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Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess and quantify the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers’ balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, leading to a relatively high cumulative probability of default, especially for less capitalized companies. In addition, the new reform of the German life insurance regulation has a beneficial effect on the cumulative probability of default, as a direct consequence of the reduction of the payouts to policyholders.
This paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-à-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
WiWi news 3/2015
(2015)
Capital maintenance rules are part of a legal capital regime that consists of rules on raising capital and rules on maintaining it. The function of these rules is the protection of the corporation’s creditors. This is evidenced by the fact that in public as well as private companies the provisions on legal capital are not open to disapplication or variation even with unanimous shareholder consent. Thus, providing the company with a minimum of funding and ensuring equal treatment of shareholders are mere reflexes of creditor protection or, at best, ancillary purposes of legal capital. Legal capital is part of a corporation’s equity. The key feature of equity is that it ranks behind the claims of other stakeholders in the distribution of a corporation’s assets. Consequently, equity will also be the first part of a corporation’s funds to be depleted by losses. Capital maintenance rules seek to enforce this order of priority of different groups of stakeholders by restricting distributions to shareholders. Such restrictions are not unique to legal systems that have adopted a legal capital regime. A prominent example of a statute that has eliminated mandatory legal capital is the Delaware General Corporation Law. § 154 DCGL leaves it up to the directors to decide whether any part of the consideration received by the corporation for its shares shall be attributed to capital. Thus, a Delaware corporation need not have any stated capital. This has significant impact on the funds available for distribution to shareholders. Pursuant to § 170 (a) DGCL dividends may only be paid out of surplus or, in the absence of surplus, out of net profits of the current or the preceding fiscal year. § 154 DGCL defines surplus as the excess of a corporation’s net assets over the amount of its capital, and net assets as the amount by which total assets exceed total liabilities. A corporation without stated capital may, therefore, distribute all of its net assets to its shareholders and continue business without any equity on its balance sheet. This highlights the difference between the different approaches to creditor protection in Germany and the U.S. Both legal systems acknowledge the priority of creditors over shareholders in corporate distributions. However, German law seeks to give creditors additional comfort by requiring companies to raise and maintain additional layers of assets above and beyond those corresponding to the company’s liabilities that may not be depleted by way of distributions to shareholders. While private companies must merely raise and maintain their stated capital, public companies are required to raise and maintain additional equity accounts unavailable for distributions to shareholders such as the share premium account1 and the legal reserve.2
In recent years a number of objections have been raised against this concept of creditor protection. Critics argue that contractual arrangements are a more efficient means for protecting the interests of creditors.3 Capital maintenance does not prevent creditors from negotiating for more stringent protection of their claims such as collateral or financial covenants. It does, however, provide a minimum standard of protection for the benefit of creditors who lack the commercial experience or the bargaining power or who, like tort victims, are simply unable to negotiate for contractual safeguards. Capital maintenance ensures that their protection against excessive distributions does not depend on large creditors who are free to waive covenants that, in effect, benefit all creditors in exchange for individual arrangements that work exclusively in their favour.
Anleihen werden in der Regel in zahlreiche Teilschuldverschreibungen aufgespalten und diese an verschiedene Investoren verkauft. Dies begründet, der Zahl der umlaufenden Teilschuldverschreibungen entsprechend, jeweils unterschiedliche Schuldverhältnisse zwischen dem Emittenten und dem jeweiligen Investor. Hält ein Investor mehrere Teilschuldverschreibungen, so entstehen dementsprechend mehrere rechtlich voneinander zu unterscheidende Schuldverhältnisse mit gleichem Inhalt.1 Diese können jeweils ein unterschiedliches rechtliches Schicksal haben, z. B. getrennt voneinander übertragen werden. Sie können auch, von atypischen Gestaltungen abgesehen, je einzeln vom Gläubiger gekündigt werden, wenn die Anleihebedingungen insoweit keine Vorkehrungen treffen. Die folgenden Bemerkungen dazu befassen sich zunächst mit der umstrittenen Frage, ob auch eine Kündigung aus wichtigem Grund seitens eines Gläubigers gemäß §§ 490 Abs. 1, 314 BGB in Betracht kommt (im Folgenden I. - VII.)
