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Competition and risk‐taking in investment banking
Author(s) -
Degl'Innocenti Marta,
Fiordelisi Franco,
Girardone Claudia,
Radić Nemanja
Publication year - 2019
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/fmii.12113
Subject(s) - competition (biology) , volatility (finance) , investment (military) , business , return on investment , monetary economics , financial risk , panel data , sample (material) , minimum capital , investment banking , economics , finance , capital requirement , market economy , microeconomics , econometrics , incentive , ecology , chemistry , chromatography , production (economics) , politics , political science , law , biology
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 for both boutique investment banks and full‐service investment banks. Overall, we find some evidence that more competition leads to more fragility before and during the recent financial crisis.