Top PDF Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis

Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis

Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis

In particular, a lower agency cost results in a higher investment rate [by (4.6)], and faster growth for those entrepreneurs who have access to external finance.. So a lower V has no impa[r]

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Funding growth in bank-based and market-based financial systems : evidence from firm level data

Funding growth in bank-based and market-based financial systems : evidence from firm level data

Thus, especially for countries with lower levels of financial development, differences in contracting environments that affect the relative development of the stock market and the bankin[r]

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Impact of Market-Based Financial Structure on the Growth of Nigerian Economy: An Econometric Analysis

Impact of Market-Based Financial Structure on the Growth of Nigerian Economy: An Econometric Analysis

Market-based financial structure plays a key role in the growth and development of all the leading economies in the Western World. The dismal performance of the market-based financial structure calls for concern in Nigeria. The objective of this paper is the examination of the impact of market-based financial structure on the growth of Nigerian economy, with emphasis on market capitalization, total value of transactions, total listed equities and government stocks and total new issues. The paper employs time series data from Central Bank of Nigeria Statistical Bulletin from 1980-2014. Econometric techniques are used to test the time series properties of the data and error correction mechanism is used for the estimation of the variables. The findings of this paper reveal that market-based financial structure significantly impacted on the growth of Nigerian economy. The joint performances of the variables in the model hold positive value for economic growth in Nigeria. The policy recommendation of this paper is that the government should make policy that will encourage firms listing in the capital market so as to improve on market capitalization and value of transactions in the market.
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Adverse Feedback Loop in the Bank-Based Financial Systems

Adverse Feedback Loop in the Bank-Based Financial Systems

2 owing to increased financing costs and can also adversely affect supply via banks’ reaction to the increased credit risk of firms and households or the lower profitability of investment projects (Calza, Gartner and Sousa, 2001). However, if growth in interest rates leads to a fall in profit margins, banks may increase the supply of loans in an attempt to maintain their profitability thanks to larger loan portfolios. The impact of interest rate changes is therefore not entirely clear-cut. Koopman, Kraussl, Lucas and Monteiro (2009) demonstrate empirically that GDP is the most significant indicator affecting bank lending. 1 Macroeconomic fluctuations affect not only the volume of loans in the economy, but also credit standards. Maddaloni (2009) demonstrated on data for the euro area countries that credit standards are tightened at times of economic contraction and softened at times of economic growth. Moreover, low interest rates cause credit standards to be softened (Bernanke and Gertler, 1995). Another natural source of procyclicality is the way in which risks are measured and managed. Problems distinguishing between short-term swings and longer-term trends and estimating robust correlations between market and economic variables, together with the use of risk management techniques that take into account relatively short periods of past observations, can cause risks to build up in an expansion phase (Borio, Furfine and Lowe, 2001). This phase usually results in growth in optimistic expectations, leading to rising leverage of financial and non-financial institutions at times of growth. Simultaneously, the need to create a buffer of reserves for the adverse phase of the cycle is underestimated during the growth phase. During the subsequent economic slowdown, measured risk rises sharply and leverage falls, with mutually reinforcing effects on the financial and non-financial sectors in a situation where financial institutions have inadequate capital and other buffers.
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Bank based Financial Intermediation for Financial Inclusion and Inclusive Growth

