1. 1
Business College
Banking and Finance Department
The role of financial innovation in a financial crisis
By
Feras Ali Al Derazi
ID Number - 201110401
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Abstract
This project study examines the importance of the role of financial innovation in a
financial crisis. The testing of stock prices on the S &P 500 was used from the last
few months of 2006 to the end of 2011. It was done through a regression model. This
research particularly analyzes the financial crisis that occurred in the United States of
America in 2008. This study was done in order to show the innovative method that
was used during the financial crisis was not the basis of the economic fall but because
of other reasons. This study was also done to show the reader that implanting
innovation is the way of the future and could help with economies around the globe.
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Table of contents
Contents
Chapter 1.........................................................................................................................7
1.1 Introduction............................................................................................................ 7
1.2 Objectives of the study............................................................................................ 8
1. 3 Questions of the study............................................................................................ 9
1.4 Significance of the Study.........................................................................................10
1.5 Organization of the study .......................................................................................10
Chapter 2....................................................................................................................... 12
2.0 Introduction...........................................................................................................12
2.1 Did financial Innovation cause the crisis? (March 24,2010) .......................................12
2.2 Financial innovation: The bright and the dark sides(October2012) Thorsten Beck,
Tao chen, Chen Lin, Frank M, Song.........................................................................14
Figure 1.1....................................................................................................................15
Figure 1.2....................................................................................................................15
2.3Two Drivers of Financial Innovation(February 2014).................................................16
2.4 Finnovresearchinthe contextof the currentinternational financialcrisis(2010)
Finnov, Finance innovation and growth.........................................................................18
2.5 Innovationinthe crisisandbeyond -Impactsonfuture innovationperformance:
Looking ahead (2012)...................................................................................................19
2.6 Financial Innovation and the Global Crisis II. The Effects of Innovation (2009) ...........20
2.7 Types of Financial innovation..................................................................................21
Chapter 3....................................................................................................................... 24
3.1 introduction...........................................................................................................24
3.2 Type of Research....................................................................................................24
3.3 Population and sample...........................................................................................25
3.4 Variables, Research methods and Resources............................................................26
3.5 Model ...................................................................................................................26
Chapter 4....................................................................................................................... 30
4.1 - Introduction.........................................................................................................30
4.2 Explanation of the Descriptive statistics for the Analysis.........................................30
4.3 Regression Summary of 2006 -2007 ........................................................................31
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Chapter 1
1.1 Introduction
One of the most certain aspects of life that cannot be avoided nor can life continue without is
change. Moving forward and accepting reality especially during a time of hardship cannot be
done without change. We as human beings have the power to create the positive out of the
negative. We have the power of imagination which can lead us to create the most innovative
of solutions. It could come in many forms and countries around the world have had to deal
with situations within their economy that needed change for the better. Throughout history,
disastrous situations within the economy have been dealt with methods that have succeeded in
the past as well as new ground-breaking methods were used to help get out of the undesirable
situations and into the where they a country wants to be in terms of the state of the economy.
Innovation can be defined as a way of transformation or a method for change. Every
country has their ups and downs and situations of grand upheaval within an economy have
been dealt with for the better and the methods can be remembered through history.
Sometimes though, a certain situation cannot be approached with the same methods so new
innovative ways has to be used to move forward. Let us go back to one of the most significant
days in history, September 11th
2001. World trade center went down, hit by two commercial
planes that were hijacked. The American economy went down; their stock exchange was shut
for a few days. An economy was hit and hit badly. Now throughout the years, there has been
talk of certain conspiracies that the United States of America itself was the ones responsible
for creating 9/11 attacks. It was said that they did it in order to gain a lot more in the
upcoming years and it would be able to control their economy and other countries through a
catastrophic incident like this. It is said that they were able to gain ways to get 6 Trillion
Dollars' worth of Oil in Afghanistan, have total control in terms of security and were able to
build bases around the world if anything were to happen in the future.
