Bank Safety and Soundness and the Structure of Bank Supervision: A Cross-Country Analysis
James R. Barth (Auburn University and The Milken Institute)
Luis G. Dopico (Macrometrix)
Daniel E. Nolle (Office of the Comptroller of the Currency)
James A. Wilcox (University of California, Berkeley)

Two central questions about the structure of bank supervision are whether central banks should supervise banks and whether to have multiple supervisors. We use data for 70 countries across developed, emerging and transition economies to estimate statistical connections between banking performance, the structure of bank supervision, permissible banking activities, legal environments, banking market structure and macro-economic conditions. We find that where central banks supervise banks, banks tend to have more non-performing loans. Countries with multiple supervisors have lower capital ratios and higher liquidity risk. We also find that conclusions from non-transition economies may not necessarily apply to transition economies.
*The authors would like to thank Richard Levich, John J. McConnell, Joe Peek, Gary Whalen, conference participants at the 2001 FMA Meetings and anonymous referees for their comments and suggestions. The opinions expressed in this paper are those of the authors alone and do not necessarily represent those of the Office of the Comptroller of the Currency or the United States Department of the Treasury. The authors alone are responsible for any errors.

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Impact of International Cross-listing on Local Exchanges: Evidence from Chile
Vivekanand Jayakumar (Department of Economics, Purdue University)

This article examines the impact of international cross-listings on local stock exchanges by focusing on the experience of Chile. First, we analyse the consequences to the domestically traded shares of a sample of Chilean companies that undertook ADR listings. Our findings show that there is no indication of order-flow migration from the domestic market following cross-listings. There is, however, evidence that in the aftermath of cross-listings trading becomes concentrated in the ADR market. There is also some indication of an increase in the base-level price volatility of the underlying stock series following cross-listings. Second, we study the changes in Chile’s local stock market vis-a-vis the ADR market. We observe that the increase in the size and liquidity of the domestic stock exchange is overshadowed by the rapid growth of the ADR market. From a policy perspective, the continued rise in the number of companies undertaking international cross-listings can cause the local stock markets to become secondary role players relative to the major foreign exchanges, thus affecting domestic financial development.
*The author would like to thank Professor John A. Carlson (Purdue University) and Professor Sheridan Titman (University of Texas-Austin) for their valuable comments and suggestions.

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Do Reforms in Transition Economies Affect Foreign Bank Entry?
Robert Lensink (University of Groningen, Economics Department, External Credit Fellow, University of Nottinghan)
Jakob De Haan (CESifo, Munich)

Using a newly developed database for eight transition economies, this paper examines whether reforms and political freedom are important for foreign bank entry. We provide evidence that foreign bank entry positively responds to reform measures. We also find some support for the importance of political freedom. Our estimates suggest that economic reform affects foreign bank entry by enhancing the efficiency of the financial sector and by stimulating domestic investments.
*The research for this paper has been financially supported by the European Commission’s ACE/Phare programme under contract number p98-1082-R. We thank all participants in this project for their help and their stimulating comments on conferences in Tallinn, Poznan and Groningen. We also thank the referee for his helpful comments. Part of this research was done while De Haan was visiting scholar at the Netherlands Bank.

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Testing Option Pricing Models with Stochastic Volatility, Random Jump and Stochastic Interest Rate
George J. Jiang* (Finance Department, Eller College of Management, University of Arizona)

In this paper, we propose a parsimonious GMM estimation and testing procedure for continuous-time option pricing models with stochastic volatility, random jump and stochastic interest rate. Statistical tests are performed on both the underlying asset return model and the risk-neutral option pricing model. Firstly, the underlying asset return models are estimated using GMM with valid statistical tests for model specification. Secondly, the preference related parameters in the risk-neutral distribution are estimated from observed option prices. Our findings confirm that the implied risk premiums for stochastic volatility, random jump and interest rate are overall positive and varying over time. However, the estimated risk-neutral processes are not unique, suggesting a segmented option market. In particular, the deep ITM call (or deep OTM put) options are clearly priced with higher risk premiums than the deep OTM call (or deep ITM put) options. Finally, while stochastic volatility tends to better price long-term options, random jump tends to price the short-term options better, and option pricing based on multiple risk-neutral distributions significantly outperforms that based on a single risk-neutral distribution.
*I would like to thank Professor Nai-fu Chen (the editor) and an anonymous referee for very helpful comments and suggestions. Corresponding address: George J. Jiang, Department of Finance, Eller College of Management, McClelland Hall, Room 3158, University of Arizona, P.O. Box 210108, Tucson, Arizona 85721-0108. E-mail:gjiang@eller.arizona.edu. George Jiang is also a SOM research fellow of the Faculty of Business and Economics at the University of Groningen in The Netherlands.

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