Bank based Financial Intermediation for Financial Inclusion and Inclusive Growth

Amartya Sen (2000) argued convincingly that pov- erty is not merely insufficient income, rather the absence of wide-ranging capabilities, including se- curity and ability to contribute in economic and political systems. Franklin Roosevelt, the popular president of United States of America in 1932, men- tioned the American poor as the forgotten man at the bottom of the economic pyramid. The term “bot- tom of the pyramid” today is referred to the global poor most of whom survive in the developing coun- tries. These large numbers of poor are required to be provided with much needed financial assistance in order to sail them out of their conditions of poverty. Joseph E. Stilglitz opines that if economic growth is not shared throughout society then development has failed. Accordingly, there is felt a need for policy support in channeling the financial resources to- wards the economic upliftment of resource poor in any developing economy. This study is an attempt to comprehend and distinguish the significance of financial inclusion in the context of a developing country like India, wherein a large population is deprived of the financial services which are very much essential for overall economic growth of a country. Our understandings and analysis on the topic are presented here below in the following sec- tions. The importance of “finance” for economic growth has been established with adequate literature review in Section 1. In Section 2, inclusive growth and its significance for achieving sustainable growth is discussed. Section 3 brings to fore the financial inclusion and its dimensions in detail. In Section 4, the importance of financial inclusion for achieving inclusive growth in India is detailed with a statistical analysis. Lastly, findings and conclusion is pre- sented in the last Section.
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Bank-Based or Market-Based Financial Systems: Which is Better?

Bank-Based or Market-Based Financial Systems: Which is Better?

mobilizing capital to exploit economies of scale (Sirri and Tufano, 1995). The bank-based view also stresses the shortcomings of market-based systems. Stiglitz (1985), for instance, argues that well- developed markets quickly and publicly reveal information, which reduces the incentives for individual investors to acquire information. Banks, however, mitigate this problem since they form long-run relationships with firms and do not reveal information immediately in public markets (Boot, Greenbaum, and Thakor, 1993). Also, Boot and Thakor (1997) argue that banks – as coordinated coalitions of investors – are better than uncoordinated markets at monitoring firms and reducing post-lending moral hazard (asset substitution). Proponents of the bank-based view also stress that liquid markets create a myopic investor climate (Bhide 1993). In liquid markets, investors can inexpensively sell their shares, so that they have fewer incentives to exert rigorous corporate control. Thus, according to the bank-base view, greater market development may hinder corporate control and economic growth. Furthermore, Gerschenkron (1962) and Rajan and Zingales (1998) stress that powerful banks can more effectively force firms to re-pay their debts than atomistic markets, especially in countries with weak contract enforcement capabilities. Without powerful banks to force repayment, therefore, external investors may be reluctant to finance industrial expansion in countries with underdeveloped institutions. Thus, the bank-based view holds that banks -- unhampered by regulatory restrictions on their activities -- can exploit scale economies in information processing, ameliorate moral hazard through effective monitoring, form long-run
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Financial sector development convergence in Africa: Evidence from bank- and market-based measures

Financial sector development convergence in Africa: Evidence from bank- and market-based measures

Not exceptionally, African countries have also moved with the speed of light to develop and liberalize their financial sector to hasten the convergence process with other regions of the world. Convergence in several areas among countries with differing levels of macroeconomic, structural and fundamental developments presents a springboard to accelerate the catching up process for these countries. As a result, convergence criteria in a number of areas of interests are being championed by the several regional economic communities and monetary zones in Africa, with the aim of quickening monetary integration leading to the single continental market (continental free trade area). This integration is expected to massively enhance competition and trade, movement of factors and labour, and increase economic growth. On a number of fronts, financial development convergence is one of the key areas required to drive this integration. As the advantages of financial development are well–known, evidence of its convergence in Africa is elusive. However, recent literature is skewed towards examining the factors influencing financial development in Africa. For instance, in the case of sub-Saharan Africa, Ibrahim & Alagidede (2017) argue that the legal origin of countries matters in their level of financial sector development. In particular, the authors find that, relative to countries practicing civil law, English common law countries have higher financial sector development both in terms of financial activity and banking sector efficiency. More recently, after examining how the interactive effect of trade openness and human capital influence financial sector development in Africa, Ibrahim & Sare (2018) conclude that human capital accumulation and trade openness are substitutable in their effect on domestic financial development. While these studies carry important implications for policy, little is known regarding the (di)convergence of the financial sector. Sprat (2009) documents two types of financial systems: (i) bank-based and (ii) market- based financial systems. While the bank-based considers issues in the financial institutions where banks forge long-term relationships with corporate borrowers, the market-based financial sector revolves around the equity/capital markets. This notwithstanding, the existing studies are mainly centered on the bank-based measures while remaining mute on the market-based measures. In this paper, we deviate from the earlier studies by examining the convergence or otherwise of financial development across a substantial number of African countries by using bank and marketbased measures of financial development.
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Bank market power, economic growth and financial stability: Evidence from Asian banks