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Now one would ask, why would the United States hit their own country and their
economy to get better? The Gains that the united states have made after the incident are there
to be seen and that is an arguable point. One would ask what does this have to do with this
research? A one word answer would be given and that word is nothing. The point that is
trying to be stressed and there may not be any truth to these conspiracies but now you get the
point of innovation. Trying something new to move forward assuming these conspiracies
were to be true and not fiction. Doing something innovative to get into the best possible of
shapes.
1.2 Objectives of the study
A financial crisis can come in many forms and financial innovation can come in
many forms as well. Financial innovation can be done through government regulations,
different tax rates,creating new securities or even in the form of technology. Credit cards for
one can help a lot within the economy; change how it would process within the system can
change the significance and value when it comes to transaction costs. In this research,the role
of innovation within a financial crisis shall be explained in depth. To help understand this a
lot more, these objective shall be explained in full in order to reach the goal of this research.
Objectives
A. To understand when to implement new financial innovative techniques.
B. To analyze certain methods of financial innovation that was used in history and was they
positive or negative outcomes.
C. Assessing and understanding the impact of financial innovation and how it would help
during a financial crisis
Throughout the following readings, we shall try to explain every objective in full detail in
order for us to explain the importance of this study. It shall give more insight on how one
could deal with a crisis, whether it may be of an economy, or of a smaller stature. This study
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could show how innovation helps during a time of need and also how it could backfire. it
could also show how important it is to look back in the past to see if innovation did help or
could have countries just stuck to methods that were already known and guaranteed success.
1. 3 Questions of the study
For one to know a certain task or to reach a certain goal, questions have to be asked and
the following questions will be asked in this research to help reach our objectives and explain
the importance of the study in more depth.
A. Define financial innovation and the significance of its role?
B. Why is innovation important during a time of financial crises for a countries economy?
C. Has new financial innovations and different approaches that were implemented in the past
during a time of need show it as an encouraging way to help deal with a crisis?
D. Why consider new techniques when we can just implement techniques that have proven to
have worked in the past?
These research questions shall help assist the significance of the study and the two main
points of this research. The two main points that are going to be stressed and explained is that
new financial innovative techniques could help with an economy that is in a crisis and new
financial innovative techniques may actually hurt an economy and methods of the past on
how to deal with a financial crisis could be superior. Going back to the importance of the
study, innovation is key for the economy to develop. For one to grow, knowledge has to be
obtained and knowledge is endless. Finding new ways to move forward should be the goal or
a principle to just about everything in life. It is a must for progression.
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1.4 Significance of the Study
An evaluation should be made to proof as evidence for the conclusions, so a two
hypothesizes shall be stated in order to further understand what are trying to achieve
in the research. The main goal of the project is to find out whether or not financial
thinnovation can be helpful during a time of peril in the economy. At the end of the 4
chapter of this research, we shall accept one of the following hypotheses.
uccess,itcouldNewfinancial innovativetechniqueshave novalidproof of s:Null Hypothesis
cause negative outcomesonthe economyandmethodsof the paston how to deal witha
financial crisiscouldbe superior
:Newfinancial innovative techniquescouldhelpwithaneconomy:.AlternativeHypothesis
that isin a crisis.
Afterthe analysis,one hypothesisshall be rejectedandthe otheracceptedbasedonthe
analysisandthe methodsusedinorderto reacha solidanswer.
1.5 Organization of the study
The research shall go as follows. In chapter 2, we shall critique and summarize certain
articles to help answer our objectives and questions. In chapter 3 we shall try to reach our
objectives through our data that we have collected through Bloomberg. Also help explain the
hypothesis in full detail through this chapter. In chapter 4, it shall be a full on analysis of the
subject as a whole and in the final chapter we should come to the conclusion as to why and
how important financial innovation is during a time of crisis.
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Chapter 2
2.0 Introduction
In this chapter, the research will be analyzing articles of the past about the
research topic. Each article was chosen to best represent the matter at hand. These
articles were collected, collected and read by the researcher. The following is the
analysis and point of views of the researcher that was helped done by the articles.
