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242
Using a unique confidential contract level dataset merged with firm-level asset price data, we find robust evidence that firms' stock market valuations and employment levels respond more to monetary policy announcements the higher the degree of wage rigidity. Data on the renegotiations of collective bargaining agreements allow us to construct an exogenous measure of wage rigidity. We also find that the amplification induced by wage rigidity is stronger for firms with high labor intensity and low profitability, providing evidence of distributional consequences of monetary policy. We rationalize the evidence through a model in which firms in different sectors feature different degrees of wage rigidity due to staggered renegotiations vis-a-vis unions.
241
This paper analyzes the effect of financial constraints on firms' corporate social responsibility. Exploiting heterogeneity in firms' exposure to a monetary policy shock in the U.S., which reduced financial constraints for some firms, I find that firms increase their environmental responsibility. I use facility-level data to account for unobservable time-varying influences on pollution and find that toxic emissions decrease when parent companies are more exposed to the monetary policy shock. I further find that these facilities are also more likely to implement pollution abatement activities. Examining within-parent company heterogeneity I find that pollution abatement investments center on facilities at greater risk of facing additional costs due to environmental regulation. The findings are consistent with the idea that a reduction in financial constraints reduces pollution as it allows firms to implement pollution abatement measures.
240
Households buy life insurance as part of their liquidity management. The option to surrender such a policy can serve as a buffer when a household faces a liquidity need. In this study, we investigate empirically which individual and household specific sociodemographic factors influence the surrender behavior of life insurance policyholders. Based on the Socio-Economic Panel (SOEP), an ongoing wide-ranging representative longitudinal study of around 11,000 private households in Germany, we construct a proxy to identify life insurance surrender in the data. We use this proxy to conduct fixed effect regressions and support the results with survival analyses. We find that life events that possibly impose a liquidity shock to the household, such as birth of a child and divorce increase the likelihood to surrender an existing life insurance policy for an average household in the panel. The acquisition of a dwelling and unemployment are further aspects that can foster life insurance surrender. Our results are robust with respect to different models and hold conditioning on region specific trends; they vary however for different age groups. Our analyses contribute to the existing literature supporting the emergency fund hypothesis. The findings obtained in this study can help life insurers and regulators to detect and understand industry specific challenges of the demographic change.
239
Higher capital ratios are believed to improve system-wide financial stability through three main channels: (i) higher loss-absorption capacity, (ii) lower moral hazard, (iii) stabilization of the financial cycle if capital ratios are increased during good times. We examine these mechanisms in a laboratory asset market experiment with indebted participants. We find support for the loss-absorption channel: higher capital ratios reduce the bankruptcy rate. However, we do not find support for the moral hazard channel. Higher capital ratios (insignificantly) increase asset price bubbles, an aggregate measure of excessive risk-taking. Additional evidence suggests that bankruptcy aversion explains this surprising result. Finally, the evidence supports the idea that higher capital ratios in good times stabilize the financial cycle.
238
Much ado about nothing : a study of differential pricing and liquidity of short and long term bonds
(2018)
Are yields of long-maturity bonds distorted by demand pressure of clientele investors, regulatory effects, or default, flight-to-safety or liquidity premiums? Using data on German nominal bonds between 2005 and 2015, we study the differential pricing and liquidity of short and long maturity bonds. We find statistically significant, but economically negligible segmentation in yields and some degree of liquidity segmentation of short-term versus long-term bonds. These results have important policy implications for the e17.5 trillion European pension and insurance industries: long maturity bond yields seem appropriate for the valuation of long-term liabilities.
237
A number of recent studies have concluded that consumer spending patterns over the month are closely linked to the timing of income receipt. This correlation is interpreted as evidence of hyperbolic discounting. I re-examine patterns of spending in the diary sample of the U.S. Consumer Expenditure Survey, incorporating information on the timing of the main consumption commitment for most households - their monthly rent or mortgage payment. I find that non-durable and food spending increase with 30-48% on the day housing payments are made, with smaller increases in the days after. Moreover, households with weekly, biweekly and monthly income streams but the same timing of rent/mortgage payments have very similar consumption patterns. Exploiting variation in income, I find that households with extra liquidity decrease non-durable spending around housing payments, especially those households with a large budget share of housing.
