COVID-19, stability and regulation: evidence from Indonesian banksPamungkas, Putra; Arifin, Taufiq; Trinugroho, Irwan; Lau, Evan; Sergi, Bruno S.
2024 Studies in Economics and Finance
doi: 10.1108/sef-12-2022-0569
This study aims to investigate the effect of credit relaxation policy during the COVID-19 pandemic and its efficacy as a countercyclical policy on bank risk and stability.Design/methodology/approachUsing a sample of 39 listed Indonesian banks, the authors investigate the effect of credit relaxation policy on banks’ risk and stability. Data were retrieved from Eikon DataStream from monthly financial statements from June 2019 to December 2020. The authors use panel data analysis with a fixed-effect estimator to estimate the model.FindingsThe authors find that the credit relaxation policy affects banks’ stability. The authors also find no significant relationship between the policy and bank risk measured by non-performing loans. The authors also find that the policy mainly affects small banks and both state-owned and private banks.Originality/valueThis research has some policy implications that issuing prompt regulations to respond to urgent situations is needed and is very important to face crisis conditions and reduce the negative impact of such crises.
Excess cash or excess headache? Demonetisation and bank behaviour in IndiaMajumdar, Saumen; Agarwal, Swati; Ghosh, Saibal
2024 Studies in Economics and Finance
doi: 10.1108/sef-12-2022-0552
Sudden and unannounced policy changes by the government that provide banks with windfall deposits creates a challenge in terms of resource deployment. In the process, there is an impact on their risk and returns. Using data on domestic Indian commercial banks, this study aims to examine the impact of such an announcement – the 2016 demonetisation episode – on bank behaviour.Design/methodology/approachUsing data on domestic Indian commercial banks during 2010–2020, the paper investigates the effect of a sudden and unannounced policy change on their risk and returns. Using the demonetisation undertaken in November 2016 as a natural experiment, the paper applies the difference-in-differences methodology to tease out the causal impact.FindingsThe findings reveal a decline in risk and an increase in returns of state-owned banks, consistent with a flight-to-safety. The response differed in terms of market and accounting measures and across state-owned banks with differing levels of capital and asset quality.Originality/valueAlthough several aspects of the demonetisation episode have been well analysed, its impact on banks – the main conduits of the exercise – and in particular on their risk and returns, is an unaddressed area of research. Viewed from this standpoint, this is one of the early studies to undertake a comprehensive empirical analysis on this aspect.
The impact of the COVID-19 pandemic on regional inflation in IndonesiaNugraha, Iqbal Reza; Sahadewo, Gumilang Aryo; Setiastuti, Sekar Utami
2024 Studies in Economics and Finance
doi: 10.1108/sef-12-2022-0550
This paper aims to examine the impact of COVID-19 on inflation in Indonesia. There are two questions in this study: (1) Is there an impact of COVID-19 on inflation in Indonesia? and (2) whether there are differences in the impact of COVID-19 on regional inflation in Indonesia, considering the different intensities associated with COVID-19.Design/methodology/approachThe estimation technique showing the impact of the COVID-19 pandemic on inflation uses the difference-in-differences (DID) method described by Pischke (2008). The core idea of the estimation above is continuous DID using panel data. No province was affected by COVID-19 before 2020:Q1. Once COVID-19 hits the economy, the effects vary from one district to the other.FindingsThe authors find that the severity of the COVID-19 pandemic negatively affects inflation – the more severe the pandemic, the lower the inflation. This finding conforms with several studies suggesting higher demand pressures than supply during the pandemic. Compared with supply-side indicators such as production index, demand-side indicators – such as consumer confidence index and real sales index – fell more sharply.Research limitations/implicationsIn the Introduction section, the authors have added a discussion that indeed the COVID-19 pandemic affects inflation through both the demand- and supply-side shocks. While factors driving regional differences in inflation rate are important research and policy questions, the analysis of these factors is outside the scope of this study. The study focuses on the COVID-19 impact on inflation and whether the pandemic disproportionately affects some regions than the others.Practical implicationsThis research is important to provide an understanding of the nature of the pandemic on inflation in the context of the Indonesian economy, which is essential to policy formulation, especially for the Central Bank in carrying out the mandate to maintain rupiah stability. This issue is due to the implications of different policy responses between demand- and supply-side shocks.Originality/valueAs a novelty in this study and research gap, the authors use a continuous DID method to account for the varying intensity of COVID-19 across the provinces. In particular, the authors use the number of positive cases of COVID-19 per 1,000 population as opposed to just a binary indicator of before-and-during COVID-19 across provinces.
