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Competition and risk-taking in investment banking

Competition and risk-taking in investment banking
Competition and risk-taking in investment banking
How does competition affect the investment banking business and the risks individual institutions are exposed to? Using a large sample of investment banks operating in seven developed economies over 1997-2014, we apply a panel VAR model to examine the relationships between competition and risk without assuming any a priori restrictions. Our main finding is that investment banks’ higher risk exposure, measured as a long-term capital-at-risk and return volatility, was facilitated by greater competitive pressures especially for full service investment banks but also for boutique investment banks. Overall, we find some evidence that more competition leads to more fragility before and during the recent financial crisis.
Degl'innocenti, Marta
e33b2a74-a534-44a2-ab66-819b156564c3
Fiordelisi, Franco
29337b1e-43e4-48b1-880c-0527af6dbce2
Girardone, Claudia
34521ad9-837c-4b7e-bf9a-95a967eb5325
Nemanja, Radic
d8f68006-345a-4d4b-8669-e24074b15c2e
Degl'innocenti, Marta
e33b2a74-a534-44a2-ab66-819b156564c3
Fiordelisi, Franco
29337b1e-43e4-48b1-880c-0527af6dbce2
Girardone, Claudia
34521ad9-837c-4b7e-bf9a-95a967eb5325
Nemanja, Radic
d8f68006-345a-4d4b-8669-e24074b15c2e

Degl'innocenti, Marta, Fiordelisi, Franco, Girardone, Claudia and Nemanja, Radic (2019) Competition and risk-taking in investment banking. Financial Markets, Institutions and Instruments. (doi:10.1111/fmii.12113).

Record type: Article

Abstract

How does competition affect the investment banking business and the risks individual institutions are exposed to? Using a large sample of investment banks operating in seven developed economies over 1997-2014, we apply a panel VAR model to examine the relationships between competition and risk without assuming any a priori restrictions. Our main finding is that investment banks’ higher risk exposure, measured as a long-term capital-at-risk and return volatility, was facilitated by greater competitive pressures especially for full service investment banks but also for boutique investment banks. Overall, we find some evidence that more competition leads to more fragility before and during the recent financial crisis.

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Competition and risk-taking in Inv. Banking_final - Accepted Manuscript
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Accepted/In Press date: 17 October 2017
e-pub ahead of print date: 5 March 2019

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Local EPrints ID: 414995
URI: https://eprints.soton.ac.uk/id/eprint/414995
PURE UUID: 30c2bb7d-ce67-4046-9083-5b47611b5dbf

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Date deposited: 20 Oct 2017 16:31
Last modified: 19 Jul 2019 17:54

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Contributors

Author: Franco Fiordelisi
Author: Claudia Girardone
Author: Radic Nemanja

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