236
Asset transaction prices sampled at high frequency are much staler than one might expect in the sense that they frequently lack new updates showing zero returns. In this paper, we propose a theoretical framework for formalizing this phenomenon. It hinges on the existence of a latent continuous-time stochastic process pt valued in the open interval (0; 1), which represents at any point in time the probability of the occurrence of a zero return. Using a standard infill asymptotic design, we develop an inferential theory for nonparametrically testing, the null hypothesis that pt is constant over one day. Under the alternative, which encompasses a semimartingale model for pt, we develop non-parametric inferential theory for the probability of staleness that includes the estimation of various integrated functionals of pt and its quadratic variation. Using a large dataset of stocks, we provide empirical evidence that the null of the constant probability of staleness is fairly rejected. We then show that the variability of pt is mainly driven by transaction volume and is almost unaffected by bid-ask spread and realized volatility.
235
Through the lens of market participants' objective to minimize counterparty risk, we provide an explanation for the reluctance to clear derivative trades in the absence of a central clearing obligation. We develop a comprehensive understanding of the benefits and potential pitfalls with respect to a single market participant's counterparty risk exposure when moving from a bilateral to a clearing architecture for derivative markets. Previous studies suggest that central clearing is beneficial for single market participants in the presence of a sufficiently large number of clearing members. We show that three elements can render central clearing harmful for a market participant's counterparty risk exposure regardless of the number of its counterparties: 1) correlation across and within derivative classes (i.e., systematic risk), 2) collateralization of derivative claims, and 3) loss sharing among clearing members. Our results have substantial implications for the design of derivatives markets, and highlight that recent central clearing reforms might not incentivize market participants to clear derivatives.
234
A tale of one exchange and two order books : effects of fragmentation in the absence of competition
(2018)
Exchanges nowadays routinely operate multiple, almost identically structured limit order markets for the same security. We study the effects of such fragmentation on market performance using a dynamic model where agents trade strategically across two identically-organized limit order books. We show that fragmented markets, in equilibrium, offer higher welfare to intermediaries at the expense of investors with intrinsic trading motives, and lower liquidity than consolidated markets. Consistent with our theory, we document improvements in liquidity and lower profits for liquidity providers when Euronext, in 2009, consolidated its order ow for stocks traded across two country-specific and identically-organized order books into a single order book. Our results suggest that competition in market design, not fragmentation, drives previously documented improvements in market quality when new trading venues emerge; in the absence of such competition, market fragmentation is harmful.
233
This paper presents new evidence on the expectation formation process from a Dutch household survey. Households become too optimistic about their future income after their income has improved, consistent with the over-extrapolation of their experience. We show that this effect of experience is persistent and that households over-extrapolate income losses more than income gains. Furthermore, older households over-extrapolate more, suggesting that they did not learn over time to form more accurate expectations. Finally, we study the relationship between expectation errors and consumption. We find that more over-optimistic households intend to consume more and subsequently report higher consumption, even though they do not consume as much as they intended to. These results suggests that overextrapolation hurts consumers and amplify business cycles.
232
This paper argues that the introduction of the Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver.
231
We study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we investigate whether fee rebates for liquidity providers enhance liquidity on the introducing market and thereby increase its competitiveness and market share. Further, we analyze whether single-market liquidity provider incentives increase overall market liquidity available for market participants. Therefore, we measure the specific liquidity contribution of individual markets to the aggregate liquidity in the fragmented market environment. While liquidity and market share of the venue introducing incentives increase, we find no significant effect for turnover and liquidity of the whole market.
230
We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities.
229
This paper analyzes how the combination of borrowing constraints and idiosyncratic risk affects the equity premium in an overlapping generations economy. I find that introducing a zero-borrowing constraint in an economy without idiosyncratic risk increases the equity premium by 70 percent, which means that the mechanism described in Constantinides, Donaldson, and Mehra (2002) is dampened because of the large number of generations and production. With social security the effect of the zero-borrowing constraint is a lot weaker. More surprisingly, when I introduce idiosyncratic labor income risk in an economy without a zero-borrowing constraint, the equity premium increases by 50 percent, even though the income shocks are independent of aggregate risk and are not permanent. The reason is that idiosyncratic risk makes the endogenous natural borrowing limits much tighter, so that they have a similar effect to an exogenously imposed zero-borrowing constraint. This intuition is confirmed when I add idiosyncratic risk in an economy with a zero-borrowing constraint: neither the equity premium nor the Sharpe ratio change, because the zero-borrowing constraint is already tighter than the natural borrowing limits that result when idiosyncratic risk is added.
