Research Spotlight

CAF hosts Finance Summer Research Conference 2017

On the weekend of 28-29 July 2017, researchers from premier institutions across India, the United Kingdom (UK), China and the United States of America (USA) gathered at the Indian School of Business (ISB), Hyderabad campus to participate in the annual flagship Summer Research Conference in Finance (SRC). The SRC was organized by the Centre for Analytical Finance at the ISB. The conference saw the presentation of cutting-edge techniques and ideas on topics as diverse as macro-finance, innovation, start-up finance, asset pricing, emerging markets, banking and household finance.  
Professor Shashwat Alok of the ISB presented “Banking the Unbanked: What do 255 Million New Bank Accounts Reveal about Financial Access?” He and his co-authors studied how expanding financial access in India affected the economy. Their findings from administrative bank data showed that only a fifth of such new accounts are in use; further, the effects of this bank account growth on GDP and inflation are negligible. On the flipside, however, some preliminary results by these authors also revealed how the programme aided in meeting emergency expenses, especially hitherto prohibitive expenses related to healthcare. Audience members were also immensely curious to learn about the behaviour or attributes of the 18% of individuals who are using these new bank accounts.

Jeramia Allan Poland, Fellow in Management, Financial Economics, ISB along with fellow ISB researchers probed the ‘wisdom of the crowd’ in a paper titled “Margin Credit and Stock Predictability”. These ISB authors demonstrated that margin credit, collected from the New York Stock Exchange and aggregated across investors, was the best predictor of returns of the Standard and Poor's 500 index. Its predictive ability held up well even in comparison to current industry standards such as the short interest and sentiment indices. Researchers in the audience noted that behavioural issues must be considered when using margin credit as a predictor for future returns.
An evergreen research subject was the impact of policy and politics on the economy, and specifically, how supply of credit, interest rates, and lending behaviour all change with the evolving legal system. At the SRC, certain papers discussed the effect of mere announcements, and others considered the aftermath of implementation.
Sascha Steffen, Professor of Finance and the Chair of Financial Markets, Business School, University of Mannheim presented highly topical work on “Brexit and the Contraction of Syndicated Lending”. He and his co-authors analysed how the Brexit impacted syndicating lending practices in UK based banks. They found that not only do these financial institutions lend less to UK-based firms, as opposed to firms abroad, but that the demand for credit in the UK, and the attractiveness of the pound itself are dropping. Audience members suggested that the authors also look into any bounce-back effect after the announcement of Brexit, especially with the results of the most recent British elections.
Arkodipta Sarkar, PhD Student in Finance, London Business School, University of London explored borrowing and investment behaviour under political uncertainty in his paper “Firm Boundaries and Political Uncertainty: Evidence Using State Elections”. Using Indian state elections data and data on Indian firms, he showed that stand-alone companies rather than conglomerates are more likely to have a drop in leverage and investment, and an increase in interest rates during times of political uncertainty. One idea from the audience was to see if firms that are more politically connected are less affected by political uncertainty.

How do environment and past experience affect behaviour? This was another classic question tackled at the SRC. “Systemic Bank Panics in Financial Networks”, presented by Zhen Zhou, Assistant Professor, PBC School of Finance, Tsinghua University, teased out the role of financial panics on the stability of financial networks. His theoretical findings showed that the greater the number of financial connections a bank had, the less stable it was during a panic. Furthermore, core banks, due to greater exposure, were more fragile than those on the periphery. Participants suggested a robustness check to see if the benefits of having financial connections outweighed instability during panics.
The winner of the National Stock Exchange (NSE) Best Paper Award was Ankit Kalda, PhD Candidate, Finance, Olin Business School, Washington University in St Louis, who presented “Peer Financial Distress and Household Debt”. Mr Kalda explored the effects of social learning on risk behaviour. Using data from an anonymous major financial institution, he found that peer financial distress and health shocks decreased both leverage and amount of future debt. This in turn led to lower delinquency rates, and better credit scores. The author also suggested that there were ensuing effects on consumption on a macro scale.

The discussions following the presentations were constructive, with many conference participants suggesting ways of strengthening the results through use of alternate methodologies or by widening or narrowing the data samples. But the consistent takeaway was the need for greater transparency in data. High quality data could make all the difference in making our understanding of finance more nuanced, while opening up novel and important research questions for the future. 

Sharada Sridhar is a doctoral student in Finance at Columbia Business School, Columbia University.

A longer version of this report will appear on the ISBInsight website.