SAFE working paper
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295
The paper compares provision of public infrastructure via public-private partnerships (PPPs) with provision under government management. Due to soft budget constraints of government management, PPPs exert more effort and therefore have a cost advantage in building infrastructure. At the same time, hard budget constraints for PPPs introduce a bankruptcy risk and bankruptcy costs. Consequently, if bankruptcy costs are high, PPPs may be less efficient than public management, although this does not result from PPPs’ higher interest costs.
294
We develop a novel empirical approach to identify the effectiveness of policies against a pandemic. The essence of our approach is the insight that epidemic dynamics are best tracked over stages, rather than over time. We use a normalization procedure that makes the pre-policy paths of the epidemic identical across regions. The procedure uncovers regional variation in the stage of the epidemic at the time of policy implementation. This variation delivers clean identification of the policy effect based on the epidemic path of a leading region that serves as a counterfactual for other regions. We apply our method to evaluate the effectiveness of the nationwide stay-home policy enacted in Spain against the Covid-19 pandemic. We find that the policy saved 15.9% of lives relative to the number of deaths that would have occurred had it not been for the policy intervention. Its effectiveness evolves with the epidemic and is larger when implemented at earlier stages.
293
This paper studies a household’s optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the dierential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly aected.
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.
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.
290
Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.
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.
288
The possibility to investigate the impact of news on stock prices has observed a strong evolution thanks to the recent use of natural language processing (NLP) in finance and economics. In this paper, we investigate COVID-19 news, elaborated with the ”Natural Language Toolkit” that uses machine learning models to extract the news’ sentiment. We consider the period from January till June 2020 and analyze 203,886 online articles that deal with the pandemic and that were published on three platforms: MarketWatch.com, Reuters.com and NYtimes.com. Our findings show that there is a significant and positive relationship between sentiment score and market returns. This result indicates that an increase (decrease) in the sentiment score implies a rise in positive (negative) news and corresponds to positive (negative) market returns. We also find that the variance of the sentiments and the volume of the news sources for Reuters and MarketWatch, respectively, are negatively associated to market returns indicating that an increase of the uncertainty of the sentiment and an increase in the arrival of news have an adverse impact on the stock market.
287
Using experimental data from a comprehensive field study, we explore the causal effects of algorithmic discrimination on economic efficiency and social welfare. We harness economic, game-theoretic, and state-of-the-art machine learning concepts allowing us to overcome the central challenge of missing counterfactuals, which generally impedes assessing economic downstream consequences of algorithmic discrimination. This way, we are able to precisely quantify downstream efficiency and welfare ramifications, which provides us a unique opportunity to assess whether the introduction of an AI system is actually desirable. Our results highlight that AI systems’ capabilities in enhancing welfare critically depends on the degree of inherent algorithmic biases. While an unbiased system in our setting outperforms humans and creates substantial welfare gains, the positive impact steadily decreases and ultimately reverses the more biased an AI system becomes. We show that this relation is particularly concerning in selective-labels environments, i.e., settings where outcomes are only observed if decision-makers take a particular action so that the data is selectively labeled, because commonly used technical performance metrics like the precision measure are prone to be deceptive. Finally, our results depict that continued learning, by creating feedback loops, can remedy algorithmic discrimination and associated negative effects over time.
286
Incentivized experiments in which individuals receive monetary rewards according to the outcomes of their decisions are regarded as the gold standard for preference elicitation in experimental economics. These task-related real payments are considered necessary to reveal subjects' "true preferences". Using a systematic, large-sample approach with three subject pools of private investors, professional investors, and students, we test the effect of task-related monetary incentives on risk preferences elicited in four standard experimental tasks. We find no systematic differences in behavior between subjects in the incentivized and non-incentivized regimes. We discuss implications for academic research and for applications in the field.