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4 June 2013 marked the formal launch of the third generation of the Equator Principles (EP III) and the tenth anniversary of the EPs – enough reasons for evaluating the EPs initiative from an economic ethics and business ethics perspective. This chapter deals with the following questions: What has been achieved so far by the EPs? Which reform steps need to be adopted to further strengthen the EPs framework? Can the EPs be regarded as a role model in the field of sustainable finance and CSR? The first part explains the term EPs and introduces the keywords related to the EPs framework. The second part summarises the main characteristics of the newly-released third generation of the EPs. The third part critically evaluates EP III from an economic ethical and business ethics perspective. The chapter concludes with a summary of the main findings.
Hackethal and Schmidt (2003) criticize a large body of literature on the financing of corporate sectors in different countries that questions some of the distinctions conventionally drawn between financial systems. Their criticism is directed against the use of net flows of finance and they propose alternative measures based on gross flows which they claim re-establish conventional distinctions. This paper argues that their criticism is invalid and that their alternative measures are misleading. There are real issues raised by the use of aggregate data but they are not the ones discussed in Hackethal and Schmidt’s paper. JEL Classification: G30
The long-run consumption risk model provides a theoretically appealing explanation for prominent asset pricing puzzles, but its intricate structure presents a challenge for econometric analysis. This paper proposes a two-step indirect inference approach that disentangles the estimation of the model's macro-economic dynamics and the investor's preference parameters. A Monte Carlo study explores the feasibility and efficiency of the estimation strategy. We apply the method to recent U.S.\data and provide a critical re-assessment of the long-run risk model's ability to reconcile the real economy and financial markets. This two-step indirect inference approach is potentially useful for the econometric analysis of other prominent consumption-based asset pricing models that are equally difficult to estimate.
An analyst who works in Germany is more likely to publish a high (low) price target regarding a DAX30 stock if other Germany based analysts are also optimistic (pessimistic) about the same stock. This finding is not biased by the fact that DAX30 companies are headquartered in Germany. In times of bull markets, price targets of analysts who regularly exchange their opinion are higher correlated compared to other analysts. This effect vanishes in a bearish market environment. This suggests that communication among analysts indeed plays an important role. However, analysts’ incentives induce them not to deviate too much from the overall average during an economic downturn.
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.
We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/ representative agent can be characterized by a specific semilinear partial differential equation. To date, the solution to this equation has mostly been approximated by Campbell-Shiller techniques, without addressing general issues of existence and uniqueness. We develop a novel approach that rigorously constructs the solution by a fixed point argument. We prove that under regularity conditions a solution exists and establish a fast and accurate numerical method to solve consumption-portfolio and asset pricing problems with recursive preferences and unspanned risk. Our setting is not restricted to affine asset price dynamics. Numerical examples illustrate our approach.
As a sign of ambivalence in the regulatory definition of capital adequacy for credit risk and the quest for more efficient refinancing sources collateral loan obligations (CLOs) have become a prominent securitisation mechanism. This paper presents a loss-based asset pricing model for the valuation of constituent tranches within a CLO-style security design. The model specifically examines how tranche subordination translates securitised credit risk into investment risk of issued tranches as beneficial interests on a designated loan pool typically underlying a CLO transaction. We obtain a tranchespecific term structure from an intensity-based simulation of defaults under both robust statistical analysis and extreme value theory (EVT). Loss sharing between issuers and investors according to a simplified subordination mechanism allows issuers to decompose securitised credit risk exposures into a collection of default sensitive debt securities with divergent risk profiles and expected investor returns. Our estimation results suggest a dichotomous effect of loss cascading, with the default term structure of the most junior tranche of CLO transactions (“first loss position”) being distinctly different from that of the remaining, more senior “investor tranches”. The first loss position carries large expected loss (with high investor return) and low leverage, whereas all other tranches mainly suffer from loss volatility (unexpected loss). These findings might explain why issuers retain the most junior tranche as credit enhancement to attenuate asymmetric information between issuers and investors. At the same time, the issuer discretion in the configuration of loss subordination within particular security design might give rise to implicit investment risk in senior tranches in the event of systemic shocks. JEL Classifications: C15, C22, D82, F34, G13, G18, G20
Asset securitisation as a risk management and funding tool : what does it hold in store for SMES?
(2005)
The following chapter critically surveys the attendant benefits and drawbacks of asset securitisation on both financial institutions and firms. It also elicits salient lessons to be learned about the securitisation of SME-related obligations from a cursory review of SME securitisation in Germany as a foray of asset securitisation in a bank-centred financial system paired with a strong presence of SMEs in industrial production. JEL Classification: D81, G15, M20
In this paper, I examine the potential of mobile alerting services empowering investors to react quickly to critical market events. Therefore, an analysis of short-term (intraday) price effects is performed. I find abnormal returns to company announcements which are completed within a timeframe of minutes. To make use of these findings, these price effects are predicted using pre-defined external metrics and different estimation methodologies. Compared to previous research, the results provide support that artificial neural networks and multiple linear regression are good estimation models for forecasting price effects also on an intraday basis. As most of the price effect magnitude and effect delay can be estimated correctly, it is demonstrated how a suitable mobile alerting service combining a low level of user-intrusiveness and timely information supply can be designed.