Bank market power, economic growth and financial stability: Evidence from Asian banks

With regards to the implications of bank consolidations to rescue distressed banks, Berger and Mester (2003) argue that market power gained by banks after consolidation increases banks‟ capacity to expand their activity into various products and across national borders. This process has lead to the emergence of large “too big to fail” banks and potentially to higher moral hazard incentives to exploit government bailout. Meanwhile, regarding corporate governance reforms in Asia, firms still face major challenges, such as poor accounting systems, non-transparent management, and weak protection for minority shareholders (Park, 2006). Because firms significantly depend on banks for their external funding (Adams, 2008), bank stability is a major concern for policy makers. Corporate sector vulnerability is indeed more likely to affect bank soundness through risk-shifting mechanisms in bank-based financial systems (Stiglitz and Weiss, 1981).
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Venture capital in bank - and market - based economies

Venture capital in bank - and market - based economies

The second dimension of our sensitivity analysis refers to characteristics of the errors. We use the ratio of seed and start-up venture capital to investments into tangible and intangible capital. Since this ratio is bounded between zero and one the corresponding regression error cannot be normally distributed. For this reason we apply a logit transformation to the venture capital ratio which expands the domain of the dependent variable from [0, 1] to [-∞, +∞] and thus theoretically allows for disturbances from the full domain of the normal distribution. We do not expect to achieve fundamentally different results from this step because standard errors in Tables 3 and 4 are already computed by bootstrap methods. Actually, our conclusion on the significance of the financial structure index does not change in any of the models. As a second variation in our endogenous variable we use GDP as the denominator to compute the venture capital ratio instead of our combined investments into tangible and intangible capital. This resembles the more common normalization for international comparisons of venture capital activity. Again our results with respect to the significance of the financial structure remain unchanged. Another potential source of wrong inference is outliers in the data. Figure 2 shows that Canada has the highest venture capital ratio, exceeding even the US value by about 50 percent. This surprisingly high value might be due to errors in data collection and may bias our estimates but, after eliminating Canada from the sample, our conclusion remains the same. A further step in this direction would be to eliminate the USA as well from the sample, because the US venture capital market is exceptional and may bias our results toward a significant positive relation between venture capital finance and market-based financial systems. Figure 2 already points to this possibility. But, even after eliminating North American data from the sample, our financial structure index remains significantly positive, in most of the models at the 1-percent level. Finally, we also use asymptotic standard errors for the computation of test statistics and our results are again confirmed without exception. 6. Conclusions
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Effect of Bank-Based or Market-Based Financial Systems on Income Distribution in Selected Countries

Effect of Bank-Based or Market-Based Financial Systems on Income Distribution in Selected Countries

Financial system could be bank-based, securities-based and financial services-based. The bank-based theory emphasizes on the positive role of banks in economic growth and development and shortcomings and failures of the securities-based financial system. According to this theory in developing countries, banks could be more effective than market of securities on the economic growth. The view of being bank-based also emphasizes on the shortcomings and failures of the basis system among which the following point could be referred to that securities - based system has issued the information for the public and in this way it reduces the investors' incentive to seek information. On the other hand, banks remove the disturbances resulting from unbalanced information through establishment of a long-term relation between themselves and firms. As a result, bank-based arrangements could improve the optimal allocation and company governance more than the securities-based systems. Furthermore, securities-based theory explains the advantages of better performance of the market and emphasizes on the problems of the bank-based system.
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The origins of bank-based and market-based financial systems: Germany, Japan, and the United States

The origins of bank-based and market-based financial systems: Germany, Japan, and the United States