Die sog. Business Judgment Rule wurde durch Art. 1 Nr. 1a des UMAG1 auf entsprechende Vorschläge im Schrifttum2 als neuer § 93 Abs. 1 Satz 2 in das Aktiengesetz eingefügt. Der Sache nach war sie bereits zuvor in Rechtsprechung3 und Lehre4 anerkannt. Nach gängigem Verständnis soll die Business Judgment Rule einen „sicheren Hafen“ bieten, der Organmitglieder davor schützt, dass unternehmerische Misserfolge auf der Grundlage nachträglicher besserer Erkenntnis als Sorgfaltspflichtverstöße sanktioniert werden. Nach ganz überwiegen-der Auffassung beschränkt sich die Bedeutung von § 93 Abs. 1 Satz 2 AktG nicht darauf, durch ausdrückliche Regelung von Elementen der Sorgfaltspflicht klarzustellen, dass das Gesetz mit dem strengen Sorgfaltsmaßstab des ordentlichen und gewissenhaften Geschäftslei-ters nicht etwa eine Erfolgshaftung statuiert. Die Business Judgment Rule wird vielmehr als Privilegierung gegenüber dem ansonsten geltenden Haftungsmaßstab des § 93 Abs. 1 Satz 1 AktG verstanden. Ausdrückliche Stellungnahmen zur Wirkungsweise dieses Privilegs reichen von der Annahme eines der richterlichen Nachprüfung entzogenen unternehmerischen Ermes-sensspielraums5 über die Einordnung als unwiderlegliche Vermutung objektiv rechtmäßigen Verhaltens6 bis hin zu der Annahme, dass im Anwendungsbereich der Business Judgment Rule eine Haftung gegenüber der Gesellschaft nur ab der Grenze der groben Fahrlässigkeit in Betracht komme.7 Aber auch die zahlreichen Stellungnahmen, die sich nicht ausdrücklich zur Frage der Haftungserleichterung äußern, setzen eine privilegierende Wirkung der Business Judgment Rule voraus. Anderenfalls hätten die eingehenden Überlegungen zur Abgrenzung unternehmerischer von anderen, insbesondere rechtlich gebundenen Entscheidungen, für die offenbar ein strengerer Sorgfalts- und Haftungsmaßstab gelten soll, keinerlei praktische Bedeutung.
1.Hinsichtlich der Haftung von Organmitgliedern gegenüber der Gesellschaft für Fehlein-schätzungen der Rechtslage gilt kein anderer Maßstab als hinsichtlich der Haftung für Fehler bei unternehmerischen Entscheidungen (dazu sogleich, II).
2.Die Business Judgment Rule des § 93 Abs. 1 Satz 2 AktG enthält kein Haftungsprivileg; insbesondere stellt sie Organmitglieder nicht grundsätzlich von der Haftung für grobe Fahr-lässigkeit frei. Sie konkretisiert vielmehr lediglich die Sorgfaltsanforderungen an einen or-dentlichen und gewissenhaften Geschäftsleiter und stellt klar, dass dessen Haftung nicht mit nachträglicher besserer Erkenntnis begründet werden kann. Aus diesem Grund ist es unbe-denklich, dass sich die Haftung für unternehmerische, rechtliche und sonstige Fehler nach einheitlichen Haftungsgrundsätzen richtet (dazu unten, III.).
The success stories of design-oriented companies like Apple, Audi or Nike have put design on the agenda in many marketing departments. Consumers cannot elude the effect of aesthetics and therefore design is a major factor for business success. Typically consumers choose the product with the best design, all other aspects being equal. Only when the interplay of product characteristics, brand and design is carefully coordinated can successful products be created. This requires an integrated approach to design, one which is applied right at the beginning of the value chain. Product development, marketing and design need to work in close cooperation, communicate well and frequently, and collect feedback from the market. Superior aesthetics are always important but should be a top priority in cases where efficiency-oriented Asian competitors are able to offer functionally similar products at much lower prices.
Die vorliegende Bachelorarbeit leistet einen Beitrag zur wissenschaftlichen Identifikation von intergenerationalen Unterschieden verschiedener Arbeitnehmergruppen. Insbesondere werden sowohl die Unterschiede zwischen den Generationen X und Y, in der Arbeitsbereitschaft, in unterschiedlichen Abschnitten des Berufslebens, als auch die Unterschiede zwischen der Wahrnehmung der Wichtigkeit von Arbeitgeberattraktivitätsattributen jener Generationen betrachtet. Ein besonderes Augenmerk liegt hierbei auf der Betrachtung von High-Potentials.
