123 results found
Allen F, Gu X, Li CW, et al., 2023, Implicit guarantees and the rise of shadow banking: The case of trust products, Journal of Financial Economics, Vol: 149, Pages: 115-141, ISSN: 0304-405X
Implicit guarantees provided by financial intermediaries are a key component of China's shadow banking sector. We show theoretically that project screening by intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement and mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a dataset of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.
Allen HF, Qian JQJ, Shan C, et al., 2023, Dissecting the long-term performance of the Chinese stock market, The Journal of Finance, ISSN: 0022-1082
Domestically listed Chinese (A share) firms have lower stock returns than externally listed Chinese, developed and emerging country firms during 2000-2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance in both stock and accounting returns is more pronounced for large A share firms, while small firms show no underperformance in either dimension. Investor sentiment explains low stock returns in the cross-country and within A share samples. Institutional deficiencies in IPO and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows.
Allen F, Qian M, Xie J, 2022, Implicit benefits and financing, Journal of Financial Intermediation, Vol: 52, Pages: 1-11, ISSN: 1042-9573
Social relationship and business connections create implicit benefits between borrowers and lenders. We model how implicit benefits and repayment enforcement costs influence credit allocation, cost, and renegotiation. The optimal solution illustrates that financing with implicit benefits may achieve lower financing costs, higher managerial effort, and better outcomes for both borrowers and lenders. This result is consistent with the continuing expansion of alternative financing despite formal financial intermediation, the rise of corporate insider debt, and joint ownership of debt and equity. The growing size and complexity of projects and changes in community relationships can explain expansion of financing with standard intermediation.
Allen F, Fatas A, Weder di Mauro B, 2022, Was the ICO boom just a sideshow of the Bitcoin and Ether Momentum?, Journal of International Financial Markets, Institutions and Money, Vol: 80, Pages: 1-9, ISSN: 1042-4431
We investigate whether the market for ICOs in 2017–2018 and 2021 showed signs of contagion from prices of Bitcoin and Ether. During phases of optimism, ICO daily returns display low correlations with those of Bitcoin or Ether. But when the bubble bursts, correlations jump to very high levels, signaling that the ICO market becomes a sideshow of the cryptocurrency dynamics. We demonstrate that this high correlation was not present during the Nasdaq bubble in the 1990s, signaling that the price dynamics of digital tokens seems to be driven by a common factor, much more than in previous bubbles.
Allen F, Gu X, Jagtiani J, 2022, Fintech, cryptocurrencies, and CBDC: financial structural transformation in China, Journal of International Money and Finance, Vol: 124, ISSN: 0261-5606
Fintech and decentralized finance have penetrated all areas of the financial system and have improved financial inclusion in the last decade. In this paper, we review the recent literature on fintech, cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs). There are important implications from the rise of fintech and the introduction of stablecoins and CBDC in recent years. We provide an overview of China’s experience in fintech, focusing on payments, digital banking, fintech lending, and the recent progress on its CBDC pilots (e-CNY). We also discuss important considerations in designing effective cryptocurrency regulations. Cryptocurrency regulations could promote growth of innovations through enhanced public confidence in this market. The e-CNY could become mainstream in the global market through effective regulations which provide incentives and protection to market participants. A key factor to success for digital currencies has been their widespread adoption. If the Chinese e-CNY were to become a mainstream currency, the introduction of CBDC could potentially offer solutions to existing problems inherent in the traditional financial systems.
Allen F, Gadi B, Gale D, 2022, Asset price booms and macroeconomic policy: a risk-shifting approach, American Economic Journal: Macroeconomics, Vol: 14, Pages: 243-280, ISSN: 1945-0443
This paper uses a risk-shifting model to analyze policy responses to asset price booms. We showrisk shifting leads to ine¢ cient asset and credit booms in which asset prices can exceed fundamentals.However, the ine¢ ciencies associated with risk shifting arise independently of whether the asset is abubble. Given evidence of risk-shifting, policymakers may not need to determine if assets are bubbles tojustify intervention. We then show that some of the main candidate interventions against asset boomshave ambiguous welfare implications: Tighter monetary policy can mitigate some ine¢ ciencies but at acost, while leverage restrictions may raise asset prices and lead to more leveraged speculation rather thanless. Policy responses are more e§ective when they disproportionately discourage riskier investments.