A crucial aspect of the industrialization process is the development of an autonomous financial system, that is, a set of specialized organizations and institutions dealing with the transfer of payments and mediating the flow of savings and investment. 1 While all industrial societies have such a specialized financial system, cross-national comparison of these systems indicates considerable structural diversity (Zysman 1983). One key difference is the degree to which financial systems are bank-based or market-based. In bank-based systems, the bulk of financial assets and liabilities consist of bank deposits and direct loans. In market-based systems, securities that are tradeable in financial markets are the dominant form of financial asset. Bank- based systems appear to have an advantage in terms of providing a long-term stable financial framework for companies. Market-based systems, in contrast, tend to be more volatile but are better able quickly to channel funds to new companies in growth industries (Vitols et al. 1997) (see also Gregory Jackson’s contribution to this volume). A second key distinction between financial systems is the degree to which the state is involved in the allocation of credit. State involvement in credit allocation can turn the financial system into a powerful national resource for overcoming market failure problems and achieving collective economic and social goals. However, financial targeting also runs the danger of resource misallocation due to inadequate reading of market trends or “clientelism” (Calder 1993). 2
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The Analysis of Bank Performance in PT. Bank Negara Indonesia, Tbk and PT. Bank Rakyat Indonesia,tbk Based on Financial Ratio

The Analysis of Bank Performance in PT. Bank Negara Indonesia, Tbk and PT. Bank Rakyat Indonesia,tbk Based on Financial Ratio

Capital Adequacy Ratio (CAR) at the end of 2011 experienced a decline to 17.6% from 18.6% in 2010. The decline reflects increased financing in 2011 and was also attributed to the change in the calculation of operational risk weighting, from the original 10% in 2010 to 15% in 2011, in accordance with Bank Indonesia Circular LetWHU 1R '313 GDWHG -DQXDU\ $OWKRXJK %1,¶V &$5 UDWLR ZDV ORZHU WKDQ WKH SUHYLRXV year, the capital structure still demonstrates its ability to compensate for market risk, credit risk and operational risks, as it was still much higher than the minimum level of capital adequacy ratio set by BI of 8%. And in the en of 2012 the Capital Adequacy Ratio (CAR) declined to 16.7% in 2012 from 17.6% in 2011. The decline was due to business expansion as reflected in the strong loan growth during 2012. However, the decline does not DIIHFW WKH FDSDELOLW\ RI %1,¶V FDSLWDO VWUXFWXUH WR DQWLFLSDWH FUHGLW ULVN RSHUDWLRQDO ULVNV DQG PDUNHW ULVN DV LW was still much higher than the minimum level of capital adequacy ratio set by Bank Indonesia of 8%.
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Venture capital in bank - and market - based economies

Venture capital in bank - and market - based economies

The second dimension of our sensitivity analysis refers to characteristics of the errors. We use the ratio of seed and start-up venture capital to investments into tangible and intangible capital. Since this ratio is bounded between zero and one the corresponding regression error cannot be normally distributed. For this reason we apply a logit transformation to the venture capital ratio which expands the domain of the dependent variable from [0, 1] to [-∞, +∞] and thus theoretically allows for disturbances from the full domain of the normal distribution. We do not expect to achieve fundamentally different results from this step because standard errors in Tables 3 and 4 are already computed by bootstrap methods. Actually, our conclusion on the significance of the financial structure index does not change in any of the models. As a second variation in our endogenous variable we use GDP as the denominator to compute the venture capital ratio instead of our combined investments into tangible and intangible capital. This resembles the more common normalization for international comparisons of venture capital activity. Again our results with respect to the significance of the financial structure remain unchanged. Another potential source of wrong inference is outliers in the data. Figure 2 shows that Canada has the highest venture capital ratio, exceeding even the US value by about 50 percent. This surprisingly high value might be due to errors in data collection and may bias our estimates but, after eliminating Canada from the sample, our conclusion remains the same. A further step in this direction would be to eliminate the USA as well from the sample, because the US venture capital market is exceptional and may bias our results toward a significant positive relation between venture capital finance and market-based financial systems. Figure 2 already points to this possibility. But, even after eliminating North American data from the sample, our financial structure index remains significantly positive, in most of the models at the 1-percent level. Finally, we also use asymptotic standard errors for the computation of test statistics and our results are again confirmed without exception.
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Financial Development and Economic Growth Relationship: An Analysis with Credit Based Financial Index