SAFE Newsletter : 2015, Q2
(2015)
SAFE Newsletter : 2015, Q1
(2015)
SAFE Newsletter : 2015, Q3
(2015)
SAFE Newsletter : 2015, Q4
(2015)
This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy long-term life insurance that can only be revised at significant costs, which makes insurance decisions sticky. Furthermore, a revision is only possible as long as the insured person is healthy. A second important feature of our model is that the labor income of the wage earner is unspanned. We document that the combination of unspanned labor income and the stickiness of insurance decisions reduces the long-term insurance demand significantly. This is because an income shock induces the need to reduce the insurance coverage, since premia become less affordable. Since such a reduction is costly and families anticipate these potential costs, they buy less protection at all ages. In particular, young families stay away from long-term life insurance markets altogether. Our results are robust to adding short-term life insurance, annuities and health insurance.
We consider the continuous-time portfolio optimization problem of an investor with constant relative risk aversion who maximizes expected utility of terminal wealth. The risky asset follows a jump-diffusion model with a diffusion state variable. We propose an approximation method that replaces the jumps by a diffusion and solve the resulting problem analytically. Furthermore, we provide explicit bounds on the true optimal strategy and the relative wealth equivalent loss that do not rely on quantities known only in the true model. We apply our method to a calibrated affine model. Our findings are threefold: Jumps matter more, i.e. our approximation is less accurate, if (i) the expected jump size or (ii) the jump intensity is large. Fixing the average impact of jumps, we find that (iii) rare, but severe jumps matter more than frequent, but small jumps.
Based on a cognitive notion of neo-additive capacities reflecting likelihood insensitivity with respect to survival chances, we construct a Choquet Bayesian learning model over the life-cycle that generates a motivational notion of neo-additive survival beliefs expressing ambiguity attitudes. We embed these neo-additive survival beliefs as decision weights in a Choquet expected utility life-cycle consumption model and calibrate it with data on subjective survival beliefs from the Health and Retirement Study. Our quantitative analysis shows that agents with calibrated neo-additive survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival chances. Our neo-additive life-cycle model can therefore simultaneously accommodate three important empirical findings on household saving behavior.
This paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-à-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
The European Central Bank (ECB) increased the emergency liquidity assistance (ELA) for Greek banks from €50 billion in February 2015 to approximately €90 billion in June 2015. Its actions were accompanied by a discussion among academics, politicians and practitioners regarding the legitimacy of the ELA. Some have even accused the ECB of deliberately delaying the bankruptcy filing of already insolvent Greek banks.
We take the claim regarding insolvency delay as an opportunity to highlight the underlying economics of the ELA program and discuss its legitimacy in the current situation. We start by characterizing the complex interrelationship of the European Union, the ECB and the Greek banks through the lens of financial economics, with a particular focus on the political economy of a monetary union with incomplete fiscal union (or fiscal consolidation). Combining these two issues, we examine the decision of the ECB to continue the provision of ELA to Greek banks. Our conclusions, drawn from the analysis, do not support the claim that the ECB’s actions are consistent with a delayed filing for insolvency.
Von Februar bis Juni 2015 hat die Europäische Zentralbank (EZB) die Notfall-Liquiditätshilfen (emergency liquidity assistance, ELA) für griechische Banken von 50 auf etwa 90 Milliarden Euro ausgeweitet. Dies hat zu einer Diskussion unter Wissenschaftlern, Politikern und Praktikern geführt, ob diese Liquiditätshilfen rechtmäßig sind. Es wurde der Vorwurf erhoben, die EZB trage bewusst zu einer Konkursverschleppung der bereits insolventen griechischen Banken bei.
Wir nehmen diesen Vorwurf zum Anlass, die Grundsätze des ELA-Programms genauer zu betrachten und die Frage zu diskutieren, ob das Programm in der aktuellen Situation rechtmäßig war. Zunächst beschreiben wir hierfür aus finanzwirtschaftlicher Perspektive die komplexe Beziehung zwischen der Europäischen Union, der EZB und den griechischen Banken. Dabei gehen wir insbesondere auf die wirtschaftspolitischen Grundsätze einer Währungsunion mit einer unvollständigen Fiskalunion (oder Haushaltskonsolidierung) ein. Vor diesem Hintergrund analysieren wir dann die Entscheidung der EZB, weiterhin Liquiditätshilfen an griechische Banken bereitzustellen. Wir kommen zu dem Ergebnis, dass das Vorgehen der EZB nicht als Konkursverschleppung zu bezeichnen ist.
