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Essays on Empirical Models of Macroeconomics and Finance


The dissertation oers insights into measuring and managing risk in nancial in-

stitutions and the role of central banks as regulators and supervisors. Specically, the rst

chapter analyzes the impact of U.S. rms' equity risk on bank lending standards and on the

macroeconomy, considering two groups: small rms and medium-large rms. Using rms'

daily stock returns, we construct a rm equity risk index for each group based on 30,000

rms over 104 quarters. Once the indices are constructed, they are analyzed with a large

dataset of over 50 macroeconomic and nancial time series using the Factor-Augmented

Vector Autoregressive (FAVAR) framework. The results indicate that a higher level of rm

risk leads to a higher percentage of banks tightening their lending standards on commercial

and industrial (C&I) loans. The eect of rm risk on bank lending standards for medium-

large rms is twice that for small rms. In addition, we nd that greater rm risk results

in an inversion of the yield curve, an increase in the corporate bond risk premium, and a

decrease in real GDP. Lastly, the eect of an increase in rm risk on bank lending standards

and the economy is larger during recessions than in expansions.

The second chapter uses a big dataset of over one million observations on rm

characteristics, bank balance sheets, and loan information to study the default risk of loans

to small businesses under the Small Business Administration (SBA) loan guarantee program.

Using a logistic model, we nd that loan age is the most important predictor of loan default

over the entire sample. This is also the case for the periods before, during, and after

the 2008 nancial crisis. The other important variables are bank capital and bank assets

in predicting default risk before and during the crisis period. However, after the crisis,

rm characteristics, such as earnings-to-assets and debt-to-assets, are the most important

predictors after loan age. The results suggest that major post-crisis reforms in the banking

industry may have improved the quality of bank balance sheets. Bank characteristics,

therefore, have since become less crucial in determining the quality of loans after the crisis.

The third chapter investigates the eects of the Dodd-Frank Act Stress Test

(DFAST) on bank equity risk and liquidity risk management of the 100 largest publicly

traded banks in the U.S. based on their consolidated assets. Bank equity risk is derived

from banks' daily stock returns. Exposure to liquidity risk is measured by the amount of

bank equity capital, core deposits, and liquid assets since they act as buers for banks when

market liquidity becomes scarce. Using a dierence in dierence panel data model for the

period between 2008Q1-2017Q4, the paper nds that the implementation of the DFAST

signicantly decreases bank equity risk and increases the amount of equity capital and core

deposits held at stress-tested banks. The paper concludes that the stress test indeed has

had a positive impact on banks' risk exposure and risk management.

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