Is there a time-varying nexus between stock market liquidity and informational efficiency? – A cross-regional evidencePatra, Subhamitra; Hiremath, Gourishankar S.
2024 Studies in Economics and Finance
doi: 10.1108/sef-12-2022-0558
This study aims to measure the degree of volatility comovement between stock market liquidity and informational efficiency across Asia, Europe, North-South America, Africa, and the Pacific Ocean over three decades. In particular, the authors analyze the extent of the time-varying nexus between different aspects of stock market liquidity and multifractal scaling properties of the stock return series across various regions and diversified market conditions. This study further investigates several factors altering the degree of dynamic conditional correlations (DCCs) between the efficiency and liquidity of the domestic stock markets.Design/methodology/approachThe study measures five aspects of stock market liquidity – tightness, depth, breadth, immediacy, and adjusted immediacy. The authors evaluate the multifractal scaling properties of the stock return series to measure the level of stock market efficiency across the regions and diversified market conditions. The study uses the dynamic conditional correlation-multivariate generalized autoregressive conditional heteroscedasticity framework to quantify the degree of volatility comovement between liquidity and efficiency over the period.FindingsThe study finds the presence of stronger volatility comovement between inefficiency and illiquidity due to the price impact characteristics of the stock markets irrespective of different regions and diversified market conditions. The extent of time-variation increased following the shock periods, indicating the significant role of the financial crisis in increasing the volatility comovement between inefficiency and illiquidity. The highest degree of time-varying correlation is observed in the developed stock markets of Northwestern and Northern Europe compared to the regional and emerging counterparts. On the other hand, weak DCCs are observed in the emerging stock markets of Europe.Originality/valueThe output of the present study assists investors in identifying diversification opportunities across the regions. Additionally, the study has significant implications for market regulators, aiding in predicting future troughs and peaks. The prediction, in turn, helps formulate capital market development plans during dynamic economic situations.
ESG, innovation, and economic growth: an empirical evidenceMohd Daud, Siti Nurazira; Ghazali, Nur Syazwina; Mohammad Ismail, Nur Hafizah
2024 Studies in Economics and Finance
doi: 10.1108/sef-11-2023-0692
This paper aims to examine the relationships among environmental, social and governance (ESG) practices, innovation and economic growth in five Asian countries from 1990 to 2020.Design/methodology/approachThe study innovatively constructed the ESG index at the country level by using frequency statistics on text mining and factor analysis for each country over time. In addition, this study used the autoregressive distributed lag method to establish a long-term relationship.FindingsThe authors discovered that ESG practices among corporate entities significantly impact economic growth in Malaysia, the Philippines and Singapore. Specifically, the environmental component positively affects the growth of Malaysia, Thailand and the Philippines, while the governance components of ESG contribute to Thailand’s economic growth. The authors also discovered that innovation improves countries’ economic growth, thus offering policy insights into promoting ESG practices and stimulating the ecosystem for innovation.Originality/valueThe paper fills the gap left in previous inconclusive findings on the association between ESG practices and country growth.
