Research
Research interests
Behavioural finance, Herding, Banking and Systemic Risk, Social Responsibility, Machine Learning.
Papers and Publications
Social Responsibility and Bank Resiliency
(Thomas Gehrig, Maria Chiara Iannino and Stephan Unger)
Journal of Financial Stability, Vol. 70, February 2024, 101191
We find strong evidence that measures of social responsibility contribute to increasing the resilience of banks. This finding holds when social responsibility is measured by aggregated ESG scores provided by Thomson Reuters, both according to their older Asset 4 categorization and to the reformed ESG Refinitiv classification, and resilience is proxied by various measures of systemic and systematic risk. The results hold on the level of subcategories of the ESG pillars, where we find that, particularly, variables related to the long-term perspective enhance resilience. Moreover, in our international study, we find significant transatlantic differences.
Did the Basel Process of Capital Regulation Enhance the Resiliency of European Banks?
(Thomas Gehrig and Maria Chiara Iannino)
Journal of Financial Stability (2021), Volume 55, August 2021
CEPR Discussion Paper 11920, Bank of Finland WP16-18
This paper analyses the evolution of the resiliency of the European banking sector after the implementation of the Basel Capital Accord. In particular, by analysing SRISK and CoVaR we trace systemic risk and measures of systematic risk as the Basel process unfolds. We observe that, though systematic risk for European banks has been decreasing over the last three decades, systemic risk has heightened especially for the largest systemic banks. While the Basel process has succeeded in containing systemic risk of small banks, it has been less successful for the larger institutions. The latter ones opportunistically exploited the option of self-regulation by employing internal models and effectively increasing SRISK. Hence, the sub-prime crisis found the largest and more systemic banks ill-prepared and lacking resiliency. This condition was even aggravated during the European sovereign crisis.
Signaling through Timing of Stock Splits
(Maria Chiara Iannino and Sergey Zhuk)
We develop a dynamic structural model of stock splits, in which managers signal their private information through the timing of the split decisions. Our approach is consistent with the empirical evidence which shows that the majority of stock splits have a 2:1 ratio of old-to-new shares, but are announced at various pre-split price levels. Moreover, it explains why split announcement returns are decreasing with the pre-split price. In addition, by matching the model to the data, we estimate the nominal share price preferences of investors and decompose the split announcement return into the value of new information and the signalling cost.
Transatlantic Differences in Bank Resiliency
(Thomas Gehrig, Maria Chiara Iannino and Stephan Unger)
in Guglielmo Caporale (ed.): Handbook of Financial Integration, Edgar Elgar, forthcoming 2024.
CEPR Press Discussion Paper No. 17744
The relative importance of banks for the financial system differs widely in Europe and the U.S., where Europe has historically been more bank-based than the U.S. How does the different role of the banking systems translate into the resiliency of bank business models, and of the financial system overall? In aggregate, European banks are more exposed to systemic risk relative to U.S. banks despite the fact that their book-based tier-1 core capital is comparable. However, there is wide heterogeneity across European banks rendering the transatlantic comparison more delicate. Also, we find differences in social responsibility scoring between the two systems. ESG scores tend to be higher for European banks, particularly on the Social and Environmental components. On the other side, US banks score higher on Governance items. Upon inspection of the subcategories of each ESG pillar, it appears that on average European banks tend to maintain a longer planning horizon. Nevertheless, the largest European banks employ internal credit risk models which enable them to reduce capitalization and increase capital shortfall. Effectively, at the start of the pandemic in March 2020 the largest European banks were more highly levered relative to their U.S. peers, and, consequently lagging behind in terms of market capitalization.
Industry Return Prediction via Interpretable Deep Learning
(Lazaros Zografopoulos, Maria Chiara Iannino, Ioannis Psaradellis, Georgios Sermpinis)
We apply an interpretable machine learning model, the deep LassoNet, to the task of forecasting and trading U.S. industry portfolio returns. The model combines a regularization mechanism on top of a neural network architecture with a cooperative game-theoretic algorithm. The latter hierarchizes the covariates based on their contribution to the overall model performance. Our findings reveal that the deep LassoNet outperforms various linear and non-linear benchmarks concerning out-of-sample forecasting accuracy and provides economically meaningful and profitable predictions. Valuation ratios are the most crucial covariates, followed by individual and cross-industry lagged returns. The constructed industry investment portfolios attain positive and statistically significant alphas up to 15.5% and Sharpe ratios up to 1.11 per annum, surviving even transaction costs.
Capital Regulation and Systemic Risk in the Insurance Sector
(Thomas Gehrig and Maria Chiara Iannino)
Journal of Financial Economic Policy (2018), Vol. 10 No. 2, pp. 237-263.
This paper analyses systemic risk and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016. With the help of multivariate regressions the main drivers of systemic risk are identified. The paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter. These findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policy makers and supervisors. This paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence based policy evaluation of regulatory measures such as Solvency II.
Islamic Securities in Corporate Financial Hierarchy
(Sara AlBalooshi, Maria Chiara Iannino, and Pejman Abedifar)
In this paper, we investigate the place of Islamic investment securities (sukuk) in firms' financial hierarchy using the modified pecking order theory. We study the external funding preferences of Malaysian firms using quarterly data of 112 firms for the period between 2005 and 2017. We find that when internal funds are exhausted, firms prefer to issue profit-loss sharing sukuk over bonds and fixed income sukuk is placed before equity. The results show that sukuk can widen external finance spectrum which has important implications for policy makers in countries with dual financial systems.
Firm Opacity and Islamic Securities Issuance
(Sara AlBalooshi, Maria Chiara Iannino, and Pejman Abedifar)
We study the relationship between firm opacity and the choice of funding instruments when different types of sukuk and conventional financial securities are available. For this purpose, we construct an opacity index for 107 Malaysian firms issuing sukuk and conventional financial instruments during 2005-2017. We apply a mixed-level multinomial logistic model for our analysis. We find that as opacity levels increase, the probability of firms issuing zero-coupon sukuk increases followed by conventional bonds, pro.fit-loss sharing sukuk, and equity. Our results suggest that the use of sukuk is not merely determined by religious motives, in fact, information disclosure preferences also influence the choice of this sharia-compliant instrument for fund raising, which has important implications for policy-makers and investors.
Analysts' Forecast Dispersion and Stock Split Announcements
(Maria Chiara Iannino)
This paper is an empirical investigation of the relation between asymmetric information in the analysts' forecasts and stock splits announcements. On a sample of US splits occurred from 1993 to 2013, I distinguish the two components of private and common information in analysts' forecasts. I observe a change in the distribution of analysts' forecasts after the split announcements, and in particular an increase in total dispersion. This development is primarily reflected in an increase in asymmetric information, rather than in common uncertainty, consistent with splits impacting on the formation of private information. This paper sheds also light on the literature on disagreement observing a negative relationship between asymmetric information and both future returns and cumulative abnormal returns post-split. High level of asymmetric information in analysts' forecasts leads to negative future returns, and the post-event abnormal performance is higher for .firms with low prior asymmetric information.
(Maria Chiara Iannino)
The relation between institutional herding and stock splits is being examined. Using data on buying and selling activity of US institutional investors I compared the abnormal correlation of trades in a sample of companies that have announced at least a stock split, with the rest of the market. The results show a significant level of convergence in both groups, slightly higher for splitting companies between 1998 and 2001, and a stabilizing effect of herding in the future returns of splitting companies. Decomposing the correlation of trades into the contributions of several types of herding, there is evidence of a significant impact of informational-based herding for companies under analysis.