Bank Supply Shocks and Firm Investment: A Granular View from the Thai Credit Registry Data
This paper attempts to link bank loan supply shocks to the real economic activity at the firm and aggregate level. We apply the methodology pioneered by Amiti and Weinstein (2017) to bank-firm credit registry dataset in Thailand for the period of 2004-2015. Loan growth dynamics of individual banks and individual firms are exactly decomposed into a time series of bank, firm, industry, and common shocks. We show that the bank and firm shocks obtained using this method are consistent with various measures of individual banks’ and firms’ balance sheet health, supporting the validity of the shock decomposition. Results from firm-level regressions indicate that bank supply shocks do matter for firm investment activity even after controlling for common, industry, firm-specific shocks and firm’s leverage. We find that Thai firms are generally highly sensitive to bank lending shocks, particularly firms that borrow from only one bank and have low propensity to switch to another bank. The size and the dynamics of bank shocks appears to differ between heathy versus unhealthy, and small versus large firms, suggesting differential bank lending policy across different types of firms. At the aggregate level, we find that granular bank shock accounts for around 37 percent of aggregate lending growth and is the major source of financial shocks driving aggregate investment.
Collectivism and Connected Lending
National culture may affect the prevalence of connected lending. This study aimed to assess the effects of national culture, especially collectivism, on the need for special connections with banks, which is a measure of connected lending. The researcher obtained national culture data from both Hofstede’s work and the GLOBE project. Using data covering more than 5000 firms in 51 countries, this study found that GLOBE Institutional Collectivism decreases the need for special connections, while Hofstede Collectivism and GLOBE In-Group Collectivism do not. This suggests that the need for special connections with banks is different from the corruption of bank officials.
Multi-Firm Entrepreneurship and Financial Frictions
An entrepreneur’s ability to save is crucial to mitigating aggregate productivity losses caused by underdevelopedfinancial markets. Previous studies of this mechanism assume that an entrepreneur’s savings come from income generated by only onefirm. In contrast, this paper uses a large, novel dataset from Thailand and, using a legal mandate that Thai households have unique surnames, documents a large share of entrepreneurs with income from multiplefirms. They can therefore accumulate wealth from various sources, allowingfinancially constrained firms that are owned by multi-firm entrepreneurs to grow faster and survive longer than those owned by single-firm entrepreneurs. Motivated by these facts, I develop a tractable model of multi-firm entrepreneurship in the presence of financial frictions and study its impact on aggregate productivity and the allocation of capital. After calibrating to match the salient features of the Thai data, I find that the aggregate productivity loss due tofinancial frictions would rise from 7% to 21% if entrepreneurs could not own multiple firms.
Economic Fundamentals and Spill-over among Asian Term Structures
This paper estimates affine term structure models of government bonds in selected 5 emerging countries during 2002-2015 periods. It aims to study the relationship between sovereign bond markets and the real economy. The analysis confirms evidences earlier that macroeconomic variables help explaining yield curve and term premium dynamics. For short-term bonds, yield’s responses to shocks are mostly carried by policy channel. For long-term bonds, responses are mostly from term premium. Furthermore, there are external factors that could generate yields co-movement in some emerging-economy countries. Our findings therefore suggest that portfolio diversification would benefit investors who allocate their assets globally. Central banks, however, have to face with difficulties in managing bond market as they have to oversee risk factors affecting investors’ risk perception and causing cross-country spill-over effects.
Value Investing: Circle of Competence in the Thai Insurance Industry
This study explores the strategy of value investing, specifically for the insurance industry in Thailand. It employs multiple measures of “value,” suitable for insurance companies, such as the price-to-earning (PE), price-to-book (PB), and cyclically adjusted price-to-earnings (CAPE). Value premium exists in the Thai insurance industry. Most of the value portfolios constructed from these measures significantly outperform the market, even when adjusting for price volatility and portfolio’s ß . The cumulative returns are also higher for the value stocks, when compared to the growth stocks, and the Thai stock market. Constructing a value portfolio, using the PE ratio, results in the highest returns and are far better than PB and CAPE. The value anomaly cannot be fully explained by either the capital asset pricing model or the Fama-French 3 factor models.
Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets
In recent years, portfolio flows to emerging markets (EMs) have become increasingly large and volatile. Using weekly portfolio fund flows data, the paper finds that their short-run dynamics are driven mostly by global “push” factors. To what extent do these cross-border flows and global risk aversion drive asset volatility in EMs? We use a Dynamic Conditional Correlation (DCC) Multivariate GARCH framework to estimate the impact of portfolio flows and the VIX index on three asset prices, namely equity returns, bond yields and exchange rates, in 17 emerging economies. The analysis shows that global risk aversion has a significant impact on the volatility of asset prices, while the magnitude of that impact correlates with country characteristics, including financial openness, the exchange rate regime, as well as macroeconomic fundamentals such as inflation and the current account balance. In line with earlier literature, portfolio flows to EMs are also found to affect the level of asset prices, as was the case in particular during the global financial crisis.
International Correlation Asymmetries: Frequent-but-Small and Infrequent-but-Large Equity Returns
We propose a novel regime-switching model to study correlation asymmetries in international equity markets. We decompose returns into frequent-but-small diffusion and infrequent-but-large jumps, and derive an estimation method for many countries. Wefind that correlations due to jumps, not diffusion, increase markedly in bad markets leading to correlation breaks during crises. Our model provides a better description of correlation asymmetries than GARCH, copula and stochastic volatilit ymodels. Good and bad regimes are persistent. Regime changes are detected rapidly and risk diversification allocations are improved. Asset allocation results in and out-of-sample are superior to other models including the 1/strategy.
Daily Movements in the Thai Yield Curve: Fundamental and Non-Fundamental Drivers
This paper attempts to identify the key determinants of daily yield movements in the Thai government bond market. It finds that Thai short-term yield movements are solely driven by domestic factors, namely policy rate expectations and bond supply. By contrast, longer-tenor yields are also found to be affected by global factors, namely global monetary conditions and global risk appetite. Apart from these “fundamental” factors, the net-buying pressures of foreign players, and not those of domestic investors, are also found to exert significant influence over the Thai medium and long rates. Taken alone, this finding may appear somewhat alarming as it implies that foreign activity can be a significant source of market volatility. Further investigations suggest, however, that the detected foreign influence may be due to informational reasons; foreign investors lead yield movements because they provide price-relevant “private” information to the market. Viewed in this light, the detected foreign influence may not altogether be so detrimental, at least insofar as normal periods are concerned.
Corporate Debt Maturity and Future Firm Performance Volatility
We propose a simple idea that corporate debt maturity should serve as a good indicator of future firm performance volatility. We show in a simple two-period model that the riskiness of corporate investment is a decreasing function of corporate debt maturity. If “observable” corporate debt maturity and ex ante “unobservable” corporate risk-taking is highly correlated, corporate debt maturity should be highly correlated with “ex post” realized firm performance volatility in following years. Using data on publicly listed firms in 10 developing and developed countries over the period 1991-2013, we find that future firm operating performance volatility decreases as corporate debt maturity increases and that future firm value volatility is not associated with corporate debt maturity. In addition, banking sector development and export intensity of a country play an important role in determining firm operating performance volatility.
Welfare Impacts of Index Insurance in the Presence of a Poverty Trap
This paper evaluates the welfare impacts of an index-based livestock insurance designed to compensate for satellite-based predicted livestock mortality in northern Kenya, where previous work has established the presence of poverty traps. We simulate household wealth dynamics based on rich panel and experimental data. The bifurcated livestock dynamics associated with the poverty trap gives rise to insurance valuation that is highly nonlinear in herd size. Estimated willingness to pay among vulnerable groups who most need insurance is, on average, lower than commercially viable rates. Targeted premium subsidization nonetheless appears to offer more cost-effective poverty reduction than need-based direct transfers.