Levels 2 and 3 Instruments and Stock Price Crash Risk: Evidence From European Banks

29 Pages Posted: 21 Apr 2020

See all articles by Marika Carboni

Marika Carboni

University of Roma Tre - Department of Business Studies

Franco Fiordelisi

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

Claudia Girardone

University of Essex - Essex Business School

Ornella Ricci

University of Roma Tre, Department of Business Studies

Date Written: March 27, 2020

Abstract

Financial instruments in levels 2 and 3 for accounting purposes are complex and opaque products and their evaluation is problematic. The amount of these assets held by banks in Europe is exceptionally high (€3 trillion in 2019) and there is no empirical evidence as to the extent, if at all, to which investors perceive them as risky instruments. Focusing on stock price crash risk, we provide evidence of a significant difference in the relationship between these instruments and risk depending on whether they are classified as levels 2 or 3. Specifically, level 3 assets and liabilities appear positively linked to bank risk, while there is no similar evidence for level 2 instruments. Our results are robust to various risk measures, including value-at-risk and expected shortfall. A key implication that emerges from this study is that stability requires more defined boundaries between level 2 and level 3 financial instruments and a reduction of the opportunities for managerial discretion.

Keywords: European Banking, Stock price risk, Financial stability, Level 2 and 3 instruments, Fair value accounting

JEL Classification: G21, G14

Suggested Citation

Carboni, Marika and Fiordelisi, Franco and Girardone, Claudia and Ricci, Ornella, Levels 2 and 3 Instruments and Stock Price Crash Risk: Evidence From European Banks (March 27, 2020). Available at SSRN: https://ssrn.com/abstract=3562228 or http://dx.doi.org/10.2139/ssrn.3562228

Marika Carboni (Contact Author)

University of Roma Tre - Department of Business Studies ( email )

Via Silvio D'Amico 77
Rome, Lazio 00145
Italy

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

University of Essex - Essex Business School ( 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

Ornella Ricci

University of Roma Tre, Department of Business Studies ( email )

Via Ostiense, 159
Rome, RM 00145
Italy

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