Financial Development and Economic Growth Relationship: An Analysis with Credit Based Financial Index

Abstract: Countries are classified under different group names because of their similarity to each other, and they are analyzed in that way by various international organizations. BRICS, MENA, G7 and Fragile Five are well known group names. In this study, the relationship between financial development and economic growth for Fragile five countries (Brazil, India, Indonesia, South Africa and Turkey) through the period of 2002-2016 were examined using annual data. In emerging market economies, businesses prefer to meet their financing needs by asking for credit from the capital market, mostly from banks and non-bank financial institutions. Therefore, it would not be wrong to say that financial system of Fragile Five countries is based on "lending financial institutions". Within the framework of the analysis, financial development index which includes three data related with credit provided by banks and financial institutions, and national income per capita as an economic growth variable were taken into account. Panel co-integration, VECM, DOLS and FMOLS tests have revealed the existence of a unidirectional causality relation from growth towards financial development.
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Industry growth and capital allocation: Does having a market- or bank-based system matter?.

Industry growth and capital allocation: Does having a market- or bank-based system matter?.

Finally, our previous results concerning financial development and financial structure are not due to peculiar characteristics of industries in the U.S. We use the external dependence as calculated for a sample of Canadian firms, which RZ note is the only other country for which firm-level flow of funds are available. We confirm our results concerning financial structure. However, using the Canadian data, we cannot confirm the results concerning the legal-based view and the results on the financial services view are weakened. These results might be partly explained by the fact that we have data for only 27 industries in the Canadian sample, whereas there are at least 36 industries in the text specification. Furthermore, the sample size drops from 1222 to 702. Thus, with some qualifications, the robustness checks confirm the text’s main conclusions: (1) industries that are heavily dependent on external finance do not grow faster in bank-based or market-based financial system, (2) externally dependent industries do, however, tend to grow faster in countries with better-developed financial systems and especially in economies that efficiently project the legal rights of outside investors, and (3) overall financial development and the legal protection of investors stimulates industry growth primarily by facilitating new firm formation.
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Bank-Based Versus Market Based Financial System: Does it Really Matter?

Bank-Based Versus Market Based Financial System: Does it Really Matter?

financial development reveals the economic growth differences between countries. In particular, the legal rights of foreign investors and the effectiveness of the legal system in the application of these rights are argued to have a stronger relationship with long-term growth. On the other hand, some economists argue that such relations on economic growth do not need to be stable and may change over time [Boyd & Smith (1996, 1998), Rajan&Zingales (1998), Boot &Thakor (1997), Perotti, & von Thadden (2003)]. In the cross-country analysis of Lee's study, the stock markets in the United States, the UK and Japan played an important role in the financing of economic growth; In Germany, France, and Korea, the bank-based system has an impact on growth. When more detailed analyses are performed, it is seen that the bank-based system plays an important role for all countries in the first years of growth. In addition, while in all countries except the USA the mentioned economic systems have complementary effects; this effect appears itself as a substitution in the US. For Korea, strong pieces of evidences have been found that economic growth leads to the development of the financial system. Especially in recent years in Japan, it is stated that the stock markets played a more effective role in economic growth than in the banking sector (Lee, 2010, pp.174, 195-196).
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Bank-Based or Market-Based Financial Systems: Which is Better?

Bank-Based or Market-Based Financial Systems: Which is Better?

