News-based indicators as a measure of credit market integration in the Visegrad countries

Transcription

1 News-based indicators as a measure of credit market integration in the Visegrad countries Pavla Vodová 1 Abstract In this paper we assess with news-based indicators the extent to which credit markets in the Visegrad countries are integrated with euro zone countries and we test the hypothesis that markets of loans provided to nonfinancial companies are more integrated than markets of loans provided to households in the Visegrad countries. Analysis is based on monthly values of four interest rates for the period from January 2005 to March The tested hypothesis has been confirmed: we have found that wholesale markets (both short term and long term loans provided to nonfinancial companies) are really more integrated than retail markets (both consumer and mortgage loans provided to households). Key words Credit market integration, news-based indicators, Visegrad countries. 1. Introduction Measuring of credit market integration is quite complicated. It is possible to use method based on price indicators, quantity indicators or news-based indicators. The aim of this paper is to assess with news-based indicators the extent to which selected segments of credit markets in the Visegrad countries are integrated with euro zone countries. Loans provided to nonfinancial companies and to households typically represent the biggest part of banks credit portfolios. Our analysis is therefore based on monthly values of two interest rates charged for loans to households (interest rate on mortgage loans and consumer loans) and two interest rates for nonfinancial companies (interest rate on short term and long term loans). Many studies (for list of them see Adam et al. (2002)) came to conclusion that wholesale markets are usually more integrated than retail markets. That is why we would like to test the hypothesis that markets of loans provided to nonfinancial companies are more integrated than markets of loans provided to households in the Visegrad countries. The paper is structured as follows. After introduction as a first chapter, second chapter defines credit market integration and methods how to measure it. Third chapter focuses on news-based indicators. Next chapter analyzes the integration of credit markets in the Visegrad countries with euro zone countries with news-based indicators. Last chapter captures concluding remarks. 1 Ing. Pavla Vodová, Ph.D., Silesian University in Opava, School of Business Administration in Karviná, Department of Finance, Univerzitní nám. 1934, Karviná, vodova@opf.slu.cz. This paper was prepared with financial support of Czech Science Foundation - Project GAČR 402/08/0067 Financial Integration of the EU New Member States with Eurozone.

2 2. Credit market integration and its measuring European Central Bank (2008) considers the market for a given set of financial instruments or services to be fully integrated, when all potential participants in such market: are subject to a single set of rules when deciding to buy or sell those financial instruments of services; have equal access to this set of financial instruments or services; and are treated equally when they operate in the market. Adam et al. (2002) define financial markets as integrated when the law of one price holds. This states that assets generating identical cash flows command the same return, regardless of the domicile of the issuer and of the asset holder. Otherwise, the arbitrage opportunity exists and it should adjust prices to same level. Credit markets are integrated when terms of credits (both financial and non-financial) are not influenced by geographical location of the bank. In practice, measuring of credit market integration is quite complicated. The key to an accurately measured integration is to find assets, which have the same level of risk and generate identical cash flows. Then it is possible to choose which method to use: method based on price indicators, which refer to the definition of integration, based on law of one price see for example Adam et al. (2002), Babetskii et al. (2007), Cabral et al. (2002), ECB (2008), Komárková et al. (2008), Pungulescu (2002) or Vodová (2009); method based on quantity indicators, which should quantify determinants of demand and supply of investment opportunities and capture the importance and size of financial connections between countries - see for example Adam et al. (2002), Baele et al. (2004), Cabral et al. (2002) or Vodová (2009); method based on indicators of new information this method is described in next chapter. 3. News-based indicators Although most studies use price or quantity indicators, it is possible to measure the integration also with indicators based on news. These indicators are described e.g. by Baele et al. (2004), Babecky et al. (2009), Baltzer et al. (2008), Čermák (2006) or Vodová (2009). News-based indicators are designed to distinguish the information effects from other frictions or barriers. In integrated markets, portfolios should be well diversified. Therefore, news of a regional character should have little impact on prices, whereas common or global news should be relatively more important. The reason is that for integrated market, the degree of systematic risk should be identical across assets in different countries. In an integrated credit market, the interest rate for borrowers of the same risk category should be equal across countries and influenced only by factors common to all. To use news-based indicators, it is necessary to provide a proxy for common news. It is possible to specify explicitly the relevant local and common information variables and then test whether local information has any statistically significant power to explain changes in interest rates. The possible way to do this is to assume that the changes of a benchmark interest rate are a good reflection of all relevant common news. Baele et al. (2004) used following regression to separate common influences from local influences: = + R + (1) R i, t i, t i, t b, t εi, t

