Essays on Financial Economics Público

Abstract

The dissertation consists of three essays that study the behavior of financial intermediaries. The first and third essays focus on the mutual fund performance evaluation. The second essay studies the risk-taking behavior of Chinese commercial banks.

The first essay, "Mutual Fund Style Analysis: A Stochastic Dominance Approach," uses the stochastic dominance test proposed by Linton, Maasoumi, and Whang (2005) to shed new light on mutual fund performance on average and across styles. While most previous research concludes that actively managed mutual funds underperform the market based on the first two moments of mutual fund returns, the first essay asks whether some omitted risk factors or investors' preferences explain the puzzle. Using the stochastic dominance test, I find little evidence that actively managed mutual funds on average underperform the passive benchmark, suggesting that mutual fund performance results are highly sensitive to investor preference assumptions.

In the second essay, "What Do We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending," I construct a comprehensive transaction-based loan dataset and establish evidence that the rise in China's shadow banking is inextricably linked to potential balance-sheet risks in the banking system. The empirical and theoretical findings demonstrate that the loans to deposits regulation, coupled with regulations prohibiting banks from making traditional loans to risky industries, creates an incentive for small banks to bring the risk of shadow loans into their balance sheet through regulatory arbitrage in order to compensate for the high costs of meeting random deposit shortfalls.

The third essay, "Measuring Mutual Fund Skill with Active Alphas" examines the impact of beta exposure on mutual fund performance. Similar to the findings in Frazzini and Pedersen (2014), I document that high market beta exposure is associated with low mutual fund standard alpha.However, when I explore the relationship between mutual fund beta and active alpha, a measure that I define as the difference between a mutual fund's standard alpha and the matching stock alpha, I find that the active alphas monotonically increase in beta. After adjusting mutual fund returns by a passive stock benchmark, the high beta mutual funds appear to have more skills.

Table of Contents

I Mutual Fund Style Analysis: A Stochastic Dominance

Approach 3 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.3 Stochastic Dominance . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.4 Hypotheses and Test Statistics . . . . . . . . . . . . . . . . . . . . . 14 1.5 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.5.1 Summary Data on Mutual Funds . . . . . . . . . . . . . . . . 16 1.5.2 Normality Test . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.5.3 Mutual Funds and Market Return Comparison . . . . . . . . . 18 1.5.4 Investment Objective Subgroups of Mutual Funds and Market Return Comparison . . . . . . . . . . . . . . . . . . . . . . . . 20 1.5.5 Recession/Boom . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.5.6 Risk Adjusted Return . . . . . . . . . . . . . . . . . . . . . . 23 1.6 Investment Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.7 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.7.1 Liquidity Factor . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.7.2 Value Weighted Portfolios . . . . . . . . . . . . . . . . . . . . 26 1.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 II What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending 51 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.3 Data Construction and Description . . . . . . . . . . . . . . . . . . . 61 2.3.1 Data Construction . . . . . . . . . . . . . . . . . . . . . . . . 61 2.3.2 Data Description and Other Data Sources . . . . . . . . . . . 64 2.3.3 Other Data Sources . . . . . . . . . . . . . . . . . . . . . . . . 65 2.4 Empirical Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 2.4.1 Maturities and Lending Rates of Entrusted Loans . . . . . . . 68 2.4.2 Role of Banks in Entrusted Lending . . . . . . . . . . . . . . . 69 2.4.3 Types of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 71 2.4.4 Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 72 2.4.5 Types of Loans Interacting with Types of Banks . . . . . . . . 74 2.4.6 Further Robustness Analysis . . . . . . . . . . . . . . . . . . . 76 2.5 Institutional Asymmetry . . . . . . . . . . . . . . . . . . . . . . . . . 79 2.5.1 The Usual Suspects . . . . . . . . . . . . . . . . . . . . . . . . 79 2.5.2 Banking Regulations against the Macroeconomic Background 81 2.5.3 The Last-Minute Rush for Deposits by Small Banks . . . . . . 83 2.5.4 The Asset Side of Banks' Balance Sheet . . . . . . . . . . . . 84 2.6 A Theoretical Model Against the Unique Institutional Background . . 87 2.6.1 Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 2.6.2 Lending Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 2.6.3 Balancing Stage . . . . . . . . . . . . . . . . . . . . . . . . . . 90 2.6.4 The Bank's Optimizing Problem . . . . . . . . . . . . . . . . . 92 2.6.5 Further Discussions . . . . . . . . . . . . . . . . . . . . . . . . 99 2.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 2.8 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 2.8.1 Data Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . 124 2.8.2 Regulation Timeline Appendix . . . . . . . . . . . . . . . . . . 125 2.8.3 Technical Appendix: Proofs of Propositions 1-3 . . . . . . . . 130 III Measuring Mutual Fund Skill With Active Alphas 138 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 3.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 3.2.1 Data Description . . . . . . . . . . . . . . . . . . . . . . . . . 140 3.2.2 Variable Construction . . . . . . . . . . . . . . . . . . . . . . 141 3.3 Empirical Specication - Active Alpha . . . . . . . . . . . . . . . . . 145 3.4 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 3.4.1 Relation between Standard Alphas and Holding Based Market Betas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 3.4.2 Relation between Active Alphas and Holding Based Market Betas148 3.4.3 Standard Alphas and Active Alphas for Various Style of Mutual Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 3.5 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 3.5.1 Alpha Estimation . . . . . . . . . . . . . . . . . . . . . . . . . 150 3.5.2 Stock Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151

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School	Laney Graduate School
Department	Economics
Degree	PhD
Submission	Dissertation
Language	English
Research Field	Economics, General Economics, Finance
Palabra Clave	Financial Institutions Mutual Fund Shadow Banking
Committee Chair / Thesis Advisor	Maasoumi, Esfandiar, Emory University Chen, Kaiji, Emory University
Committee Members	Zha, Tao, Emory University Fohlin, Caroline , Emory University

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