Investors and insurance policyholders are often confronted with complex products and providers' opaque organisational structures. At the same time, the possibility that their claims will not be honoured often poses an existential risk. Financial regulation therefore aims at putting in place a financial services framework that will safeguard market processes whilst also protecting consumers. However, benefits of regulation are accompanied by certain risks, as can be exemplified with the case of insurance regulation.
Kapitalanleger wie Versicherungsnehmer werden oft konfrontiert mit komplexen Produkten und nicht durchschaubaren Unternehmensstrukturen der Anbieter. Gleichzeitig stellt die mögliche Nichterfüllung ihrer Ansprüche häufig ein existenzielles Risiko dar. Deshalb ist es Ziel der Finanzregulierung, Rahmenbedingungen im Finanzdienstleistungsbereich zu schaffen, die wirtschaftliche Abläufe gewährleisten und gleichzeitig den Konsumenten schützen. Dem Nutzen der Regulierung stehen aber auch Risiken gegenüber, die im diesem Artikel am Beispiel der Versicherungsregulierung dargelegt werden.
The paper discusses an additional reform proposal for enhancing Social Security solvency which reframes the existing debate in a different light. In our research, we focus on incentives to prolong working years and to delay benefits claiming as a way of sustaining Social Security. Specifically, we analyze how the offer of a budget-neutral, actuarially fair lump sum payment - instead of the current delayed retirement credit – would encourage people to delay claiming their OASI benefits and work longer. The results of our research will be useful for policymakers, namely in (1) measuring who would delay claiming benefits if offered a lump sum instead of higher annuity payments, (2) examining how long they would wait, and (3) how much longer, if at all, they would continue working in the interim.
IFRS 9 introduces new impairment rules responding to the G20 critique that IAS 39 results in the delayed and insufficient recognition of credit losses. In a case study of a Greek government bond for the period 2009 to 2011 when Greece’s credit rating declined sharply, this study highlights the discretion that preparers have when estimating impairments. IFRS 9 relies more on management expectations and will lead to earlier impairments. However, these appear still delayed and low if compared to the fair value losses.
European households face tremendous obstacles when intending to open a savings account outside their home country. The shortage of deposits has become a major reason for banks’ declining loan supply and ultimately is responsible for a substantial part of the investment weakness and GDP decline in affected European countries.
Policy makers have made important efforts to promote European deposit market integration and to stimulate cross border flows of savings within the European Union. But these efforts will only yield the intended benefits if a number of additional non-tariff trade barriers are removed. Currently, these barriers prevent households in surplus countries to transfer their savings to banks in deficit countries where their deposits are most urgently needed.
This Paper gives an overview of the German banking system and current challenges it is facing. It starts with an overview of the so-called ‘Three-Pillar-Banking-System’ and a detailed description of the current structure of the banking system in Germany. A brief comparison of the banking system in Germany with the ones in other European countries points out its uniqueness. The consequences of the financial crisis of 2007/2008 and further challenges for the German banking system are discussed, as well as the the ongoing debate around the question whether the strong government involvement should be sustained.
The Liikanen Group proposes contingent convertible (CoCo) bonds as instruments to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. The growing number of banks issuing CoCo bonds leads to a rising awareness of these hybrid securities among life insurers as they are increasingly looking for higher?yielding investments into bond?like asset classes during the current low interest rate period. Our contribution provides an insight for life insurance companies to understand the effects of holding CoCo bonds as implied by the Solvency II standards that will become effective by 2016.
The global financial crisis (as well as the European sovereign debt crisis) has led to a substantial redesign of rules and institutions – aiming in particular at underwriting financial stability. At the same time, the crisis generated a renewed interest in properly appraising systemic financial vulnerabilities. Employing most recent data and applying a variety of largely only recently developed methods we provide an assessment of indicators of financial stability within the Euro Area. Taking a “functional” approach, we analyze comprehensively all financial intermediary activities, regardless of the institutional roof – banks or non-bank (shadow) banks – under which they are conducted. Our results reveal a declining role of banks (and a commensurate increase in non-bank banking). These structural shifts (between institutions) are coincident with regulatory and supervisory reforms (implemented or firmly anticipated) as well as a non-standard monetary policy environment. They might, unintendedly, actually imply a rise in systemic risk. Overall, however, our analyses suggest that financial imbalances have been reduced over the course of recent years. Hence, the financial intermediation sector has become more resilient. Nonetheless, existing (equity) buffers would probably not suffice to face substantial volatility shocks.
