SAFE working paper
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- Sustainable Architecture for Finance in Europe (SAFE) (36) (remove)
260 n
This paper contributes to the debate on the adequate regulatory treatment of non-bank financial intermediation (NBFI). It proposes an avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation at the same time. We argue for a normative approach to supervision that can overcome the proverbial race between hare and hedgehog in financial regulation and demonstrate how such an approach can be implemented in practice. We first show that regulators should primarily analyse the allocation of tail risk inherent in NBFI. Our paper proposes to apply regulatory burdens equivalent to prudential banking regulation if the respective transactional structures become only viable through indirect or direct access to (ad hoc) public backstops. Second, we use insights from the scholarship on regulatory networks as communities of interpretation to demonstrate how regulators can retrieve the information on transactional innovations and their risk-allocating characteristics that they need to make the pivotal determination. We suggest in particular how supervisors should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the risk-allocating features of evolving transactional structures. Finally, this paper uses the example of credit funds as non-bank entities economically engaged in credit intermediation to illustrate the merits of the proposed normative framework and to highlight that multipolar regulatory dialogues are needed to shed light on the specific risk-allocating characteristics of recent contractual innovations.
265
We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average about seven percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that `late' stocks can only have higher expected returns than `early' stocks if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.
289
Predictability and the cross-section of expected returns: a challenge for asset pricing models
(2020)
Many modern macro finance models imply that excess returns on arbitrary assets are predictable via the price-dividend ratio and the variance risk premium of the aggregate stock market. We propose a simple empirical test for the ability of such a model to explain the cross-section of expected returns by sorting stocks based on the sensitivity of expected returns to these quantities. Models with only one uncertainty-related state variable, like the habit model or the long-run risks model, cannot pass this test. However, even extensions with more state variables mostly fail. We derive criteria models have to satisfy to produce expected return patterns in line with the data and discuss various examples.
298
OTC discount
(2020)
We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vastmajority of OTC prices are favorable with respect to exchange quotes. This is a challenge for theories of OTC markets centered around search frictions but consistent with models of hybrid markets based on information frictions. We show empiricallythat proxies for both frictions determine variation in the discount, which is largely passed on to customers. Dealers trade on the exchange for immediacy and via brokers for opacity and anonymity, highlighting the complementary roles played by the di↵erent protocols.
192 n
This paper shows that judicial enforcement has substantial effects on firms’ decisions with regard to their employment policies. To establish causality, I exploit a reorganization of the court districts in Italy involving judicial district mergers as a shock to court productivity. I find that an improvement in enforcement, as measured by a reduction in average trial length, has a large, positive effect on firm employment. These effects are stronger in firms with high leverage, or that belong to industries more dependent on external finance and characterized by higher complementarity between labor and capital, consistent with a financing channel driving the results. Moreover, in presence of stronger enforcement, firms can raise more debt to dampen the impact of negative shocks and, in this way, reduce employment fluctuations.
291
Market fragmentation and technological advances increasing the speed of trading altered the functioning and stability of global equity limit order markets. Taking market resiliency as an indicator of market quality, we investigate how resilient are trading venues in a high-frequency environment with cross-venue fragmented order flow. Employing a Hawkes process methodology on high-frequency data for FTSE 100 stocks on LSE, a traditional exchange, and on Chi-X, an alternative venue, we find that when liquidity becomes scarce Chi-X is a less resilient venue than LSE with variations existing across stocks and time. In comparison with LSE, Chi-X has more, longer, and severer liquidity shocks. Whereas the vast majority of liquidity droughts on both venues disappear within less than one minute, the recovery is not lasting, as liquidity shocks spiral over the time dimension. Over half of the shocks on both venues are caused by spiralling. Liquidity shocks tend to spiral more on Chi-X than on LSE for large stocks suggesting that the liquidity supply on Chi-X is thinner than on LSE. Finally, a significant amount of liquidity shocks spill over cross-venue providing supporting evidence for the competition for order flow between LSE and Chi-X.
213 f
We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is unaffected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
282
This article provides a proposal to use IMF Article VIII, Section 2 (b) to establish a binding mechanism on private creditors for a sovereign debt standstill. The proposal builds on the original idea by Whitney Deveboise (1984). Using arguments brought forward by confidential IMF staff papers (1988, 1996) and the IMF General Counsel (1988), this paper shows how an authoritative interpretation of Article VIII, Section 2 (b) can provide protection from litigation to countries at risk of debt distress.
The envisaged mechanism presents several advantages over recent proposals for a binding standstill mechanism, such as the International Developing Country Debt Authority (IDCDA) by UNCTAD and a Central Credit Facility (CFF) by the Bolton Committee. First, this approach would not require the creation of new intergovernmental mechanisms or facilities. Second, the activation of the standstill mechanism can be set in motion by any IMF member country and does not require a modification of its Articles of Agreement. Third, debtor countries acting in good faith under an IMF program would be protected from aggressive litigation strategies from holdout creditors in numerous jurisdictions, including the US and the UK. Fourth, courts in key jurisdictions would avoid becoming overburdened by a cascade of sovereign debt litigation covering creditors and debtors across the globe. Fifth, private creditors would receive uniform treatment and ensure intercreditor equality. Sixth and last, the mechanism would provide additional safeguards to protect emergency multilateral financing provided to tackle Covid-19.
292
This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inefficient because agents do not internalize the effects banks’ capitalization over the allocation of capital, its price and, in turn, firms investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
268
Using an original dataset on professional networks of directors sitting on the boards of large US corporations, we examine how personal relationships are used by firms to improve job match quality in the high-skill segment of the labor market. Analyzing explicit social connection data between new hires and recruiters, we are able to test predictions of well established job referral models. We find that referred executive directors have a fifteen percent longer tenure than their non-referred counterparts. Referred executive directors also tend to be similar to their referrers on multiple dimensions, giving support to network homophily hypotheses.