2.1 Did financial Innovation cause the crisis? (March
Allen and Glenn YagoFranklin24,2010)
Before we get into the fact that financial innovation is the medicine for a financial
crisis, lets discuss why it could be the disease that would lead to a crisis. Let us go
back in time and head to the housing bubble that occurred during 2008 in the United
States. Mortgages were at attractive rates for people that could not afford them
what so ever. They were being given out to people that dreamt of having that new
luxurious Mercedes Benz but their bank accounts say they can only just afford a
considerably cheap economical type of car. It is said that was the main reason to
why it has caused the crisis. To a certain extent that is very true and giving out more
mortgages for housing was the so called cure for the crisis they were heading in but
that is not the case that the researcher agrees upon. The reason as to why the
United States went into the housing bubble was because of their weak monetary
policy.
Let us head to Europe and more specifically Spain and Ireland. The impacts of
their crisis were not for the faint of heart and as serious as it is, their financial
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innovations were not the best of cures. The innovation for the Irish was merely just
giving people an extension on their mortgages. The Spanish had to have a twenty
percent down payment from their borrowers for their citizens to have securitized
mortgages. Both these European countries had a monetary policy that was as the
"dog ate my homework" excuse.
The housing or mortgage market was trying to be cured by giving people that
cannot afford to have a home to have one with attractable rates. Although, house
prices increase and when payments for mortgages cannot be made it is sold to other
suitors in an attempt to pay of the dues. That is a right way to approach things, but it
has to be for the people that can be liable to do it. So fingers cannot be pointed on
the innovative approach that they have taken towards the housing market. It is the
policy that has allowed it to be used with the people that cannot help aid this
innovative method. There was an analysis three years prior to the crisis by the
Economist that stated that the united States were heading into that direction. The
Land of the free simply ignored this fact.
In reference to the financial crisis that happened in the states and Europe, it can
only be the cause of their monetary policies. Financial innovation should be the
considered as the thought with shiny armor that pops out to save us all and not to
darken our days. If these countries were to focus more on their policies then this
would not have happened. The United States had stable prices when it comes to
housing from 1890 to the early 2000's. That is around a hundred years of stability in
terms of pricing. Only during the late 1990's to 2006 was there a significant increase
of about 90%. Let us get to the point that is trying to be made and that is the
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innovative methods that were used was not the cause of the crisis but merely
because of policies by government's that are weak and other factors that may
contribute that could hinder the impact of the financial innovation that was made.
2.2 Financial innovation: The bright and the dark
sides (October 2012) Thorsten Beck, Tao chen, Chen Lin, Frank M, Song
Let us answer our third question on this research which is has new financial
innovations and different approaches that were implemented in the past during a
time of need show it as an encouraging way to help deal with a crisis? That could be
answered in many ways and perspectives. To do so, we have to look at countries that
have implemented innovative methods over the years. This will help aid the fact on
how it is effective to add new financial methods for better outcomes. The following
graph helps you see on how various countries have implemented innovative
methods over the years. Ranging from countries that have integrated almost
absolutely no new methods to countries with that have exactly the opposite case.
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Figure 1.1
The graph states that Denmark has implemented the most innovations in a country
while the Koreans and Russians had the least. Those two countries being on the end
of the graph is not a surprising point being made for sure. The graph that follows
states how the banking sector has also integrated new methods and this is during a
ten year spell where new methods were doubled.
Figure 1.2
Now that we have evidence for countries that have implemented financial
methods, let us look at the outcomes. In terms of growth in the GDP and growth
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opportunities, countries that have made sure to have put in new methods have had
the most growth and that is shown in their GDPs. Countries that have faced crises
have had a lower impact on less profit because of the spending they have made on
financial innovation. These countries have faced lower reductions especially in terms
of their total assets.
We should also look at the cons of the implementation of financial methods. The
countries that have made sure they have new innovative methods show that they
can be broken a lot easier when compared with those that did not spend as much on
innovation. This is all because of the comparison between banks that have it easier
to gain profit and market shares to those banks that do not have it just as easy. With
regards to the graphs, these outcomes can have many influences that at times
cannot be measured. All in all over time it has shown that countries that have the
attitude for innovation merely seemto have more economic growth. This helps
prove the point that financial innovation is an encouraging thing to do during a
financial crisis. Does it have risks? Yes it does, with risks of having several financial
intermediaries going down. In Reference to the well-known risk-return relationship
which is the higher the risk, the higher the reward.