There is a large, but yet growing debate about the need to complement the European monetary union with a stronger fiscal union. This paper reviews the potential trade-offs between effectiveness, moral hazard problems, and permanent redistribution. In particular, we contribute to the question of how member states may be willing to enter into a stronger fiscal union if the evolution of this union may imply large redistribution under incomplete contracting. We discuss clawback mechanisms that have been suggested in the literature, but conclude that clawbacks are undesirable, as they would essentially destroy the insurance value of a fiscal union. Instead, we propose that a clearly defined exit option as a guarantee against involuntary redistribution can make entry into a stronger fiscal union less risky and hence more attractive for member states.
Euro crash risk
(2015)
A premise of the capabilities perspective in strategy is that firm-specific capabilities allow some firms to be unusually adept at exploiting growth opportunities. Since few firms have the capacity to internally generate the quantity or variety of strategic resources needed to exploit growth opportunities, the ability to externally acquire complementary resources is critical to the acquisition of competitive advantage. However, the external sourcing of resources exposes the firm’s strategic resources to risks of expropriation. We argue this threat gives capable firms incentive to use internally generated strategic resources to pursue growth opportunities before turning to external sources. A pecking order theory of strategic resource deployment is implied. Data from a 22-year sample of cross-border investment partnership decisions made by U.S.-based venture capital firms lend support to our theory.
We investigate the effect of the tone of news on investor stock price expectations and beliefs. In an experimental study we ask subjects to estimate a future stock price for twelve real listed companies. As additional information we provide them with historical stock prices and extracts from real newspaper articles. We propose a way to manipulate the tone of news extracts without distorting its content. Subjects in different treatment groups read news items that are written either in positive or negative tone for each stock. We find that subjects tend to predict a significantly higher (lower) return for stocks after reading positive (negative) tone news. The effect is especially pronounced for stocks with poor past performance. Subjects are more likely to be optimistic (pessimistic) about the economy and to buy (sell) stocks after reading positive (negative) than negative (positive) tone news. Our results show that the news media might affect not only how investors perceive information, but also what they do in response to it.
We present an accessible narrative of the Turkish economy since its great 2001 crisis. We broadly survey economic developments and pay particular attention to monetary policy. The data suggests that the Central Bank of Turkey was a strong inflation targeter early in this period but began to pay less attention to inflation after 2009. Loss of the strong nominal anchor is visible in the break we estimate in Taylor-type rules as well as in asset prices. We also argue that recent discrete jumps in Turkish asset prices, especially the exchange value of the lira, are due more to domestic factors. In the post-2009 period the Central Bank was able to stabilize expectations and asset prices when it chose to do so, but this was the exception rather than the rule.
We show that the size of collateralized household debt determines an economy’s vulnerability to crises of confidence. The house price feeds back on itself by contributing to a liquidity effect, which operates through the value of housing in a collateral constraint. Over a specific range of debt levels this liquidity feedback effect is strong enough to give rise to multiplicity of house prices. In a dynamic setup, we conceptualize confidence as a realization of rationally entertainable belief-weightings of multiple future prices. This delivers debt-level-dependent bounds on the extent to which confidence may drive house prices and aggregate consumption.
Signaling cooperation
(2015)
We examine what an applicant’s vita signals to potential employers about her willingness to cooperate in teams. Intensive social engagement may credibly reveal that an applicant cares about the well-being of others and therefore is less likely to free-ride in teamwork situations. We find that contributions in a public goods game strongly increase in a subject’s degree of social engagement as indicated on her résumé (and rated by an independent third party). Engagement in other domains, such as student or sports associations, is not positively correlated with contributions. In a prediction experiment with human resource managers from various industries, we find that managers use résumé content effectively to predict relative differences in subjects’ willingness to cooperate. Thus, young professionals signal important behavioral characteristics to potential employers through the choice of their extracurricular activities.
We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this 'leaning against the wind' and consider three possible explanations: market timing, precautionary financing, and 'making the numbers'. We find no evidence in favor of the first two hypotheses, and provisionally accept the 'making the numbers' hypothesis that managers who are under pressure because of unrealistically optimistic earnings expectations by analysts and deteriorating real opportunities, will rely more heavily on debt financing to boost earnings per share and return on equity.
We build a novel leading indicator (LI) for the EU industrial production (IP). Differently from previous studies, the technique developed in this paper is able to produce an ex-ante LI that is immune to “overlapping information drawbacks”. In addition, the set of variables composing the LI relies on a dynamic and systematic criterion. This ensures that the choice of the variables is not driven by subjective views. Our LI anticipates swings (including the 2007-2008 crisis) in the EU industrial production – on average – by 2 to 3 months. The predictive power improves if the indicator is revised every five or ten years. In a forward-looking framework, via a general-to-specific procedure, we also show that our LI represents the most informative variable in approaching expectations on the EU IP growth.
