Competition and Risk‐Taking in Investment Banking

20 Pages Posted: 5 Apr 2019

See all articles by Marta Degl'Innocenti

Marta Degl'Innocenti

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Southampton

Franco Fiordelisi

University of Rome III - Department of Business Studies; Middlesex University - Business School

Claudia Girardone

Essex Business School - University of Essex

Nemanja Radic

Cranfield University - School of Management

Date Written: May 2019

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 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.

Keywords: competition, investment banking, panel var, risk

JEL Classification: D4, G3, G24

Suggested Citation

Degl'Innocenti, Marta and Fiordelisi, Franco and Girardone, Claudia and Radic, Nemanja, Competition and Risk‐Taking in Investment Banking (May 2019). Financial Markets, Institutions & Instruments, Vol. 28, Issue 2, pp. 241-260, 2019, Available at SSRN: https://ssrn.com/abstract=3367153 or http://dx.doi.org/10.1111/fmii.12113

Marta Degl'Innocenti (Contact Author)

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Franco Fiordelisi

University of Rome III - Department of Business Studies ( email )

Via Silvio D'Amico 77
Via Silvio D'Amico 77
Rome, RM 00145
Italy

HOME PAGE: http://host.uniroma3.it/docenti/fiordelisi/?home

Middlesex University - Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

Claudia Girardone

Essex Business School - University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206874156 (Phone)
+44 1206873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/ebs/staff/profile.aspx?ID=1045

Nemanja Radic

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

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