Bankers, Markets & Investors

Business Cycle, Banking Risk-Taking, and Technological Change: European Evidence

FATEN BEN BOUHENI — 2025-06-01

This paper explores the risk-taking behavior of European banks over the course of the business cycle with a particular emphasis on systemically important banks (SIBs). The findings suggest that while commercial banks’ liquidity and credit risks tend to be procyclical—rising during periods of economic growth—SIBs exhibit a countercyclical pattern by showing reduced liquidity and credit risks during such times. Often labeled as “too big to fail,” SIBs benefit from financial guarantees and deposit insurance systems that promote the diversification of their activities.
Moreover, these banks are equipped with comprehensive risk management strategies. Additionally, economic freedom plays a vital role in reducing the volatility of returns on both assets and equity for SIBs. This stabilization is influenced by market expectations regarding the efficacy of economic freedom for these large financial institutions.
The findings underscore the importance of factors such as bank size, economic freedom, financial market structure, and risk-taking culture in sustaining financial stability amid economic uncertainty. Furthermore, banks are increasingly embracing technological advancements, and the integration of fintech continues to present both opportunities and challenges.

Is the valuation of an insurance company specific?

OLIVIER LEVYNE — 2025-06-01

Valuation is traditionally based on listed peers approaches and DCF for corporate entities. Most aggregates such as EBITDA and EBIT are not relevant for insurance companies and can’t therefore be the foundations of their valuations. Given the reliance of insurance companies’ operating activity on the Solvency 2 regulation, their valuation must include such a constraint. This is why the peers approach is focused on multiples of book value of equity (P/BV) and net income (P/E). Moreover, a ROE correlated P/BV enables to reconcile both approaches. The main intrinsic approach is based on dividend discount model, the dividend corresponding to the excess equity taking the solvency constraint into account. An empirical study based on 17 European insurance companies’
evidences that the listed peers approach generally explains the market capitalisation whereas intrinsic approaches, based on a limited set of information, provide values which are a bit higher. In that context, as recommended by a paper dated from 2013 and focussed on valuation on US banks, the listed peers approach has to be the central approach for European insurance companies.

Do climate risk matter for stock market returns: Evidence from weather conditions

FATMA MRAD — 2025-06-01

This paper investigates the influence of climate risk on S&P 500 returns using New York weather variables over the period between January 3rd, 2000 and January 10th, 2023. The Bivariate Coherence Wavelet methods applied on daily data reveals that temperature, humidity and cloudiness seem to have a no significant correlation with the return of S&P 500 in the short-run. However, temperature shows a strong negative and significant impact on stock returns in the long-run. The Multivariate Coherence Wavelet methods applied shows that the weather variable considered together have a strong connectedness with the stock returns. Our findings stress the emergency to put new settings and precautionary strategies to manage the global warming to reduce the long-run damage.

Excess Volatility and the Credibility Challenges of Fundamentalist Investors

OLIVIER DAVANNE — 2025-06-01

Three key variables determine the fair value estimated by fundamentalist investors for financial assets: current and future payoffs, current and future short-term interest rates set by central banks, and current and future excess returns (short-term risk premia) required by investors.
While current payoffs and interest rates are observable, short-term risk premia remain private information. Despite the availability of some survey data, fundamentalist investors often make errors in estimating this elusive variable.
This study examines the theoretical and empirical implications of such errors. We demonstrate how misjudging short-term risk premia can erode the credibility of fundamentalist investors and amplify volatility.
A deeper understanding of the underlying market failures—stemming from private information and bounded rationality—could help these investors better utilize available data and contribute to greater market stability.
Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. Sir John Templeton, Founder of Templeton Mutual Funds