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Open access Aug 2026

Macroeconomic Shocks, Credit-Risk Persistence, and the Limits of Nonlinear Transmission in Emerging Europe

This paper examines how economic downturns and currency movements affect the quality of bank loans in Central, Eastern, and Southeastern Europe, using annual data for 14 national banking systems over 2008–2023. We estimate a bias-corrected dynamic fixed-effects model, verify inference with Driscoll–Kraay, cluster-robust, and wild cluster bootstrap procedures, run formal threshold tests, and conduct scenario simulations. Credit risk is highly persistent. The bias-corrected autoregressive coefficient of 0.944 implies a half-life of 12.0 years, although the bootstrap confidence interval of 0.601 to 1.048 does not rule out near-unit-root behavior. Exchange-rate depreciation predicts higher non-performing loan (NPL) ratios and survives both the strictest few-cluster test (p = 0.028) and a correction for euro-adoption breaks, while lower real GDP per capita growth is marginal under the same test (p = 0.060). Threshold tests that re-estimate the threshold in every bootstrap replication do not reject linearity in any of 14 configurations (minimum p-value of 0.071). Institutional quality does not measurably moderate the exchange-rate channel. A severe combined adverse scenario raises the projected NPL ratio from 6.54 to 12.32 percent over five years (90 percent interval: 8.2 to 24.6 percent). Together, the surviving channels and the disciplined null results delimit nonlinear transmission in emerging Europe.

Ivana Miklošević, Andreja Todorović, Andrija Popović · 0 citations
Open access Aug 2026

The Impact of Monetary Policy Shocks on Stock Price Crash Risk

This study examines the impact of monetary policy shocks (MPS) on future stock price crash risk (SPCR), using a sample of US firms from 1995 to 2019. We find that expansionary MPS significantly reduce the likelihood of SPCR, while contractionary MPS show no statistically significant effect on SPCR. These results remain robust after controlling for omitted variable bias, reverse causality concern, selection bias, varying forecasting windows, and incorporating different industry definitions. Furthermore, we find that expansionary MPS prevent the accumulation of bad news by curbing aggressive accrual and real earnings management (REM). We also provide evidence for two non–earnings–management‐based channels, where expansionary shocks alleviate external financing constraints and improve investment efficiency. The relation between expansionary MPS and SPCR is more pronounced among firms with better governance monitoring, lower ex‐ante risk, less information asymmetry, greater financial constraints, higher product market competition, and greater stock return sensitivity to MPS. Overall, our findings highlight the important role of macroeconomic policy uncertainty in shaping corporate financial disclosure.

Shun-Shun Xu, Haifeng Guo, Yeqin Zeng · 0 citations
Open access Aug 2026

Analyzing GDP and stock market dynamics

This paper aims to examine whether the forces linking financial markets to real economic activity operate differently across business cycle phases, using quarterly US data from 1990 to 2024, spanning four recession episodes. Specifically, the author asks whether the mechanism that normally keeps equity markets anchored to corporate earnings and real output remains stable between expansions and recessions and what the accumulated output cost is when that mechanism breaks down. The author first estimates a vector error correction model among real gross domestic product (GDP), the S&P 500 Total Return Index and Earnings Per Share, using cointegration tests to identify the long-run equilibrium structure and controlling for monetary policy, consumer confidence, market uncertainty and real GDP expectations. The author then extends this to a Bayesian Markov-Switching vector error correction model that holds the cointegrating vectors constant while allowing adjustment dynamics and shock covariance structures to vary across regimes, with regime identification anchored to NBER recession dates. The author identifies two stable long-run equilibria anchored by earnings per share. This study finds that the stock market index self-corrects toward its earnings equilibrium in normal expansions, while in recessions, the adjustment coefficient linking the stock market index to earnings reverses sign, with the index moving further from earnings fundamentals; as the Granger causality tests detect predictive content from stock returns and earnings growth to GDP growth but not in the reverse direction, no offsetting predictive force is found within the estimated system. The accumulated output cost amounts to 1.78 percentage points of cumulative GDP growth deficit by quarter 20 following a recession onset. The author provides direct evidence that the corrective mechanism linking the stock market index to its long-run earnings equilibrium is regime-dependent, reversing during recessions in a way that has not previously been documented within a regime-switching cointegration framework.

