Using monthly stock returns for the period January 1987 to December 2008, the separate effects of each of the EU banking directives on PIGIS commercial chartered banks, investment firms and the insurance companies are tested. The event-study methodology will be utilized to test three portfolios consisting of an equally weighted banking, investment and insurance index made up of the major PIGIS banks, investment firms and insurance companies respectively. The PIGIS market index serves as a proxy for the market portfolio. All the aforementioned indices were converted to returns using the log difference method.
In this dissertation what is going to be searched concerns whether the systematic risk influences of the insurance and investment firms and of the commercial chartered banks. Moreover, after controlling for systematic risk, the results should suggest whether or not the passage of the Basel I, II and III (announcement) Directives creates wealth effects for the shareholders of commercial chartered banks, investment firms and insurance companies. Lastly, the outcomes will reveal if the whole wealth effects on the PIGIS financial sector are positive, negative or neutral.
Using monthly stock returns for the period January 1987 to December 2008, the separate effects of each of the EU banking directives on PIGIS commercial chartered banks, investment firms and the insurance companies are to be tested, respectively. According to Binder (1985a, b), Allen and Wilhelm (1988), Cornett and Tehranian (1989, 1990) and to Pantos (2008) the event-study econometric methodology will be used. This econometric methodology constitutes the framework for testing a wide range of regulatory event announcements.
The event-study methodology is not always suitable for testing for abnormal returns when the event involves a common calendar date (clustering effect) ΒΡΕΣ ΒΙΒΛΙΟΓΡΑΦΙΑ. At this point, it should be noted that the error term of one equation is correlated to the error term of the other, εit (i= 1, 2, 3) and will not have an expected value of the 0. Failure to account for this effect will result in obtaining inefficient estimates of beta coefficients. Hence, the coefficients will not exhibit minimum variance and the corresponding t ratios will be drawn into question. The practical consequence of this, of course, is the possibility of erroneously not rejecting the null hypothesis relating to these coefficients. Thus, a portfolio approach is the most appropriate in testing for abnormal returns when the event involves a common calendar date.
Literature review
The academic studies of Stigler (1971) and Peltzman (1976) constitute the framework for analyzing the impact on financial institutions after various regulatory changes are introduced. Stigler (1971) developed an economic theory of regulation and explained that economic interests among various market participants are affected based on the regulatory framework and the political power that each lobby group possesses. The "chief regulator" or the "superintendent" of financial institutions sets the rules in such a way to benefit the party with the greatest political power at the expense of everybody else in the system. Regulation essentially imposes a tax on the wealth of economic agents and per capita gains accrue to the party with the greatest political association with the regulators. Peltzman (1976) suggested that the introduction of various regulatory reforms may affect the systematic risk of banks. He argues that reduction of economic regulation and movement from functional markets to "universal bank" markets would increase the risk of equity ownership. This is due to the increase in competition and the resultant increased variability of banking earnings.
In the last two decades, various academic researchers have examined deregulatory changes produced by the introduction of the Glass-Steagall Act, which separated banking from underwriting/investment business in the USA. Litan (1985) discussed how systematic risk may rise when banks diversify into riskier non-banking ventures because of the existence of moral hazard associated with government deposit insurance. Joskow and MacAvoy (1975), on the other hand, suggested that the introduction of various regulatory reforms and barriers results in lower risk. Brewer (1990) claimed that regulatory reforms leading to geographical diversification also decreased systematic risk.
Fraser and Kannan (1990) found that the introduction of regulatory reforms increased the risk of equity for banks. Similar results were obtained by Pettway et al. (1988). They examined Japanese and American financial institutions that underwrote and managed Eurobond offerings, and found that the systematic risk for these firms increases. Aharony et al. (1988) examined the Depository Institutions Deregulation Monetary Control Act enacted in the USA in 1980 and found that its introduction decreased systematic risk for financial institutions, while Allen and Wilhelm (1988) found no relationship associated with this Act and the risk of banks. Wall (1987) and Brewer (1990) found that deregulation did not lead to greater risk as banks entered into investment firms' business. Thus, from the literature review it can be clearly understood that no consensus exists among academics on how changes in economic regulation will affect a financial institution's risk or its shareholder value.
Timetable
Time
Task to be achieved
Start December
Start thinking about research ideas
Mid-February
Literature read
End-February
Objectives clearly defined with reference to the Literature
Mid-April
Literature Review written. Read Methodology review involving secondary data and descriptive analysis
Mid-June
Collect all the stock prices and the financial statements of the indicative listed companies
End-July
Analyse the collective data according to the suggested techniques of Methodology and research review
Mid-August
Further writing up and analysis.
End-August
Draft completed including formatting bibliography and appendices
Mid-September
Revise and correct the Dissertation
End-September
Submission of Thesis
