The impact of the yield curve on bank equity returns: Evidence from Canada

Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation-linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond data and takes into consideration the impact of transaction costs in the performance of immunization strategies and in the selection of optimal investment strategies. The results show that the multiple liability immunization strategy using inflation-linked bonds outperforms the equivalent strategy using nominal bonds and is robust even in a nearly zero interest rate scenario. These results have important implications in the design and structuring of ALM liability-driven investment strategies, particularly for retirement income providers such as pension schemes or life insurance companies.

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The Influence of Trading Locations on Equity Returns

Asian Social Science ◽

10.5539/ass.v12n12p188 ◽

2016 ◽

Vol 12 (12) ◽

pp. 188

Author(s):

Nguyen N.T. Vo

Keyword(s):

Risk Premium ◽

Stock Price ◽

Listed Companies ◽

Equity Returns ◽

Stock Exchanges ◽

Home Market ◽

Trade Effect ◽

Market Index ◽

Highly Correlated ◽

The Impact

This paper evaluates the impact of trading locations on equity returns by examining the stock price behaviour of three Anglo-Dutch dual-listed companies which result from mergers where two corporations agree to function as a single operating business, but maintain separate identities. The shares of these stocks are traded not only in their home market but also on several US stock exchanges in the form of American Depository Receipts. Regressing the return differentials on these dual-listed and cross-listed stocks on the relative market index returns and currency changes provides evidence of an apparent violation of the Law of One Price. The regression results show that the return on each part of dual-listed companies is highly correlated with the market on which it is most intensively traded. Similarly, returns on cross-listed stocks have considerably higher co-movement with US market indices and considerably lower co-movement with home-market indices than their home-market counterparts. Market risk premium is not a significant explanatory variable of the location of trade effect.

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The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

European Financial Management ◽

10.1111/1468-036x.00198 ◽

2002 ◽

Vol 8 (4) ◽

pp. 421-447 ◽

Cited By ~ 6

Author(s):

Dilip K. Patro ◽

John K. Wald ◽

Yangru Wu

Keyword(s):

Market Risk ◽

Equity Returns ◽

Financial Variables ◽

International Equity ◽

The Impact

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Monetary Policy Surprises over Time

Quarterly Journal of Finance ◽

10.1142/s2010139218400025 ◽

2018 ◽

Vol 08 (01) ◽

pp. 1840002 ◽

Cited By ~ 1

Author(s):

Marcello Pericoli ◽

Giovanni Veronese

Keyword(s):

Monetary Policy ◽

Financial Markets ◽

Interest Rates ◽

Euro Area ◽

Yield Curve ◽

Sovereign Spreads ◽

Definition Of ◽

Term Premia ◽

The Impact ◽

Over Time

We document how the impact of monetary surprises on euro-area and US financial markets has changed from 1999 to date. We use a definition of monetary policy surprises, which singles out movements in the long-end of the yield curve — rather than those changing nearby futures on the central bank reference rates. By focusing only on this component of monetary policy, our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect the shifts in sovereign spreads, and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.

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Should Vietnamese Banks Need More Equity? Evidence on Risk-Return Trade-Off in Dynamic Models of Banking

Journal of Risk and Financial Management ◽

10.3390/jrfm12020084 ◽

2019 ◽

Vol 12 (2) ◽

pp. 84 ◽

Cited By ~ 1

Author(s):

Van Dan Dang

Keyword(s):

Dynamic Models ◽

Generalized Method Of Moments ◽

Banking System ◽

Dynamic Panel Data ◽

Policy Implications ◽

Trade Off ◽

Risk Return ◽

Alternative Techniques ◽

Bank Equity ◽

The Impact

This study employs generalized method of moments (GMM) for dynamic panel data models to deal with the nature of banking behaviour, aiming at investigating the impact of bank equity on the risk and return of Vietnamese commercial banks during the period of 2006–2017. The study finds that increasing bank equity is not always the best strategy to be accompanied by absolute benefits, increasing returns and reducing risks for banks but is a trade-off instead. More precisely, banks with larger capital buffers tend to take less risk but are less profitable. In addition, the study also finds a non-linear relationship revealing that bank risk mitigates the effect of bank equity on profitability. Most estimations show strong robustness checked by some alternative techniques. Based on the findings, the study provides some important policy implications to improve the performance of the banking system in Vietnam as well as in other emerging countries.

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Spillovers and diversification potential of bank equity returns from developed and emerging America

The North American Journal of Economics and Finance ◽

10.1016/j.najef.2020.101219 ◽

2020 ◽

Vol 54 ◽

pp. 101219 ◽

Cited By ~ 3

Author(s):

Jose Arreola Hernandez ◽

Sang Hoon Kang ◽

Syed Jawad Hussain Shahzad ◽

Seong-Min Yoon

Keyword(s):

Equity Returns ◽

Bank Equity

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What Proportion of Time is a Particular Market Inefficient? … A Method for Analysing the Frequency of Market Efficiency when Equity Prices Follow Threshold Autoregressions

Journal of Time Series Econometrics ◽

10.1515/jtse-2016-0021 ◽

2018 ◽

Vol 10 (2) ◽

Cited By ~ 2

Author(s):

Muhammad Farid Ahmed ◽

Stephen Satchell

Keyword(s):

Time Series ◽

Market Efficiency ◽

Stationary Process ◽

Equity Returns ◽

Autoregressive Models ◽

Asset Markets ◽

Equity Prices ◽

Threshold Autoregressive ◽

Time Series Econometrics ◽

The Impact

Abstract We assume that equity returns follow multi-state threshold autoregressions and generalize existing results for threshold autoregressive models presented in Knight and Satchell 2011. “Some new results for threshold AR(1) models,” Journal of Time Series Econometrics 3(2011):1–42 and Knight, Satchell, and Srivastava (2014) for the existence of a stationary process and the conditions necessary for the existence of a mean and a variance; we also present formulae for these moments. Using a simulation study, we explore what these results entail with respect to the impact they can have on tests for detecting bubbles or market efficiency. We find that bubbles are easier to detect in processes where a stationary distribution does not exist. Furthermore, we explore how threshold autoregressive models with i.i.d trigger variables may enable us to identify how often asset markets are inefficient. We find, unsurprisingly, that the fraction of time spent in an efficient state depends upon the full specification of the model; the notion of how efficient a market is, in this context at least, a model-dependent concept. However, our methodology allows us to compare efficiency across different asset markets.

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Treasury Bond Illiquidity and Global Equity Returns

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109014000362 ◽

2014 ◽

Vol 49 (5-6) ◽

pp. 1227-1253 ◽

Cited By ~ 20

Author(s):

Ruslan Goyenko ◽

Sergei Sarkissian

Keyword(s):

Asset Pricing ◽

Equity Returns ◽

Asset Valuation ◽

Macroeconomic Shocks ◽

Country Level ◽

Time Period ◽

Treasury Bond ◽

Using Data ◽

The Impact ◽

Asset Pricing Tests

AbstractIn this study, using data from 46 markets and a 34-year time period, we examine the impact of the illiquidity of U.S. Treasuries on global asset valuation. We find that it predicts equity returns in both developed and emerging markets. This predictive relation remains intact after controlling for various world- and country-level variables. Asset pricing tests further reveal that bond illiquidity is a priced factor even in the presence of other conventional risks. Since the illiquidity of Treasuries is known to reflect monetary and macroeconomic shocks, our results suggest that it can be considered a proxy for aggregate worldwide risks.

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