2.3Two Drivers of Financial Innovation (February
2014) Larry D Wall
So the question is asked, when should we apply these fresh new methods?
Especially during the crisis what are the main points to consider when trying to
formulate new ways to get an economy back to its best state. There is two points to
consider and that is technology and regulation. Let us discuss first technology, which
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is one of the causes for change over the years. Technology has helped us move
forward, get things done faster with a lot less trouble. Over the years technological
advances like the ATM has helped us move forward. Online banking now has helped
with dealing with one's finances at home whenever you like. ATM's has helped with
the transaction costs and the currency of any particular country.
Technology over the years has allowed people to rarely visit their banks
because of the advances that technology has brought about. This unfortunately
could lead to less jobs at banks for instance because of the unneeded labor. This
would mean more capital for banks because of less capital being used for their wage
budget. So when banks have more capital, more money is being injected into the
money market and thus the economy will get into better shapes. So the more
technological advances that are being made, the more likely innovation will come
about and move the economy forward because technology will make things
smoother for an economy which allows for less costs to be made.
Let us move on to the other factor, which is regulation. Regulation can put a
lock on many banks from the things they are willing to do. It could restrict them from
services and certain prices or charges on transactions and other stuff for instance.
Here is where they can
innovative by doing something to go around the regulations which is frowned upon
or find another way and take advantage of the regulation.
During the 1970's in the United States, there were certain restrictions on
where banks can locate themselves and how they could expand. Opening up new
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offices was very hard to come by especially in other states. So how did they get
around regulations? They used technology would you believe. New banking services
were used especially outside their branching areas. So any regulations on location
were just sidestepped and they have move forward ever since. Getting around
regulations with new innovative methods should be used or taken advantage of by
using new innovative methods. Like they did in the past, it will take them forward.
2.4 Finnov research in the context of the current
international financial crisis (2010) Finnov, Finance
innovation and growth
In this article, it is stated as to how financial innovation has come about over the
years. It is quite easy for people to forget how innovation has come in the simplest
century, this very planet saw a systemthof ways that it is now forgotten. During the 9
for exchange come about in the form of paper money. Created by merchants from
China, this was a type of innovation that came about that people forget how
innovation can come about in the smallest of forms. Going back in time as well in
Europe, during a time where no establishment or organization had anyone the
specifically dealt with giving out loans and having saving accounts and deposit
accounts. They created such organizations that had the necessities required to run a
bank. This was also considered a form of innovation.
Innovation is created to settle the issues of creating more profit, to take down
transaction costs, to deal with any problem with information and obviously feed the
needs of society. There are a variety of groups that could be a part of this, let's
discuss two.
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The first group would come in the form of people willing to make innovations from a
technological stand point. It would help assist with transaction costs, make
acquisitions easier on the wallets of financial intermediaries and help with making
transactions run a lot more smoothly through advancements like mobile banking .
These types of technological innovations help with businesses foreign exchange and
other aspects that deal with an economy. The other group would focus more on
regulatory aspects. Back in the 1970's Derivatives that are now used in an exchange
market has come about like options and forwards. This was a type of innovation that
has changed the face of how an exchange market is run which is a direct way of
changing how an economy is run. This just shows how financial innovation can
change the face of an economy during a crisis. Having faith and belief that innovation
can change things can be proven through the simple innovations of the past that
we take for granted.