3 where,t the change in the interest rate in country i at time t, R b,t the change in the benchmark interest rate at time t, i,t the country specific, i,t the measure of convergence, ε i,t the country specific shock (white-noise disturbance). Increasing integration requires: the country specific i,t to converge to zero (in fully integrated markets, changes of interest rates in one country should not be systematically larger or smaller than those in the benchmark interest rate), the i,t to converge to one. The magnitude of parameter shows to what extent an interest rate of a selected country responds to news in the same way as the benchmark interest rate, assuming that the benchmark interest rate responds to global news only. The more close to one is the value of the parameter, the higher is the integration of the compared credit markets. At fully integrated credit markets, the changes in domestic interest rate can be fully explained by the change of benchmark interest rate. However, credit risk is not identical across individual countries in reality. Therefore we do not expect the change in interest rate in a country to be explained fully by the impact of global news. 4. Integration of credit markets in the Visegrad countries with euro zone countries As a benchmark interest rate we use average interest rate in euro zone in each case. We estimate Equation 1 both for panel data and as well separately for each country. Therefore we can compare results of these two approaches. mortgage loans (0.0118) consumer loans (0.0488) short term loans to companies (0.0141) long term loans to companies (0.0120) * (0.2373) * (0.3552) * (0.0992) * (0.1296) Table 1: News-based indicators of credit market in the Visegrad countries 2 F = Prob = F = Prob = F = F = Table 1 shows the coefficients estimated with a panel regression with fixed effects. Beta coefficients for all analyzed credit market segments are statistically significant. Markets of long term loans to nonfinancial companies, together with consumer loans, are most integrated they are characterized by the highest sensitivity to the transmission of news. The level of 2 The starred coefficient estimates are significant at the 1 % (*), 5 % (**) or 10% (***) level. Standard errors are in parentheses.

4 integration is substantially lower for mortgage loans and short term loans to nonfinancial companies. Czech Republic ** (0.0040) Slovakia ** (0.0051) Poland (0.0226) Hungary (0.0397) Table 2: News-based indicators for mortgage loans (0.0809) * (0.1040) * (0.4557) (0.8009) F = Prob = F = F = F = Prob = Comparison of integration across countries and market segments could be useful. Table 2 shows results of Equation 1 estimated for mortgage loans separately for each country. Sensitivity to the transmission of news across individual countries varies significantly. However, values of beta coefficients signal that mortgage loan markets in the Visegrad countries are not well integrated with euro zone countries. The reaction of Polish interest rate on mortgage on the global news is even doubled in comparison with euro zone countries. The changes in interest rates on mortgage loans thus cannot be explained by the impact of global news. The level of credit risk and other factors play more important role. Czech Republic (0.0436) Slovakia (0.0808) Poland (0.0775) Hungary (0.1480) Table 3: News-based indicators for consumer loans (0.3177) (0.5884) * (0.5640) ** (1.0778) F = Prob = F = Prob = F = Prob = F = Prob = As shown in Table 3, the level of integration of consumer loan markets is even worse than in case of mortgage loan markets. The values of beta coefficients for Poland and Hungary signal that the reactions of these markets on news are excessive. However, the low level of integration of consumer loan markets is not surprising. According to Lannoo and de la Mata Munoz (2004), EU consumer loan market is segmented due to the existence of many barriers of integration, such as language, geographical distance, cultural differences, consumers preferences for local banks, etc. Results of news-based measure of integration of markets of short term loans to nonfinancial companies can be found in Table 4. The highest and statistically significant beta coefficient has been obtained for Slovakian market, intermediate for Polish market. Czech and 3 The starred coefficient estimates are significant at the 1 % (*), 5 % (**) or 10% (***) level. Standard errors are in parentheses.

