The financial crisis is an issue that has been talked for several decades. As a result, there are many research papers that examine the impact on bank earnings volatility which is a predictor of chaos in the financial system. And yet, some papers also found that the volatility of stock return sores up during the crisis. Therefore, this study will use both earnings and stock return volatilities as an indicator for the risk of entering a financial crisis, when volatility becomes higher, it implies that we are getting closer to the crisis. One of the factors that affect the volatility is the size of banks. As a result, we would like to examine whether the size of commercial banks located in 4 emerging Asian countries which are Thailand, Malaysia, Indonesia, and the Philippines has an effect on both types of volatility or not and also investigate whether if their relationship is non-linear. We further find a threshold level if the relationship between the size and volatility is non-linear to raise this issue for policymakers. We use panel data of commercial banks during the period 2011Q1 to 2018Q4 to explore this study. For the model, besides the size, we control for the internal factors which are capital adequacy ratio, diversification, concentration ratio, and external factors which are GDP growth and credit growth. In addition, we also specify a dynamic model to observe the results if taking into account of the lagged period. We found that the size of banks is related to the earnings and return volatility which is in line with previous studies in the US and EU zone, except for Thailand that we found no evidence between size and earnings volatility. Nonetheless, our analysis indicates there is a non-linear relationship between bank size and volatility.
The link between bank size and volatility: Evidence from 4 emerging Asian countries; Thailand, Malaysia, Indonesia, and the Philippines
Post by MSF Chula at Friday, 8 January 2021 10:53 PM
Last updated at Friday, 8 January 2021 10:53 PM