2.5 Innovation in the crisis and beyond -Impacts on
future innovation performance: Looking ahead
YoungErnest &(2012)
To keep an innovative system running, negative factors towards labor or human
capital could have a huge effect. During a time of high unemployment, layoffs are
made which may affect any organization in terms of personal. For example, if there
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were to be many layoffs, the experienced labor could be taken out and thus there
would be less knowledge within the staff. That is needed for innovative purposes. If
new employment were to be made, training and time would be needed for
employees to first get around the company and acquire the knowledge to produce to
move forward. If the number of fresh graduates were to be unemployed that could
cause another problem. It would be very good if new life or a new breath of fresh air
be put into an organization. As creativity may be on the high for new prospects
coming in and drive may be higher than those that have been around for a while.
Grasping on to those with high experience and knowledge combined with young
employees that are willing to change their world and ours could help any economy
move forward. Innovation would be less of an issue because of the experience and
knowledge that could be mixed together with those that are willing to use it and
create a change for the better. So companies should be cautious during a crisis with
their human capital. It is these people that could change their stance in the economy
as well as the economy itself.
2.6 Financial Innovation and the Global Crisis II.
The Effects of Innovation (2009) OECD Science,Technologyand
Industry
Financial innovation could help assist with many things as it is information mixed
with the ambition to create new methods and techniques to become better. In the
financial market, innovation could add some traits that are needed during any given
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period in an economy. It could make credit be a lot more obtainable. Investors would
be willing to risk the allocation of their supply of risk instruments. Savings as well
could go up.
Innovation though can be held back because of two things, instability in terms of
finance and government regulation. Avoiding government regulation is a bit of a
taboo and it could go against you. Although innovation was made before to sidestep
any regulation and have it pass as a legal act.
Avoiding government intrusion is always a priority, so any sidestepping regulation
could be a thought that could be sidestepped. Financial instability is another aspect
to consider. Tampering with something with the belief and not the assurance for a
change is not a promising idea. Although actions that have been taken in the past
without the assurance of succeeding have deemed successful. Any financial doubt
and diversification of risk has been taken care of by using derivatives. That in the
past has been considered an act that is not even worthy of trying.
Hari Srinivas1995–2.7 Types of Financial innovation
Innovation comes in many forms, and so does financial innovations. We can keep
talking about how innovation can change an economy and a finance market but we
need to know the types of financial innovation. There are three types that we can
truly define and they are procedural institutional, products and services innovations.
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Procedural innovation could be new processes within a business that would help
lead them to a lot faster and more effective method. A very small example of this
has to deal with technology and not paperwork anymore so every file has to be
processed on the companies systemto get things done quicker.
Institutional innovation would be changing a whole sector from top to bottom.
It’s a whole change that may affect every bank and saving institution. It would mean
changing the whole structure of the financial sector for example by introducing new
rules. For example, it is like Saudi Arabia allowing women to have the chance to get
higher positions within any organization like becoming a CEO. That would huge and
thus change the face of their labor force, economy and financial sector as a whole.
The last but not least is the innovation in terms of products and services. This is
created to feed the demand of society and making sure their needs are satisfied. Of
course, also making sure with this that they maximize profits by doing so. It could
come in any form; it could be loans, leasing or any financial product.
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Chapter 3
3.1 introduction
The following chapter we will be explaining the methodology that was used and
more specifically the qualitative and quantitative research that was used in more
depth. Other information like the sample and population set of data will also be
explained. Criteria , data and specific variables has been chosen in order to explain
more about how innovation panned out over the year. This will all be explained with
the model that was developed in the form of regression.
3.2 Type of Research
Qualitative and quantitative research was used in this research. This was done in order
to get every objective, answer all questions that were stated in the proposal. The
following will explain how qualitative research and quantitative research was used in
this project to help further explain how innovation in a financial crisis goes and how it
worked in the past.
Qualitative research
Firstly, let us explain what qualitative research is. Qualitative research is regularly
found within researches in social sciences and more often than not in business
research as well. It is information that is collecting to explain the matter at hand. Used
for case studies and to get the hypothesis. Conclusions are made based on the writer's
perspective view on the matter by analyzing information that was available in the
past. An in depth analysis of decisions, actions and events that occurred in order to
get a better opinion on the matter.