Unveiling the complex web: exploring the international fossil fuel trade network and its impact on CO2 emissions and trade patternsVidya, CT; M., Srividhya; D., Ujjwal
2024 Studies in Economics and Finance
doi: 10.1108/sef-12-2023-0697
The purpose of this study is to examine the structure of the international fossil fuel trade network (IFFTN) and assess its effects on CO2 emissions and global trade patterns. This research integrates complex network theory with econometric analysis to explore the dynamics of fossil fuel trade and its implications for environmental quality across various countries. Specifically, the study analyses the roles of different countries within this global network, examines the relationship between trade volumes and environmental impacts and evaluates how advancements in renewable energy generation could mitigate these effects. Through this comprehensive examination, the study seeks to provide an in-depth understanding of the trade-environment nexus.Design/methodology/approachThe study uses data on international fossil fuel trade from 2005 to 2020, which includes 74 countries categorized as high-income, low-income and Asian economies based on their roles in the global market. This research constructs the IFFTN, where countries are depicted as nodes and trade links as edges. The authors analyse network parameters, such as degree, density and clustering coefficient, along with trade metrics like strength and centrality. These parameters are integrated into a panel fixed effects model, with the robustness of the findings confirmed through dynamic ordinary least squares (DOLS) analysis.FindingsThe study finds that the dynamic fossil fuel trade network includes key players such as the USA, China, France, India, the Netherlands and South Korea. It demonstrates increased connectivity and dependence among these countries, directly correlating with higher CO2 emissions. However, this correlation is mitigated by the adoption of renewable energy, particularly in Asia and high-income countries. The impact on environmental quality is mediated through scale, technique and composition effects, suggesting significant environmental improvements through enhanced industry structure, technological progress and economies of scale.Research limitations/implicationsThis study recognizes several limitations. First, the categorization of countries into Asian economies, low-income and high-income groups may oversimplify the intricate effects of economic status on environmental impacts. Second, focusing primarily on per capita CO2 emissions may neglect other critical environmental indicators. Future research should consider examining regional variations and including a wider range of environmental metrics. This approach would offer a more detailed perspective on the nuanced interactions between economic development and environmental sustainability, enhancing the depth and applicability of the findings.Practical implicationsTo address the challenges of the IFFTN and CO2 emissions, several practical policy measures are recommended. Governments should enhance international cooperation by establishing global platforms for sharing best practices and initiating technology transfer agreements to accelerate the adoption of energy-efficient technologies. Additionally, a phased transition towards more sustainable energy sources is crucial, involving increased investment in the renewable energy sector alongside incentives for adopting green technologies. On the trade front, governments should modify trade partnerships to address congestion externalities, fostering a shift towards more sustainable and environmentally friendly trade practices.Social implicationsThe social implications of the IFFTN are profound. As global reliance on fossil fuels continues, communities face heightened health risks due to increased pollution. Transitioning to renewable energy can alleviate these health concerns and the creation of green technologies, enhancing social well-being. Moreover, equitable access to energy-efficient solutions can reduce energy poverty, particularly in low-income countries, fostering greater societal resilience and inclusivity.Originality/valueThis study offers a pioneering examination of the trade-energy nexus across 74 countries, using complex network models to analyse diverse economic settings, particularly in Asian economies dominated by non-renewable energy. It identifies key market players and assesses their impact on dynamics such as congestion and market power. Additionally, the study explores the positive effects of renewable energy capacity on these relationships, highlighting its crucial role in driving sustainable energy transitions and enhancing the understanding of indirect trade-environment interactions.
The dynamic trade-off theory of capital structure: evidence from a panel of US industrial companiesEsghaier, Ridha
2024 Studies in Economics and Finance
doi: 10.1108/sef-04-2023-0200
This paper aims to test the empirical validity of the dynamic trade-off theory in its symmetric and asymmetric versions in explaining the capital structure of a panel of publicly listed US industrial firms over the period from 2013 to 2019. It analyzes the existence of an adjustment of leverage toward its target level and whether the speed of this adjustment is influenced by the debt measure, the model specification or/and the fact that the actual debt ratio is higher or lower than its long-term target level.Design/methodology/approachThis paper uses a quantitative research methodology using panel data analysis under the partial adjustment model and the error correction model using the generalized moment method in first differences and in systems to explore the dynamic nature of firms’ capital structure behavior.FindingsThe results show that the effects of the conventional determinants of leverage are globally consistent with the trade-off theory predictions. The dynamic versions confirm that firms exhibit leverage-targeting behavior. Although this speed of adjustment (SOA) depends on the debt and model specifications, it is around 60% on average. The estimated SOA is higher for the market leverage measure compared to the book leverage. The asymmetric adjustment model reveals that firms are more sensitive to reducing leverage than increasing it when they are away from their target; overleveraged firms exhibit approximately 5% faster adjustment than underleveraged firms when book leverage is used.Originality/valueThe originality of this research paper lies in its development and test of an asymmetric model to allow the leverage adjustment speed to vary depending on whether the firm’s debt ratio is above or below its target level and the methodological approach as well as the different model specifications used and the insights generated through the application of rigorous econometric techniques.