The interbank market is important for the efficient functioning of the financial system, transmission of monetary policy and therefore ultimately the real economy. In particular, it facilitates banks' liquidity management. This paper aims at extending the literature which views interbank markets as mutual liquidity insurance mechanism by taking into account persistence of liquidity shocks. Following a theory of long-term interbank funding a financial system which is modeled as a micro-founded agent based complex network interacting with a real economic sector is developed. The model features interbank funding as an over-the-counter phenomenon and realistically replicates financial system phenomena of network formation, monetary policy transmission and endogenous money creation. The framework is used to carry out an optimal policy analysis in which the policymaker maximizes real activity via choosing the optimal interest rate in a trade-off between loan supply and financial fragility. It is shown that the interbank market renders the financial system more efficient relative to a setting without mutual insurance against persistent liquidity shocks and therefore plays a crucial role for welfare.
This paper undertakes a quantitative investigation of the effects of anticipated inflation on the distribution of household wealth and welfare. Consumer Finance Data on household financial wealth suggests that about a third of the US population holds all its financial assets in transaction accounts. The remaining two-third of the US population holds most of their financial assets outside transaction accounts. To account for this evidence, I introduce a portfolio choice in a standard incomplete markets model with heterogeneous agents. I calibrate the model economy to SCF 2010 US data and use this environment to study the distributive effects of changes in anticipated inflation. An increase in anticipated inflation leads households to reshuffle their portfolio towards real assets. This crowding-in of supply for real assets lowers equilibrium interest rates and thereby redistributes wealth from creditors to borrowers. Because borrowers have a higher marginal utility, this redistribution improves aggregate welfare. First, this paper shows that inflation acts not only a regressive consumption tax as in Erosa and Ventura (2002), but also as a progressive tax. Second, this paper shows that the welfare cost of inflation are even lower than the estimates computed by Lucas (2000) and Ireland (2009). Finally, this paper offers insights into why deflationary environments should be avoided.
We study the life cycle of portfolio allocation following for 15 years a large random sample of Norwegian households using error-free data on all components of households’ investments drawn from the Tax Registry. Both, participation in the stock market and the portfolio share in stocks, have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; the share invested in stocks among the participants is high and flat for the young but investors start reducing it as retirement comes into sight. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that incorporating in these models a reasonable per period participation cost can generate limited participation among the young but not enough exit from the stock market among the elderly. Adding also a small probability of a large loss when investing in stocks, produces a joint pattern of participation and of the risky asset share that resembles the one observed in the data. A structural estimation of the relevant parameters that target simultaneously the portfolio, participation and asset accumulation age profiles of the model reveals that the parameter combination that fits the data best is one with a relatively large risk aversion, small participation cost and a yearly large loss probability in line with the frequency of stock market crashes in Norway.
n this paper we analyze an economy with two heterogeneous investors who both exhibit misspecified filtering models for the unobservable expected growth rate of the aggregated dividend. A key result of our analysis with respect to long-run investor survival is that there are degrees of model misspecification on the part of one investor for which there is no compensation by the other investor's deficiency. The main finding with respect to the asset pricing properties of our model is that the two dimensions of asset pricing and survival are basically independent. In scenarios when the investors are more similar with respect to their expected consumption shares, return volatilities can nevertheless be higher than in cases when they are very different.
We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
IT-driven trading innovations offer institutional investors alternative trading channels to broker delegated order handling. Motivated by the impact on intermediation relationships in securities trading and the adoption rate of such trading channels, the new option of self-directed order handling is analyzed. To capture the prerequisites for institutional investors to insource their order handling, an order-channel management (OCM) framework is introduced. It is based on a structural approach to account for the increasing complexity in comparison to traditional intermediary services. Drivers for the adoption of an OCM framework are investigated from the strategic perspective. Operational OCM is based on the business value of IT analysis of distinct trading innovations. It includes smart order router technology, low latency technology as an upgrade for existing IT-driven trading channels as well as negotiation dark pools, representing alternative trading venues. Evidence that all investigated IT-driven trading innovations generate additional business value is provided as one result. However, it is also shown that they exhibit entry barriers tightly related to investor size. Further, Task-Technology Fit is proven to be the major driver for the adoption decision. Consequently, IT-driven trading innovations should increase trading control, satisfy high anonymity and varying urgency demands.
There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.