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Quantitative research
A numerical form of research in order to get to conclusions on the matter at hand
would be known as quantitative research. Statistics that come in the form of stock
numbers, call options and your monthly salary are numbers that can be used in a
quantitative research. In this research we used stock prices from S & P, call options,
and put options that were used in order to get our regression. This was used in order to
find out how innovation has either helped or worked against economies during a
financial crisis. It is explained in more detail by using populations and samples.
3.3 Population and sample
Population
The population that was used in this research is data found on the S % P 500 on
yahoo finance, and Bloomberg. These numbers were chosen in order to see the
difference before and after the crisis that occurred during 2008 and other events
leading up to 2012. The data that was calculated was through daily data on s&p prices
call and put options, the ratio of the put and call as well as their volatility.
Sample
The sample that was used is different periods of time in order to get the point
across. We used both data from Bloomberg and the S % P 500 on Yahoo finance. It
was stock and option prices that were separated into four different periods in order to
calculate the difference and see how certain actions may have been better or worse
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based on the outcome. These statistics are trusted sources and the method that was
used will be explained in further detail in this chapter later on.
3.4 Variables, Research methods and Resources
The variables that were used are stock prices and more specifically call and put
options, their volatility, their ratio and their closing value on a daily basis. These
variables were chosen because it would show the changes that occur over certain time
periods of significance. In return, this will help show the outcome by using the
method that was implemented in order to come to a full on analysis. The research
methods that were used come in a quantitative and qualitative format. It is a variation
of the two used to get the best possible outcome followed by a regression model on
the data that was collected. This will help the reader get more knowledge on how
innovation can either be beneficial or unfavorable.
Resources were in many forms. Primary and secondary data was collected.
Articles, PDF documents, and general websites were also used. Bloomberg was used
to get the quantitative data and help with the method that was used for quantitative
analysis. S & P 500 on yahoo finance was used as well to get data dating back to
2006 to 2012.
3.5 Model
The data that was used was based on two scales. The first being that the data
collected was on a day to day basis that was later separated into four periods. It is
information that is collected from Bloomberg and the S & P 500 on yahoo finance.
This model has been used in order to see the difference on how innovation played its
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role. It is separated into four different parts and is before, during and after the
financial crisis. The whole period will also be used in order to gain more insight on
the matter. The following model was used.
S&P = intercept + B1 call + B2 put + B3 volatility + B4 p/c ratio
The periods that were tested are as followed:
a) The period of 2006-2007 (2 years) - before fin. Crisis
b) The period of 2008-2009 (2 years) - During fin. Crisis
c) The period of 2010-2011 (2 years) - after fin. Crisis
d) The period of 2006-2011 (6 years) – the whole period
A Regression method was then later used on excel for each period based on the
following.
Y: S&P
X1 : call option
X2: put option
X3: Volatility
X4: P/C ratio
Where Y is the dependent variable and X’s are the independent variables. The content
that was used for the regression method was as follows, the call option, put option,
volatility and the put to call ratio. Prices of the S & P 500 from the 1st of November
2006 to the final day in 2012.
Summary
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This chapter is used to explain the methods and type of data that has been collected
in order to write out the analysis in the next chapter. The method has been implemented
in the regression and this helps us get to our hypothesis. All in all this chapter has helped
us explain why how we got our conclusions that will be explained in the following
chapter which is the analysis of this research.
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Chapter 4
4.1 - Introduction
In this chapter,we will giving a full analysis on the matter of financial innovation
during a financial crisis. It will be split into two parts, one representing the qualtitative data
amd the other will be the quantative. The first part will reperesent the model that we used to
come to the final decesion on how innovation is helpful during a time of need. We shall
anaylze four differenet periods, these periods will be from 2006 to 2011.
4.2 Explanation of the Descriptive statistics for the
Analysis
Let us first explain how we will analyze it and explain some details on the matter
before we head into the juiciy details. We first used a regression method to get the regression
statistics, annova table and coefficents. This was done by gathering dailiy call options, put
options ,and their volatility numbers from Bloomberg. We also colleceted S & P numbers
from S % P 500 to help formulate our equation. The equations should go as the following.