Allen F, Haas M, Nowak E, et al., 2021, Market efficiency and limits to arbitrage: evidence from the Volkswagen short squeeze, Journal of Financial Economics, Vol: 142, Pages: 166-194, ISSN: 0304-405X
On October 26, 2008, Porsche announced a largely unexpected domination plan for Volkswagen. The resulting short squeeze in Volkswagen’s stock briefly made it the most valuable listed company in the world. We argue that this was a manipulation designed to save Porsche from insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data we provide the first rigorous academic study of the Porsche-VW squeeze and show that it significantly impeded market efficiency. Preventing manipulation is important because without efficient securities markets, the EU’s major project of the Capital Markets Union cannot be successful.
Allen F, Gu X, 2021, Shadow banking in China compared to other countries, The Manchester School, Vol: 89, Pages: 407-419, ISSN: 1463-6786
China's shadow banking has been rising rapidly in the last decade, mainly driven by regulations for banks, the Fiscal Stimulus Plan in 2008 and credit constraints in restrictive industries. This sector has continued growing although the regulators repeatedly attempted to impose new regulations on banks and nonbanks. The existence of shadow banking fulfills the high demand for funding. The standard view is that it poses risks to financial stability. However, in China, this is not necessarily the case. Entrusted loans, implicit guarantees from nonbanks, banks or government may provide a second‐best arrangement in funding risky projects and improving welfare.
Allen HF, Gu X, Jagtiani J, 2021, A survey of fintech research and policy discussion, Review of Corporate Finance, Vol: 1, Pages: 259-339, ISSN: 2693-9312
The intersection of finance and technology, known as fintech, has resulted in the dramatic growth of innovations and has changed the entire financial landscape. While fintech has a critical role to play in democratizing credit access to the unbanked and thin-file consumers around the globe, those consumers who are currently well served also turn to fintech for faster services and greater transparency. Fintech, particularly the blockchain, has the potential to be disruptive to financial systems and intermediation. Our aim in this paper is to provide a comprehensive fintech literature survey with relevant research studies and policy discussion around the various aspects of fintech. The topics include marketplace and peer-to-peer lending; credit scoring; alternative data; distributed ledger technologies; blockchain; smart contracts; cryptocurrencies and initial coin offerings; central bank digital currency; robo-advising; quantitative investment and trading strategies; cybersecurity; identity theft; cloud computing; use of big data, artificial intelligence. and machine learning; identity and fraud detection; anti-money laundering; Know Your Customers; natural language processing; regtech; insuretech; sandboxes; and fintech regulations.
Walther A, Allen H, 2021, Financial architecture and financial stability, Annual Review of Financial Economics, ISSN: 1941-1375
This paper studies the links between financial stability and the architecture of financial systems. We review the existing literature and provide organizing frameworks for analyzing three empirically important aspects of financial architecture: The rise of non-bank financial intermediaries, the regulatory response to these structural changes, and the emergence of complex interbank networks. One of our main new results is a necessary and sufficient condition for whether non-bank intermediaries are immune to runs in an extended version of the Diamond-Dybvig model.
We explore the relationship between bank branch expansion, financial inclusion, and profitability for Equity Bank. Unlike traditional banks, including foreign and government owned banks in Kenya, Equity Bank targets less developed territories and less privileged households. Its presence increased financial inclusion by 31% of the adult population between 2006 and 2015, especially for Kenyans who were less educated, did not own their own home, and lived in less-developed areas. The bank’s business model proves to be highly effective, with branch-level profits rising in areas with a smaller number of operating banks. Overall, the growth of Equity Bank demonstrates that financial inclusion can be achieved and sustained through profitable branching and service strategies that also serve the needs of underserved regions and populations. Thus, financial inclusion need not come at the sacrifice of bank profitability.
