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Journal of Banking and Financial Economics


JBFE No 1/2019

Financial Deepening in Mexico

Alexander Herman, Alexander Klemm

 

ABSTRACT

International comparisons reveal that – even controlling for a host of explanatory factors – credit depth is exceptionally low in Mexico. Using panel data methods linking credit growth and fundamentals, this paper estimates a long-term gap between actual and expected credit of about 40 percent of GDP. Possible explanations include the history of banking crises, the large informal sector and an inefficient legal system. Using a disequilibrium regression approach, this paper also finds that supply factors are particularly important as determinants of credit in Mexico. Recent financial reforms address many of the supply constraints, but their success will depend on implementation. The main challenge going forward will be to support financial deepening, while limiting risks to financial stability.

 

JEL classification: G18; G21; O16
Keywords: Mexico; credit gap; credit growth; financial development

DOI: 10.7172/2353-6845.jbfe.2019.1.1

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Frontier and Emerging Markets: A Perspective from Portfolio Flows and Financial Integration

Nordine Abidi, Burcu Hacibedel, Mwanza Nkusu

 

ABSTRACT

This paper investigates to what extent low-income developing countries (LIDCs) characterized as frontier markets (FMs) have begun to be subject to capital flows dynamics typically associated with emerging markets (EMs). Using a sample of developing countries covering the period 2000–14, we show that: (i) average annual portfolio flows to FMs as a share of gross domestic product (GDP) outstripped those to EMs by about 0.6 percentage points of GDP; (ii) during years of heightened stress in global financial markets, portfolio flows to FMs dried up like those to EMs; and that (iii) FMs have become more integrated into international financial markets. Our findings confirm that, in terms of portfolio flows, FMs have become more similar to EMs than to the rest of LIDCs and are therefore more vulnerable to swings in global financial markets conditions. Accordingly, it is important to have in place frameworks to strengthen FMs’ resilience to adverse capital flows shocks.

 

JEL classification: E44, F3, G0, O57
Keywords: Frontier Markets, Portfolio flows, Financial Integration, Balance of Payments Needs

DOI: 10.7172/2353-6845.jbfe.2019.1.2

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Financial Stability Reports in Latin America and the Caribbean

Cheng Hoon Lim, Alexander D. Klemm, Sumiko Ogawa, Marco Pani, Claudio Visconti

 

ABSTRACT

Many countries in Latin America and the Caribbean now publish financial stability reports. They use FSRs as a tool for financial surveillance and communication. This study reviews their latest issues to assess their content, quality, and transparency, and the extent to which the country’s macrofinancial and institutional context affect the quality of the publications. While some reports provide a strong analysis of risks and vulnerabilities, there are significant cross-country differences, and many reports could be improved by adopting a more comprehensive, forwardlooking, and thematic assessment of financial stability. A well thought out communication strategy, including a regular and predictable publication schedule and an easily accessible website, is also important to enhance the impact of the reports. Data gaps, particularly at the disaggregated level, are material and need to be urgently addressed.

 

JEL classification: G01; G18; G28
Keywords: Financial Stability Report; Financial Supervision

DOI: 10.7172/2353-6845.jbfe.2019.1.3

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Options Pricing by Monte Carlo Simulation, Binomial Tree and BMS Model: a comparative study

Ali Bendob, Naima Bentouir

 

ABSTRACT

Investment behaviour, techniques and choices have evolved in the options markets since the launch of options trading in 1973. Today, we are entering the field of Big Data and the explosion of information, which has become the main feature of science, impacts investors' decisions and their trading position, particularly in the financial markets. Our paper aims to testing the effectiveness of the most popular options pricing models , which are the Monte Carlo simulation method, the Binomial model, and the benchmark model; the Black-Scholes model, when we ignore/take on account the Moneyness categories and different time to maturities; five months, one year, and two years, in addition to comparing these models, we will then test the effect of each model on the prediction of the current options prices, using the regression analysis, and the Nifty50 option index during the period of 25/07/2014 to 30/06/2016. The result shows that all models are overpriced in all Moneyness categories with a high level of volatility in In-the money category, other
finding concludes that the Monte Carlo Simulation method is outperforming when the volatility is lower, while the Black-Sholes model and the Binomial model are outperforming in the entire sample with ignoring the Moneyness.

 

JEL classification: C13, C15, G12, G13, G15, G17
Keywords: options pricing, option markets, Black-Scholes model, Binomial model, Monte-Carlo
Simulation model, Greek letters

DOI: 10.7172/2353-6845.jbfe.2019.1.4

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The Banks Profitability and Economic Freedom Quality: Empirical Evidence from Arab Economies

Omar Ghazy Aziz,  Julie Knutsen

 

ABSTRACT

This study empirically examines the impact of economic freedom quality and global financial crisis on the banking sector profitability in the Arab region. The analysis is performed by employing system GMM estimation in panel data comprising of 14 Arab countries over the period 1985–2016. The study constructed an economic freedom index based on the economic freedom indicators. The findings indicate that greater economic freedom has positively influenced
the profitability of the Arab banking sector. The results also suggest that the more profitable banks are those that have lower operating expenses against asset and income, better capitalized, more diversified and concentrated at economies having growth in the GDP. Furthermore, the global financial crisis in 2008 negatively impacted the profits of Arab banks.

 

JEL classification: G210, G280, C23
Keywords: Profitability, Economic freedom, Global financial crisis, Arab economies
DOI: 10.7172/2353-6845.jbfe.2019.1.5

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