S&P = intercept + B1 call + B2 put + B3 volatility + B4 p/c ratio.
The data shall be inputed in order to see the relationship betweem the S % P and the
innovation method that was implemented during that time period. We shall also calculate the
R Squared and the Anova table in order to find out statistically how the innovation methods
outcome is either considered significant or insignificant in the annova table and to see if the
changes in the Y variables of the S%P is explained in the X variables . The R square is the
perentage of variable variation that a linear model clarifies. It is between 0 – 100%, the lower
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the percentage the less likely it would suit your data and the higher the percentage means it
represents your data.
The Annova table is ued with the help of the F significance to determine the data. When
it is higher the 0.05, means it shows a positive outcome and the changes in the Y variable is
explained in the X variable of the S%P.These are the statistics that will be used in order to
know more about our final outcome.
4.3 Regression Summary of 2006 -2007
Figure 1.3
Let us first analyze our first period which is from 2006 to 2007. This period represents
the period before the financial crisis that occurred or the" Housing bubble" . The Annova
table here shows that its F Significance is at 1.97524E-16. This shows that the methods that
they were applying and were at a healthy state and is significant. Although, the R square that
is shown states that it is at 0.24 %, so that is fairly low and shows that the innovation does not
play apart in what has panned. So let us apply our method in order to gain even more insight
into the matter.
The model equation:
S&P = 1496.21 + 0.0000432 call – 0.0000316 put + 0.000271 volatility – 122.509 p/c
ratio.
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This clearly shows that the innovation method that was used or the methods that were
used at this particular time does not play a part in the results that occurred. This is a start of
showing that the innovation method that was used in 2008 was not the cause of the crisis but
of other factors that lead to it.
Figure 1.4
4.4 Regression Summary of 2008 – 2009
The second period is between 2008 and 2009, which is during the financial crisis and its
aftermath. When referring to its f significance on the annova table, it shows it is at
0.063076368 which means it is insignificant. The R square statistic also shows that it has
dropped significantly. Which proves that the Changes in the Y variables in S&P is not
explained in the X variable. This explains even further that the method was not the cause.
This period is during the time of the crisis and this regression statistic states that those who
think that the method was the cause should think otherwise. Let us now use the model
equation for this period.
The model equation:
S&P = 1411.37 – 0.0002756 call – 0.00003613 put + 0.0001137 volatility – 434.109
p/c ratio
33. 33
4.5 Summary of 2010 – 2011
Figure 1.5
Let us look at the aftermath of the financial crisis and see how they have faired and whether
the innovative methods that were implemented have helped them get into a better state. The
annova table's F Significance shows that it is 3.72207E-21 which is higher then previous two
periods and is considered significant. The R square states that it is at 0.18 which shows it has
barely increased and is still a low percentage. So the method that was used here shows it has
gotten them into a better state. Another point for financial innovation after a time of crisis.
The model equation:
S&P = 1195.366 + 6.3681 call – 0.000185 put + 0.0002325 volatility – 2.43438 p/c
ratio
34. 34
4.6 Summary 2006 – 2011
Figure 1.6
Let us look at the three periods as a whole, and see how the economy has been fairing as a
whole. The R square is at 0.0720 which is pretty low and the anova table shows that the F
significance is a significant number of 4.41721E-20. This shows that as a whole the methods
that they have been applying were not the reason of crisis but because of other factors.
The model equation:
S&P = 1706.301 -0.000214 call – 0.000138 put + 5.24589 volatility – 490.969 p/c
ratio
35. 35
To sum up the Method used by the researcher,it proves that the innovation method is not the
factor that leads to the crisis. The housing bubble that occurred in the United states occurred
because of the very weak regulations that were there at the time. People with low credit scores
were given mortgages that they could not afford. Why give out money to people to borrow
that you know cannot give it back. Regulation and an irregular amount of mortgage backed
securities that were sold were the cause of crisis.
4.7 Hypothesis to accept
couldhelpwithaneconomythatisina:Newfinancial innovativetechniquesNull Hypothesis
crisis.