We explore the relationship between bank branch expansion, financial inclusion and profitabilityfor Equity Bank. Unlike traditional banks, including foreign and government owned banks inKenya, Equity Bank targets less developed territories and less privileged households. Its presenceincreased financial inclusion by 31 percent of the adult population between 2006 and 2015,especially for Kenyans who were less educated, did not own their own home, and lived in lessdeveloped areas. The bank’s business model proves to be highly effective, with branch-levelprofits rising in areas with a smaller number of operating banks. Overall, the growth of EquityBank demonstrates that financial inclusion can be achieved and sustained through profitablebranching and service strategies that also serve the needs of underserved regions and populations.Thus, financial inclusion need not come at the sacrifice of bank profitability.
Allen F, Qian JQJ, Shan C, et al., 2020, The Development of the Chinese Stock Market, The Handbook of China's Financial System, Editors: Amstad, Sun, Xiong, Publisher: Princeton University Press
Allen HF, Qian M, Xie J, 2019, Understanding informal financing, Journal of Financial Intermediation, Vol: 39, Pages: 19-33, ISSN: 1042-9573
This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing.
Allen HF, Qian Y, Tu G, et al., 2019, Entrusted loans: a close look at China's shadow banking system, Journal of Financial Economics, Vol: 133, Pages: 18-41, ISSN: 0304-405X
We perform transaction-level analyses of entrusted loans, one of the largest components of shadow banking in China. Entrusted loans involve firms with privileged access to cheap capital channeling funds to less privileged firms, and the increase when credit is tight. Nonaffiliated loans have much higher interest rates than both affiliated loans and official bank loans, and they largely flow into real estate. The pricing of entrusted loans, especially of nonaffiliated loans, incorporates fundamental and informational risks. Stock market reactions suggest that both affiliated and nonaffiliated loans are fairly compensated investments.
Allen F, Qian JQJ, Qian M, 2019, A Review of China's Institutions, ANNUAL REVIEW OF FINANCIAL ECONOMICS, VOL 11, Editors: Lo, Merton, Publisher: ANNUAL REVIEWS, Pages: 39-64
Allen F, Pastor L, 2019, Capital Markets Union: Key Challenges, Conference on Capital Market Union and Beyond, Publisher: MIT PRESS, Pages: 3-24
Allen F, Brealey R, Myers S, 2019, Principles of Corporate Finance, 13th edition, Publisher: McGraw-Hill, ISBN: 978-1260013900
Banks are intrinsically fragile because of their role as liquidity providers. This results in under-provision of liquidity. We analyze the effect of government guarantees on the interconnection between banks' liquidity creation and likelihood of runs in a global-game model, where banks' and depositors' behavior are endogenous and affected by the amount and form of guarantee. The main insight of our analysis is that guarantees are welfare improving because they induce banks to improve liquidity provision, although that sometimes increases the likelihood of runs or creates distortions in banks' behavior.
Allen HF, Bartiloro L, Gu X, et al., 2018, Does economic structure determine financial structure?, Journal of International Economics, Vol: 114, Pages: 389-409, ISSN: 0022-1996
In this paper, we examine the relationship between the structure of the real economy and a country's financial system. We consider whether the development of the real economic structure can predict the direction of evolution of a country's financial structure. Using data for 108 countries, we find a significant relationship between real economic structure and financial structure. Next, we exploit shocks to the economies in India, Finland and Sweden, and South Korea and show that changes in the economic structure of a country influence the evolution of its financial system. This suggests that financial institutions and capital markets change in response to the structure of industries.
Allen HF, Gu X, 2018, The Interplay between regulations and financial stability, Journal of Financial Services Research, Vol: 53, Pages: 233-248, ISSN: 0920-8550
The crisis demonstrated that microprudential regulation focusing on the risks taken by individual banks is not sufficient to prevent crises. This is because it ignores systemic risk. Six types of systemic risk are identified, namely: (i) panics – banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; (iv) financial architecture; (v) foreign exchange mismatches in the banking system; (vi) behavioral effects from Knightian uncertainty. We focus on the first three as they are arguably the main causes of the 2007–9 crisis and consider regulatory and other policies to counteract them.