Naowar Mohiuddin · 0 citations
2026

Trade Policy Shocks and the Indian Equity Market: An Empirical Analysis of U.S. Tariff Changes and Sectoral Stock Returns

This study aims to understand how major US tariff-policy announcements have influenced the prices of Indian equities. The study further explores conditional volatility and financial transmission channels from January 2018 to June 2026. This study employs a combined event-study framework. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) volatility modelling along with a five-variable Structural Vector Autoregression (SVAR) was also used. The study was carried out for a 251 trading day estimation window and three event windows around six policy announcements. The reported results show a statistically significant negative response of the NIFTY 50, with a cumulative average abnormal return (CAAR) of −1.42% over the [−1,+1] window. Sectoral responses are heterogeneous: NIFTY Metal (−3.65%), and NIFTY IT (−2.84%) show larger negative responses, whereas NIFTY FMCG (−0.22%) is statistically insignificant. GARCH estimates indicate positive event-related variance shifts for NIFTY 50, IT and Metal, but not FMCG. Under the specified Cholesky identification, the 10-day forecast-error variance of NIFTY IT is associated with FPI-flow and USD/INR shocks accounting for 24.3% and 18.7%, respectively, while TPU shocks account for 29.1% of NIFTY Metal variance. The results showcase heterogeneous short-run responses across the selected sectors while the transmission estimates highlight conditionality on the specified identification structure. These findings indicate that U.S. tariff announcements are associated with heterogeneous short-run spillovers into Indian equities, with financial channels complementing direct trade exposure.

Avinash Holihosur, Melita Simoes, Laxman R. Yaligar et al. · 0 citations
Open access Aug 2026

Cash conversion cycles and financial flexibility under economic shocks: evidence from emerging markets

This study examines whether the cash conversion cycle (CCC) supports financial flexibility or instead increases firm vulnerability under economic policy uncertainty (EPU), and tests whether the COVID-19 pandemic altered this relationship for firms with different pre-existing working-capital structures. The study uses a balanced panel of 391 non-financial Indian listed firms over 2014–2024 (4,301 firm-year observations), drawn from the CMIE Prowess database. Firm fixed-effects and random-effects models are estimated with default, firm-clustered, and Driscoll-Kraay standard errors; a difference-in-differences design with firm and year fixed effects is used to exploit the COVID-19 pandemic as an exogenous shock, with firms classified into treatment (above-median pre-pandemic CCC) and control (below-median) groups. The analysis is supplemented with an event-study test of the parallel-trends assumption, a placebo test, a lagged-CCC specification, and a dynamic-panel system GMM model. CCC is not robustly significant for return on assets (ROA) once firm-clustered standard errors are applied (p = 0.264), though a one-year-lagged CCC is significantly positive for both ROA and ROE (p < 0.05); CCC is not significant for return on equity (ROE) in the static specification. EPU is positively associated with ROA at conventional or near-conventional levels across specifications. The CCC × EPU interaction is consistently negative but reaches significance only in the dynamic system-GMM specification for ROA (p = 0.025). An event-study test does not reject parallel pre-trends, and the difference-in-differences and placebo estimates show no significant differential effect for high-CCC firms at the onset of the pandemic, though a significant gap emerges by 2024. Working-capital efficiency appears to operate as a gradual, lagged operational channel rather than an immediate source of profitability or crisis vulnerability. Managers should treat CCC as a medium-term operational lever rather than a short-term crisis response tool, and should prioritise short-term liquidity buffers - proxied here by the current ratio, the most consistently significant predictor of ROA throughout this study. Policymakers should prioritise macroeconomic stability, since EPU itself shows a positive association with ROA, consistent with well-managed firms being better placed to absorb policy uncertainty. The study combines a continuous, time-varying uncertainty measure (EPU) with a discrete exogenous shock (COVID-19) within a single firm-level identification strategy, and is, to our knowledge, among the first studies of Indian working-capital management to combine static fixed-effects estimation with an event-study test of parallel trends, a placebo test, and a system-GMM dynamic-panel specification within one design.

M. Gnanendra, Guruprasad Desai, M. N. Nikhil et al. · 0 citations
Open access Aug 2026

Monetary Policy Tightening, and Banking Concentration: Structural Evidence from an Emerging Economy

This paper analyses the short-run dynamic relationship between monetary policy and banking market structure in Colombia during a period of post-pandemic inflation and aggressive policy tightening. Using monthly credit portfolio data for 2017–2024, we compute several concentration indicators (the Herfindahl–Hirschman Index (HHI), CRk ratios, and a dominance index) and employ three complementary identification strategies to evaluate the causal effect of monetary policy innovations on banking concentration. First, a structural VAR model identified through sign restrictions finds that contractionary shocks are associated with a short-run increase in banking concentration (median peak response: +0.60 HHI points at h = 3; 90% credible set: [+0.12, +1.16]), contrasting with the negative short-run response obtained under recursive reduced-form identification. Second, an extended VAR including credit portfolio growth as a mechanism variable confirms that contractionary shocks compress aggregate lending but do not generate robust, persistent changes in concentration. Third, local projections with regime-interaction terms formally test the nonlinear mechanisms discussed in the literature and find evidence of state-dependent transmission: the concentration response is larger in the low-inflation regime and attenuates during high-inflation episodes. All estimated effects are transitory and horizon-sensitive, reinforcing a cautious interpretation. The paper contributes new evidence from an emerging economy on the structural consequences of monetary policy and highlights the importance of identification assumptions in determining the direction of this effect.

Yoly Tatiana Polania Cerinza, Osval Armando Ibáñez-Díaz, H. Guerrero-Sierra et al. · 0 citations

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