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.
Publication Date: 2012
Journal of Financial and Quantitative Analysis (00221090)47(6)pp. 1279-1301
We test whether asymmetric preferences for losses versus gains affect the prices of cash flow versus discount rate risk. We construct a return decomposition distinguishing cash flow and discount rate betas in up and down markets. Using U.S. data, we find that downside cash flow and discount rate betas carry the largest premia. Downside cash flow risk is priced consistently across different samples, periods, and return decomposition methods. It is the only component of beta with significant out-of-sample predictive ability. Downside cash flow premia mainly occur for small stocks, while large stocks are compensated for symmetric cash-flow-related risk. Copyright © Michael G. Foster School of Business, University of Washington 2012.
