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Off-Balance-Sheet Activities and the Shadow Banking System: An Application of the Hausman Test with Higher Moments Instruments

Author

Listed:
  • Christian Calmès

    () (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM)

  • Raymond Théoret

    () (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM)

Abstract

The noninterest income banks generate from their off-balance-sheet activities contributes greatly to the volatility of their operating revenues. Using Canadian data, we apply a modified Hausman procedure based on higher moments instruments and revisit this phenomenon to establish that the share of noninterest income (snonin) is actually endogenous to banks returns. In 1997, after the adoption of the Value at Risk (VaR) as a measure of banks risk, the snonin sign turns positive in the returns equations, indicating the emergence of diversification gains from banks non-traditional activities. ARCH-M estimations corroborate the idea that banks have gradually adapted to their new business lines, with an adjustment process begun even before 1997. However, the banks risk premium associated to OBS activities has continuously increased since that date.

Suggested Citation

  • Christian Calmès & Raymond Théoret, 2009. "Off-Balance-Sheet Activities and the Shadow Banking System: An Application of the Hausman Test with Higher Moments Instruments," RePAd Working Paper Series UQO-DSA-wp042009, Département des sciences administratives, UQO.
  • Handle: RePEc:pqs:wpaper:042009
    as

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    File URL: http://www.repad.org/ca/qc/uq/uqo/dsa/endo092009.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank Risk Measures; Diversification; Noninterest income; Hausman test; Endogeneity; ARCH-M.;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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