SAFE working paper
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212
Departing from the principle of absolute priority, CoCo bonds are particularly exposed to bank losses despite not having ownership rights. This paper shows the link between adverse CoCo design and their yields, confirming the existence of market monitoring in designated bail-in debt. Specifically, focusing on the write-down feature as loss absorption mechanism in CoCo debt, I do find a yield premium on this feature relative to equity-conversion CoCo bonds as predicted by theoretical models. Moreover, and consistent with theories on moral hazard, I find this premium to be largest when existing incentives for opportunistic behavior are largest, while this premium is non-existent if moral hazard is perceived to be small. The findings show that write-down CoCo bonds introduce a moral hazard problem in the banks. At the same time, they support the idea of CoCo investors acting as monitors, which is a prerequisite for a meaningful role of CoCo debt in banks' regulatory capital mix.
211
Bargaining with a bank
(2018)
This paper examines bargaining as a mechanism to resolve information problems. To guide the analysis, I develop a parsimonious model of a credit negotiation between a bank and firms with varying levels of impatience. In equilibrium, impatient firms accept the bank’s offer immediately, while patient firms wait and negotiate price adjustments. I test the empirical predictions using a hand-collected dataset on credit line negotiations. Firms signing the bank’s offer right away draw down their line of credit after origination and default more than late signers. Late signers negotiate price adjustments more frequently, and, consistent with the model, these adjustments predict better ex post performance.
210
We show that time-varying volatility of volatility is a significant risk factor which affects the cross-section and the time-series of index and VIX option returns, beyond volatility risk itself. Volatility and volatility-of-volatility measures, identified model-free from the option price data as the VIX and VVIX indices, respectively, are only weakly related to each other. Delta-hedged index and VIX option returns are negative on average, and are more negative for strategies which are more exposed to volatility and volatility-of-volatility risks. Volatility and volatility of volatility significantly and negatively predict future delta-hedged option payoffs. The evidence is consistent with a no-arbitrage model featuring time-varying market volatility and volatility-of-volatility factors, both of which have negative market price of risk.
209
This paper studies the distributional consequences of a systematic variation in expenditure shares and prices. Using European Union Household Budget Surveys and Harmonized Index of Consumer Prices data, we construct household-specific price indices and reveal the existence of a pro-rich inflation in Europe. Particularly, over the period 2001-15, the consumption bundles of the poorest deciles in 25 European countries have, on average, become 10.5 percentage points more expensive than those of the richest decile. We find that ignoring the differential inflation across the distribution underestimates the change in the Gini (based on consumption expenditure) by up to 0.03 points. Cross-country heterogeneity in this change is large enough to alter the inequality ranking of numerous countries. The average inflation effect we detect is almost as large as the change in the standard Gini measure over the period of interest.
208
The paper analyses the contagion channels of the European financial system through the stochastic block model (SBM). The model groups homogeneous connectivity patterns among the financial institutions and describes the shock transmission mechanisms of the financial networks in a compact way. We analyse the global financial crisis and European sovereign debt crisis and show that the network exhibits a strong community structure with two main blocks acting as shock spreader and receiver, respectively. Moreover, we provide evidence of the prominent role played by insurances in the spread of systemic risk in both crises. Finally, we demonstrate that policy interventions focused on institutions with inter-community linkages (community bridges) are more effective than the ones based on the classical connectedness measures and represents consequently, a better early warning indicator in predicting future financial losses.
207
The increase in alternative working arrangements has sparked a debate over the positive impact of increased flexibility against the negative impact of decreased financial security. We study the prevalence and determinants of intermediated work in order to document the relative importance of the arguments for and against this recent labor market trend. We link data on individual participation and losses from a Federal Trade Commission settlement with a Multi-Level Marketing firm with detailed county-level information. Participation is greater in middle-income areas and in areas where female labor market non-participation is higher, suggesting that flexibility offers real benefits. However, losses from MLM participation are higher in areas with lower education levels and higher income inequality, suggesting that the downsides of alternative work are particularly high in certain demographics. Our results illustrate that the advantages and disadvantages of alternative work arrangements accrue to different groups.
206
We develop a simple theoretical model to motivate testable hypotheses about how peer-to-peer (P2P) platforms compete with banks for loans. The model predicts that (i) P2P lending grows when some banks are faced with exogenously higher regulatory costs; (ii) P2P loans are riskier than bank loans; and (iii) the risk-adjusted interest rates on P2P loans are lower than those on bank loans. We confront these predictions with data on P2P lending and the consumer bank credit market in Germany and find empirical support. Overall, our analysis indicates the P2P lenders are bottom fishing when regulatory shocks create a competitive disadvantage for some banks.
205
In contrast to the popularity of financial education interventions worldwide, studies on the economic effects of those interventions report mixed results. With a focus on the effect on disadvantaged groups, we review both the theoretical and empirical findings in order to understand why this discrepancy exists. The survey first highlights that it is necessary to distinguish between the concepts of, and the relationships between, financial education, financial literacy and financial behavior to identify the true effects of financial education. The review addresses possible biases caused by third factors such as numeracy. Next, we review theories on financial literacy which make clear that the effect of financial education interventions is heterogeneous across the population. Last, we look closely at main empirical studies on financial education targeted at the migrants/immigrants, the low-income earners and the young, and compare their methodologies. There seems to be a positive effect on short-term financial knowledge and awareness of the young, but there is no proven evidence on long-term behavior after being grown up. Studies on financial behavior of migrants and immigrants show almost no effect of financial education.
204
This paper investigates the effect of the conventional and unconventional (e.g. Quantitative Easing - QE) monetary policy intervention on the insurance industry. We first analyze the impact on the stock performances of 166 (re)insurers from the last QE programme launched by the European Central Bank (ECB) by constructing an event study around the announcement date. Then we enlarge the scope by looking at the monetary policy surprise effects on the same sample of (re)insurers over a timeframe of 12 years, also extending the analysis to the Credit Default Swaps (CDS) market. In the second part of the paper by building a set of balance sheet-based indices, we identify the characteristics of (re)insurers that determine sensitivity to monetary policy actions. Our evidences suggest that a single intervention extrapolated from the comprehensive strategy cannot be utilized to estimate the effect of monetary policy intervention on the market. With respect to the impact of monetary policies, we show how the effect of interventions changes over time. Expansionary monetary policy interventions, when generating an instantaneous reduction of interest rates, generated movement in stock prices in the same direction till September 2010. This effect turned positive during the European sovereign debt crisis. However, the effect faded away in 2014-2015. The pattern is confirmed by the impact on the CDS market. With regard to the determinants of these effects, our analysis suggests that sensitivity is mainly driven by asset allocation and in particular by exposure to fixed income assets.
203
his paper studies heterogeneity in the reaction to rank feedback. In a laboratory experiment, individuals take part in a series of dynamic real-effort contests with intermediate feedback. To solve the identification problem in estimating the causal effect of rank feedback on subsequent effort provision we implement a random multiplier in the first round of each contest. The realization of this multiplier then serves as a valid instrument for rank feedback. While rank feedback has a robust effect on subsequent effort provision on average, an explicit analysis of between-subject heterogeneity reveals that a substantial fraction of participants in fact react entirely opposite than the aggregated results indicate. We further show that this heterogeneity has consequences for overall outcomes, thereby arguing that heterogeneous sensitivities to rank feedback could have implications for the design of various policies in education and organizations.