The results are overwhelming. There is no cross-country empirical support for either the market- based or bank-based views. Neither bank-based nor market-based financial systems are particularly effective at promoting growth. The results are robust to an extensive array of sensitivity analyses that employ different measures of financial structure, alternative statistical procedures, and different datasets. The conclusions are also not altered when looking at extremes: countries with very well developed banks but poorly developed markets do not perform notably differently from those with very well developed markets but poorly developed banks, or than those with more balanced financial systems. I also allow for the possibility that financial structure changes as countries develop and legal systems evolve. For instance, Boyd and Smith (1998) develop a model in which countries become more market-based, with positive implications for economic growth, as they develop. Rajan and Zingales (1998) argue that bank- based systems are better at promoting growth in countries with poor legal systems, while market-based systems have advantages as legal systems improve. Allowing for these possibilities, however, does not alter this paper’s conclusion: cross-country comparisons do not suggest that distinguishing between bank- based and market-based is analytically useful for understanding the process of economic growth.
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MARKET- BASED MANAGEMENT AND TAMALE POLYTECHNIC: A CRITICAL ANALYSIS OF THE ELEMENTS OF MARKET- BASED MANAGEMENT FRAMEWORK AND THE MANAGEMENT PHILOSOPHY AND SYSTEMS OF TAMALE POLYTECHNIC

MARKET- BASED MANAGEMENT AND TAMALE POLYTECHNIC: A CRITICAL ANALYSIS OF THE ELEMENTS OF MARKET- BASED MANAGEMENT FRAMEWORK AND THE MANAGEMENT PHILOSOPHY AND SYSTEMS OF TAMALE POLYTECHNIC

The deficiencies of command and control management have been widely recognized by management experts for at least fifty years. Command and control hierarchy is no longer fashionable in management because it hampers the discovery, dissemination, and integration of knowledge in the organization (Cowen and Ellig, 1995). Nevertheless, for all its drawbacks, command and control provided an integrated conceptual framework for approaching management problems. While this paradigm is now out of fashion, it is not clear what new framework will emerge to help firms cope with knowledge problems (Cowen and Ellig, 1995). School leaders across nation are exploring ways to better educate students and improve school performance. MarketBased Management (MBM) offers a way to promote improvement by decentralizing control from central district offices to individual school sites. Gable and Ellig (1993) defined MBM as a framework that applies market process principles to improve organizational performance and profitability by fully utilizing the knowledge of each employee. According to Cowen and Ellig (1995), MBM means internalizing the beneficial characteristics of a free market economy, and eliminating the harmful effects of a command economy. Koch (year, page) says. “ It is difficult in practice, because we con not just copy everything from the external market- we have to adapt market principles for use inside the firm”.
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Weird Ties? Growth, Cycles and Firm Dynamics in an Agent-Based Model with Financial-Market Imperfections

Weird Ties? Growth, Cycles and Firm Dynamics in an Agent-Based Model with Financial-Market Imperfections

This paper studies how the interplay between technological shocks and financial vari- ables shapes the properties of macroeconomic dynamics. Most of the existing litera- ture has based the analysis of aggregate macroeconomic regularities on the represen- tative agent hypothesis (RAH). However, recent empirical research on longitudinal micro data sets has revealed a picture of business cycles and growth dynamics that is very far from the homogeneous one postulated in models based on the RAH. In this work, we make a preliminary step in bridging this empirical evidence with theoreti- cal explanations. We propose an agent-based model with heterogeneous firms, which interact in an economy characterized by financial-market imperfections and costly adoption of new technologies. Monte-Carlo simulations show that the model is able jointly to replicate a wide range of stylised facts characterizing both macroeconomic time-series (e.g. output and investment) and firms’ microeconomic dynamics (e.g. size, growth, and productivity).
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A Market-Based Risk Classification of Financial Institutions

A Market-Based Risk Classification of Financial Institutions

Our regression equation, be it a two-factor model or a multi-factor model, serves as a basis for producing the clustering result. First, we estimate the coefficients of the model for an individual bank using a time-series of stock returns over 1981 to 1988 sample period. Second, for each pair of banks, we perform an f-test, whose null hypothesis is that all the model’s coefficient estimates of the pair of banks are identical. The resulting f-statistic serves as a measurement of how different a pair of banks are from each other. Under the null hypothesis, if both banks respond similarly to all factors, the f-statistic should be zero. Otherwise, the size of the f-statistic approximately indicates the dissimilarity of banks’ sensitivity to the factors. We perform this test on all combination of banks in our sample. We use these f-test results to form a lower triangular matrix. A typical element (i, j), where i < j, stores the f-statistic from the mentioned hypothesis testing between bank i and bank j.
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