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We examine the effects of credit default swaps (CDS), a major type of over-the-counter derivative, on the corporate liquidity management of the reference firms. CDS help firms to access the credit market since the lenders can hedge their credit risk more easily using these contracts. However, CDS-protected creditors can be tougher in debt renegotiations and less willing to support distressed borrowers, causing some firms to become more cautious. Consequently, we find that firms hold significantly more cash after the inception of CDS trading on their debt. The increase in cash holdings by CDS firms is more pronounced for financially constrained firms and firms facing higher refinancing risk. Moreover, bank relationships and outstanding credit facilities intensify the CDS effect on cash holding. Finally, firms with greater financial expertise hold more cash when their debt is referenced by CDS. These findings suggest that CDS, which are primarily a risk management tool for lenders, induce firms to adopt more conservative liquidity policies.
Robustness, validity, and significance of the ECB's asset quality review and stress test exercise
(2014)
As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks’ balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB’s assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.
Efforts to control bank risk address the wrong problem in the wrong way. They presume that the financial crisis was caused by CEOs who failed to supervise risk-taking employees. The responses focus on executive pay, believing that executives will bring non-executives into line—using incentives to manage risk-taking—once their own pay is regulated. What they overlook is the effect on non-executive pay of the competition for talent. Even if executive pay is regulated, and executives act in the bank’s best interests, they will still be trapped into providing incentives that encourage risk-taking by non-executives due to the negative externality that arises from that competition. Greater risk-taking can increase short-term profits and, in turn, the amount a non-executive receives, potentially at the expense of long-term bank value. Non-executives, therefore, have an incentive to incur significant risk upfront so long as they can depart for a new employer before any losses materialize. The result is an upward spiral in compensation—reducing an executive’s ability to set non-executive pay and the ability of any one bank to adjust compensation to reflect risk-taking and long-term outcomes. New regulation must address the tension between compensation and competition. Regulators should take account of the effect of competition on market-wide levels of pay, including by non-banks who compete for talent. The ability of non-executives to jump from a bank employer to another financial firm should also be limited. In addition, banks should be required to include a long-term equity component in non-executive pay, with subsequent employers being restricted from compensating a new employee for any losses she incurs related to her prior work.
Motivated by the question whether sound and expressive applicative similarities for program calculi with should-convergence exist, this paper investigates expressive applicative similarities for the untyped call-by-value lambda-calculus extended with McCarthy's ambiguous choice operator amb. Soundness of the applicative similarities w.r.t. contextual equivalence based on may-and should-convergence is proved by adapting Howe's method to should-convergence. As usual for nondeterministic calculi, similarity is not complete w.r.t. contextual equivalence which requires a rather complex counter example as a witness. Also the call-by-value lambda-calculus with the weaker nondeterministic construct erratic choice is analyzed and sound applicative similarities are provided. This justifies the expectation that also for more expressive and call-by-need higher-order calculi there are sound and powerful similarities for should-convergence.
I analyze a critical illness insurance in a consumption-investment model over the life cycle. I solve a model with stochastic mortality risk and health shock risk numerically. These shocks are interpreted as critical illness and can negatively affect the expected remaining lifetime, the health expenses, and the income. In order to hedge the health expense effect of a shock, the agent has the possibility to contract a critical illness insurance. My results highlight that the critical illness insurance is strongly desired by the agents. With an insurance profit of 20%, nearly all agents contract the insurance in the working stage of the life cycle and more than 50% of the agents contract the insurance during retirement. With an insurance profit of 200%, still nearly all working agents contract the insurance, whereas there is little demand in the retirement stage.
I numerically solve realistically calibrated life cycle consumption-investment problems in continuous time featuring stochastic mortality risk driven by jumps, unspanned labor income as well as short-sale and liquidity constraints and a simple insurance. I compare models with deterministic and stochastic hazard rate of death to a model without mortality risk. Mortality risk has only minor effects on the optimal controls early in the life cycle but it becomes crucial in later years. A diffusive component in the hazard rate of death has no significant impact, whereas a jump component is desired by the agent and influences optimal controls and wealth evolution. The insurance is used to ensure optimal bequest such that there is no accidental bequest. In the absence of the insurance, the biggest part of bequest is accidental.
The pi-calculus is a well-analyzed model for mobile processes and mobile computations.
While a lot of other process and lambda calculi that are core languages of higher-order concurrent and/or functional programming languages use a contextual semantics observing the termination behavior of programs in all program contexts, traditional program equivalences in the pi-calculus are bisimulations and barbed testing equivalences, which observe the communication capabilities of processes under reduction and in contexts.
There is a distance between these two approaches to program equivalence which makes it hard to compare the pi-calculus with other languages. In this paper we contribute to bridging this gap by investigating a contextual semantics of the synchronous pi-calculus with replication and without sums.
To transfer contextual equivalence to the pi-calculus we add a process Stop as constant which indicates success and is used as the base to define and analyze the contextual equivalence which observes may- and should-convergence of processes.
We show as a main result that contextual equivalence in the pi-calculus with Stop conservatively extends barbed testing equivalence in the (Stop-free) pi-calculus. This implies that results on contextual equivalence can be directly transferred to the (Stop-free) pi-calculus with barbed testing equivalence.
We analyze the contextual ordering, prove some nontrivial process equivalences, and provide proof tools for showing contextual equivalences. Among them are a context lemma, and new notions of sound applicative similarities for may- and should-convergence.
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.
This country report was prepared for the 19th World Congress of the International Academy of Comparative Law in Vienna in 2014. It is structured as a questionnaire and provides an overview of the legal framework for Free and Open Source Software (FOSS) and other alternative license models like (e.g.) Creative Commons under German law. The first set of questions addresses the applicable statutory provisions and the reported case law in this area. The second section concerns contractual issues, in particular with regard to the interpretation and validity of open content licenses. The third section deals with copyright aspects of open content models, for example regarding revocation rights and rights to equitable remuneration. The final set of questions pertains to patent, trademark and competition law issues of open content licenses.