Conviction, diversification or something else: constructing optimal portfolios with additional attributesAhmed, Muhammad Farid; Satchell, Stephen
2024 Studies in Economics and Finance
doi: 10.1108/sef-04-2023-0207
The purpose of this paper is to provide theory for some popular models and strategies used by practitioners in constructing optimal portfolios. King (2007), for example, advocated adding a diversification term to mean-variance problems to create better portfolios and provided clear empirical evidence that this is beneficial.Design/methodology/approachThe authors provide an analytical framework to help us understand different portfolio construction practices that may incorporate diversification and conviction strategies; this allows us to connect our analysis to ideas in psychophysics and behavioural finance. The critical psychological ideas are cognitive dissonance and entropy; the economics are based on expected utility theory. The empirical section uses the theory outlined and provides the basis for constructing such portfolios.FindingsThe model presented allows the incorporation of different strategies within a mean-variance framework, ranging from diversification and conviction strategies to more ESG-oriented ones. The empirical analysis provides a practical application.Originality/valueTo the best of the authors’ knowledge, this model is the first to bridge the gap between portfolio optimisation and the psychological ideas mentioned in a coherent analytical framework.
A collective decision-making model of p2p lending platforms compared to bank lendingBen-Yashar, Ruth; Krausz, Miriam
2024 Studies in Economics and Finance
doi: 10.1108/sef-05-2023-0260
This study aims to develop a theoretical model that uses the decision-making theory in a financial intermediation setting to provide insights into the differences between the outcomes of the decision-making process for a bank and for a peer-to-peer (p2p) lending platform to explain the role of p2p lending versus bank lending in the credit market.Design/methodology/approachThis study develops a novel approach to explaining the differences between p2p lending and bank lending by using the decision-making theory. In particular, it analyzes the likelihood of a risky borrower being able to obtain a loan from a p2p lending platform versus the likelihood of being able to obtain a loan from a bank. The results contribute a theoretical understanding of factors that can determine the role of p2p lending platforms versus that of banks in the credit market, with implications for recovery from an economic crisis.Findingsp2p lending platforms have the potential for contributing to economic recovery when they are subject to less regulations and are able to offer a faster and less costly lending process than do banks and when they are used by a large number of lenders. However, the potential role of p2p lending platforms in recovery might be reduced when banks have access to anticyclical measures that reduce banks’ capital requirements or provide them with low-cost funds.Originality/valueThis study provides a novel approach to explaining the differences between p2p lending and bank lending by using the decision-making theory. The results contribute a theoretical understanding of factors that can determine the role of p2p lending platforms versus that of banks in the credit market.
Leading and lagging role between financial stress and crude oilGençyürek, Ahmet Galip
2024 Studies in Economics and Finance
doi: 10.1108/sef-06-2023-0351
The crude oil market plays a key role in addressing the issue of energy economics. This paper aims to detect the causality relationship between the crude oil market and economy based on the financial system.Design/methodology/approachThis paper used the static and dynamic Hatemi-J Bootstrap Toda–Yamamoto and Diebold–Yilmaz connectedness index. The Hatemi-J Bootstrap Toda-Yamamoto approach allows researchers to use nonstationary data and that method is robust to nonnormal distribution and heteroscedasticity. The Diebold–Yilmaz connectedness index model provides researchers to detect the power of connectedness besides linkage direction. The analyzed period is the span from January 3, 2005 to October 3, 2022.FindingsThe results show bidirectional causality in the full sample but unidirectional causality before and after the 2008 financial crisis. During the 2008 financial crisis period and the COVID-19 period, there was a bidirectional and unidirectional causality, respectively. The connectedness approach indicates that the crude oil market affects financial stress through investors’ risk preferences.Research limitations/implicationsThe Diebold–Yilmaz spillover index model is based on vector autoregression methods with a stationarity precondition. However, some of the five dimensions that constitute the financial stress index (FSI) are nonstationary in level. Therefore, the authors takes the first difference of the nonstationary data.Practical implicationsThe linkage between the crude oil market and the FSI provides useful information for investors and policymakers. For instance, this paper indicates that an investor wanted to forecast future value of the crude oil (financial stress) should consider the current and past values of financial stress (crude oil). Moreover, policymaker should consider the crude oil market (FSI) to make a policy proposal for financial system (crude oil market).Originality/valueRecently, indicators of economic activity levels (economic policy uncertainty, implied volatility index) have begun to be considered to analyze the relationship between energy and the economy but very little is known in the literature about the leading and lagging roles of data in subsample periods and the linkage channel. The other originality of this research is using the new econometric approaches.