, they may have a different information content for investors with different horizons. We obtain improvements in terms of out-of-sample Sharpe ratios and expected utilities for decomposed state variables that directly reflect information related to the stock market, such as the dividend yield and stock market trend. © Copyright Michael G. Foster School of Business, University of Washington 2017.