5 Hungarian markets of short term loans to nonfinancial companies are less integrated with euro zone countries. Czech Republic (0.0142) Slovakia (0.0116) Poland (0.0220) Hungary (0.0485) * (0.1000) * (0.0813) * (0.1548) (0.3407) Table 4: News-based indicators for short term loans to nonfinancial companies 4 Czech Republic (0.0086) Slovakia (0.0189) Poland (0.0235) Hungary (0.0357) * (0.0923) * (0.2037) * (0.2526) (0.3837) Table 5: News-based indicators for long term loans to nonfinancial companies 4 F = F = F = F = Prob = F = F = F = F = Prob = Finally, Table 5 shows results of news-based measures of integration of markets of long term loans to nonfinancial companies. As a whole, values of beta coefficients are most suitable from all analyzed market segments. The changes of Polish interest rate can be almost fully explained by changes in benchmark interest rate. Reaction of Slovakian, Czech and Hungarian markets are slightly worse but still signals some consistency with euro zone markets. 5. Conclusion The aim of this paper was to assess with news-based indicators the extent to which selected segments of credit markets in the Visegrad countries are integrated with euro zone countries and to test the hypothesis that markets of loans provided to nonfinancial companies are more integrated than markets of loans provided to households. Markets of long term loans to nonfinancial companies, followed by markets of short term loans to nonfinancial companies, show the highest sensitivity to the transmission of news. These two credit market segments in the Visegrad countries are most integrated with euro zone countries. However, values of beta coefficients signal that mortgage loan markets in the Visegrad countries are not well integrated with euro zone countries and the level of integration of 4 The starred coefficient estimates are significant at the 1 % (*), 5 % (**) or 10% (***) level. Standard errors are in parentheses.

6 consumer loan markets is even worse. These two retail segments of credit markets are segmented due to the existence of many barriers of integration. The tested hypothesis can be confirmed: we have found that markets of loans provided to nonfinancial companies are really more integrated than markets of loans provided to households. Reference [1] ADAM, K., JAPPELLI, T., MENICHINI, A., PADULA, M., PAGANO, M.: Analyse, Compare and Apply Alternative Indicators and Monitoring Methodologies to Measure the Evolution of Capital Market Integration in the European Union. University in Palermo, Palermo, [2] BABECKY, J., FRAIT, J., KOMÁREK, L., KOMÁRKOVÁ, Z.: Price- and News-based Measures of Financial Integration among New EU Member States and the Euro Area. London Metropolitan Business School, [3] BABETSKII, I., KOMÁREK, L., KOMÁRKOVÁ, Z.: Financial Integration of Stock Markets among New EU Member States and the Euro Area. CNB Working Paper Series, No. 7, [4] BAELE, L., FERRANDO, A., HÖRDAHL, P., KRYLOVA, E., MONNET, C.: Measuring Financial Integration in the Euro Area. ECB Occasional Paper Series, No. 14, [5] BALTZER, M., CAPPIELLO, L., DE SANTIS, R.A., MANGANELLI, S.: Measuring Financial Integration in New EU Member States. ECB Occasional Paper Series, No. 81, [6] CABRAL, I., DIERICK, F., VESALA, J.: Banking Integration in the Euro Area. European Central Bank, Frankfurt, [7] ČERMÁK, P.: Integrace finančního trhu EU. Ministerstvo financí, Praha, Access from: < [8] ECB: Financial integration in Europe. European Central Bank, Frankfurt, [9] KOMÁRKOVÁ, Z., FRAIT, J., KOMÁREK, L.: Integrace úvěrových trhů vybraných nových členských zemí Evropské unie s eurozónou. VŠB-TU, Ostrava, Access from: < Komarek_Lubos.pdf> [10] LANNOO, K., DE LA MATA MUNOZ, A.: Integration of the EU Consumer Credit Market. Proposal for a More Efficient Regulatory Model. CEPS Working Document, No. 213, [11] PUNGULESCU, C.: Measuring Financial Market Integration: An Application for the East-European New Member States. Tilburg University, Tilburg, Access from: < [12] VODOVÁ, P.: Measuring the Integration of Credit Markets. In 12th International Conference on Finance and Banking. SU OPF, Karviná, 2009, pp

7 Summary Indikátory událostí jako měřítko integrace úvěrových trhů v zemích Visegrádské čtyřky V tomto příspěvku prostřednictvím indikátorů událostí ohodnocujeme, do jaké míry jsou úvěrové trhy v zemích Visegrádské čtyřky integrovány s úvěrovými trhy v zemích eurozóny. Testujeme také hypotézu, že trhy úvěrů poskytovaných nefinančním společnostem jsou integrovanější než trhy úvěrů poskytovaných domácnostem. Analýza je založena na měsíčních hodnotách čtyř úrokových sazeb za období od ledna 2005 do března Testovaná hypotéza byla potvrzena: zjistili jsme, že trhy úvěrů poskytovaných nefinančním společnostem (jak krátkodobých, tak i dlouhodobých) jsou skutečně integrovanější než trhy úvěrů poskytovaných domácnostem (jak hypotečních, tak i spotřebitelských úvěrů).