We shall rejectthe alternativehypothesisandacceptthe null hypothesis.We shall accept
the null hypothesisbecause the analysisandregressionmethodprovedthatthe methods
usedwasnot the reasonof the statusof the economy.Itwas because of otherrelated
reasons.Thisresearchhasachieveditsgoal byprovingthat innovativetechniquescouldhelp
an economy.
4.8 Summary and Interpretation.
The following writings will try sum up the answers for the objectives and the questions
that were stated in the beginning of the research. The methods that was used in the past and
particularly during 2008 and the years that followed shows that innovation methods could
help with the crisis if everything is place for it to work. If the regulations were actually taken
seriously and had no flaws, then the method would have helped their economy. In the
methods that were used in this research also proved that the innovation method was the cause
of the rise of the economy after the crisis.
36. 36
It shows how new methods could lead a new breath of fresh air in the economy. In the
2010 to 2011 period that was analyzed in the method. It shows that the methods used were the
cause of the healthier state of economy that they were in. This was due to the fact that
everything else was in place. Regulations were tightened and actually taken in consideration
this time for sure. It shows an encouraging sign that these methods can help a country in a
crisis get to a better position. To consider new techniques or stick with old ones is done to a
point of view and not a matter of which is better or not. This research was intended to show
that financial innovation could help with a financial crisis and through the model we can
prove that it can help and those who think that the innovation methods were the cause of the
crisis should think otherwise.
38. 38
Chapter 5
5.1 Summary
To sum up the research of financial innovation in a financial crisis, it shows
that innovation could actually be the light at the end of the tunnel when the economy
is not looking at its best days. In the research it is proven that in most cases the
methods for innovation that was used was not the cause of a crisis but because of
other factors that contributed to it. The United States of America had a huge crisis in
2008 and it was the cause of the carelessness of their regulations on important
matters. The selling of mortgaged backed securities and the mortgages that were
given to those that cannot afford them was the cause of the mess up. The people of a
country create the face of it. If a system was made for people that cannot pay their
dues then ultimately that will reflect on the country. If the people cannot pay their
dues then so will the country. If the United States stuck to their regulations and
tweaked it to the best of its ability, then the method would have succeeded.
This research has also proved that the countries with the most amounts of
innovations implemented are the ones that have the strongest economies. Countries
like Denmark have had better GDP's and was hardly hit in terms of profit during a
crisis because of their intention on innovation. It can be argued yes that innovation
methods especially when it comes the financial sector and more specifically banks
with a better reputation would profit more than others but that is just how the world
works now. There are pros and cons to everything, but one looks at how much the
pros outweighs the cons to come to a fine conclusion. In Chapter 4 of this research it
has proved statistically that those assuming innovation was the cause of the crisis
39. 39
should look into the matter a bit more. What could have been the light at the end of
the tunnel was deemed to be the reason as the why the tunnel was dark.
5.2 Conclusion
To sum up this Research, the researcher would like to say that innovation or
new ways to approach matters at hand should never be an issue. Life is about trial and
error and trying things with the intention for better results should always be that. A
look into creating more advancement in technology is a must. It would help with the
economy to get things done faster. Technology is make things easier for people every
day so why not implement the same concept to the financial sector. Worrying about
the risk of losing old methods that produce the desired results should not be a thing to
worry about. We should be worrying about getting better consistently and not staying
where we are because that is just a sign of stagnation.
Regulations should be taken serious consideration. The government should
have their policies addressed to and that should be applied to the financial sector as
well. If this was addressed to in 2008, then the look at innovation would have been
quite different. This should be the case for those applying the regulations, although
for those employed at a financial intermediary or is working round the clock at the
stock markets then that is a different case. Regulations can be rounded and can be
done creatively.
5.3 Recommendation
That is the beauty of innovation; it beats the unbeatable and other aspects that are
considered untouchable. The researcher's recommendation is for the countries to not
mess up any future developments by getting their policies and regulations to be solid
40. 40
as ever and not to be tampered with. As for financial innovation, it could be the
engine that is used for future developments and advances that could be used for a
better economy.
41. 41
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