Allen HF, Goldstein I, Jagtiani J, 2018, The interplay between financial regulations, resilience, and growth, Journal of Financial Services Research, Vol: 53, Pages: 141-162, ISSN: 0920-8550
Interconnectedness has been an important source of market failures, leading to the recent financial crisis. Large financial institutions tend to have similar exposures and thus exert externalities on each other through various mechanisms. Regulators have responded by putting in place more regulations with many layers of regulatory complexity, leading to ambiguity and market manipulation. Mispricing risk in complex models and the arbitrage opportunities through the regulatory loopholes have provided incentives for certain activities to be more concentrated in the regulated entities and for other activities to leave the banking into new shadow banking areas. How can we design an effective regulatory framework that would perfectly rule out bank runs and TBTF and to do so without introducing incentives for financial firms to take excessive risk? It is important for financial regulations to be coordinated across regulatory entities and jurisdictions and for financial regulations to be forward looking, rather than aiming to address problems of the past.
Allen F, Gu X, Qian J, 2018, The People’s Bank of China: From 1948 to 2016, Sveriges Riksbank and the History of Central Banking, Publisher: Studies in Macroeconomic History, ISBN: 9781107193109
We provide a comprehensive review of the development and activities of the People’s Bank of China (PBC) over the last half century. First, the PBC has evolved from the mixture of a central bank and a commercial bank to the central bank of China, with this status legally confirmed in 1995. Although the mandates of the PBC have altered slightly over the past decades, the bank’s monetary policy has continuously met challenges in different stages of economic development. Second, in order to reach the objectives of economic growth and stable prices, the PBC does not operate in a single instrument environment, but employs a variety of policy instruments including price-based, quantity-based and administrative policy measures. Third, the PBC has been actively promoting financial reforms and playing a key role in regulation during special episodes such as the credit crunch in 2013. These have led to the rapid development of the financial system and may further contribute to economic growth and help balance the growth in different economic sectors.
Allen H, Gale D, 2018, Financial Contagion revisited, Towards a Just Society: Joseph Stiglitz and 21st Century Economics
Allen HF, Carletti E, Grinstein Y, 2018, International evidence on firm level decisions in response to the crisis: shareholders vs. other stakeholders, Journal of the Japanese and International Economies, Vol: 47, Pages: 3-16, ISSN: 0889-1583
The relationship between changes in GDP and unemployment during the 2008 financial crisis differed significantly from previous experiences and across countries. We study firm-level decisions in France, Germany, Japan, the UK, and the US. We find significant differences between the response of US and non-US firms. US firms significantly decreased their production costs relative to firms in other countries. They have also reduced debt, reduced dividend payout, and increased their cash holdings compared to firms in other countries. The differences are, in general, explained by differences in financial leverage. However, financial leverage does not explain differences between production decisions in German and U.S. firms and between Japanese and US firms. We argue that differences in firm governance between US firms and firms in Germany and Japan drive these responses. US firms are more prone to cut labor costs and reduce leverage compared to German firms and Japanese firms in order to achieve larger profits and a larger cash-cushion in the short-run.
Allen HF, Gale D, 2017, How should bank liquidity be regulated?, Achieving Financial Stability: Challenges to Prudential Regulation, Pages: 135-157, ISBN: 978-981-3223-39-4
One reason why the 2007–2009 financial crisis was so severe and had a global impact was massive illiquidity in many markets, particularly interbank markets. This combined with an extreme exposure of many financial institutions to liquidity needs meant investors ran on a variety of financial institutions, particularly in wholesale markets. Financial institutions and non-financial firms started to sell assets at fire-sale prices to raise cash, and central banks injected huge amounts of liquidity into financial systems…Read More: https://www.worldscientific.com/doi/abs/10.1142/9789813223400_0011
Allen HF, Gu XIAN, Kowalewski O, 2017, Financial Structure. Economic Growth and Development, Handbook of Finance and Development, Editors: Beck, Levine
Financial intermediaries and markets can alleviate market frictions through producinginformation and risk sharing in different ways. In practice, the structure of financialsystems can be bank-based or market-based, varying across countries. The influence offinancial structure on economic growth is dependent on the overall development of thereal economy and institutions. The association is also different during crisis periods andnon-crisis periods. Market-based systems tend to have an advantage for financiallydependent industries in good times but are a disadvantage in bad times. The recent rapidgrowth of shadow banking benefits economic growth but also poses additional risks tothe financial system and real economy.
Burn L, Faull J, Kirilenko A, et al., 2017, The changing geography of finance and regulation in Europe, Publisher: European University Institute, ISBN: 9789290845454
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