Empirical Essays on Risk Taking by Banks and Households

This thesis consists of three empirical chapters that explore contemporary topics related to risk. Specifically, this thesis aims to contribute to the literature relating to the risk-taking channel of monetary policy and the literature relating to the household sector's risk profile by examining three distinct but related topics. The initial empirical chapter examines the link between monetary policy and banks' appetite for risk in the U.S.. Specifically, the risk-taking channel of monetary policy is examined by scrutinizing the response of banks' nonperforming loans to total loans ratios to an identified monetary policy shock. The chapter also investigates if there is any type of systematic heterogeneity in the way banks react to monetary policy shocks. Furthermore, the chapter examines the presence of spillover effects as a result of a shock originating from a specific bank. The results show that in the medium run, banks' nonperforming loans ratios increase, providing evidence in support of the presence of an active risk-taking channel in the U.S. banking system. A bank's characteristics play an important role in the way they react to a policy rate shock. The results also indicate that shocks originating from larger and riskier banks have lasting effects on the whole system, while shocks from smaller and less risky banks do not. The subsequent chapter presents empirical analysis of the determinants of risky asset holdings by Japanese households. Four different econometric methodologies are used to assess whether the methodological approach employed affects the estimated parameter coefficients. Furthermore, key explanatory variables that capture household trust in the stock market; household trust in the government; and household perception of risk are used to provide further insight into the determinants of risky asset holdings in Japan. The results indicate significant impacts from these key explanatory variables, revealing new channels which influence Japanese households' financial decisions. Moreover, the four alternative methodological approaches employed in the analysis reinforce the robustness of the impact of the variables considered in this chapter and also reveal considerable heterogeneity in the effects of some variables. The final chapter provides an empirical comparison of the determinants of risk attitudes in Japan and the U.S.. This chapter also tests if the risk attitudes measures used in the analysis explain individuals' actual choices in a variety of contexts to ensure that these measures are valid proxies for actual risk taking behaviours. Furthermore, it is crucial to examine the stability of individuals' attitudes towards risk, since exogenous shocks, such as experiencing natural disasters, can cause a permanent change in an individual's risk attitudes. Therefore, the final chapter also assesses the impact of experiencing natural disasters on individuals' attitudes towards risk. The results indicate that a number of variables have a statistically significant impact on individuals' risk attitudes and the impact of some of these variables differ across Japan and the U.S.. The exposure to natural disasters influences the risk attitudes of Japanese male individuals and this impact is robust to the use of a number of different measures of the risk of natural disasters.