228
The paper investigates the determinants of the idiosyncratic volatility puzzle by allowing linkages across asset returns. The first contribution of the paper is to show that portfolios sorted by increasing indegree computed on the network based on Granger causality test have lower expected returns, not related to idiosyncratic volatility. Secondly, empirical evidence indicates that stocks with higher idiosyncratic volatility have the lower exposition on the indegree risk factor.
227
We study the role of various trader types in providing liquidity in spot and futures markets based on complete order-book and transactions data as well as cross-market trader identifiers from the National Stock Exchange of India for a single large stock. During normal times, short-term traders who carry little inventory overnight are the primary intermediaries in both spot and futures markets, and changes in futures prices Granger-cause changes in spot prices. However, during two days of fast crashes, Granger-causality ran both ways. Both crashes were due to large-scale selling by foreign institutional investors in the spot market. Buying by short-term traders and cross-market traders was insufficient to stop the crashes. Mutual funds, patient traders with better trade-execution quality who were initially slow to move in, eventually bought sufficient quantities leading to price recovery in both markets. Our findings suggest that market stability requires the presence of well-capitalized standby liquidity providers.
226
We show that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created a large mispricing between the market for German and Italian government bonds and their respective futures contracts. On top of the direct effect the buying pressure exerted on bond prices, we show three indirect effects through which the scarcity of bonds, resulting from the asset purchases, drove a wedge between the futures contracts and the underlying bonds: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the greater uncertainty about bond availability as collateral.
225
We propose a spatiotemporal approach for modeling risk spillovers using time-varying proximity matrices based on observable financial networks and introduce a new bilateral specification. We study covariance stationarity and identification of the model, and analyze consistency and asymptotic normality of the quasi-maximum-likelihood estimator. We show how to isolate risk channels and we discuss how to compute target exposure able to reduce system variance. An empirical analysis on Euro-area cross-country holdings shows that Italy and Ireland are key players in spreading risk, France and Portugal are the major risk receivers, and we uncover Spain's non-trivial role as risk middleman.
224
An important assumption underlying the designation of some insurers as systemically important is that their overlapping portfolio holdings can result in common selling. We measure the overlap in holdings using cosine similarity, and show that insurers with more similar portfolios have larger subsequent common sales. This relationship can be magnified for some insurers when they are regulatory capital constrained or markets are under stress. When faced with an exogenous liquidity shock, insurers with greater portfolio similarity have even larger common sales that impact prices. Our measure can be used by regulators to predict which institutions may contribute most to financial instability through the asset liquidation channel of risk transmission.
223
This paper investigates inertia within and across banks in retail deposit markets using detailed panel data on consumer choices and account characteristics. In a structural choice model, I find that costs of inertia are around one third higher for switching accounts across compared to switching within banks. Observable proxies of bank-level switching costs (number and type of additional financial products) explain most of this cost premium, while online banking usage reduces inertia. Consistent with theory, I provide evidence that banks incorporate inertia in their pricing as older accounts pay lower rates than comparable newer accounts. Counterfactual policies reducing inertia shift market share to more competitive smaller banks, but only eliminating inertia within banks already results in high potential gains in consumer surplus. This suggests that facilitating bank switching alone might be insufficient to improve consumer choices.
222
In recent years European financial regulation has experienced a tremendous reorientation with respect to the shadow banking system, which manifested first and foremost in its reframing as market-based finance. Initially identified as a source of systemic risk certain initiatives did not only fall much behind the envisaged changes but all to the contrary have been substantially modified in a way that they now aim at revitalizing these activities. The reorientation of European regulatory agency on shadow banking post-crisis, from curtailing it to facilitating resilient market-based finance, has been a cause for irritation by academic observers, dismissed by some as mere rebranding or taken as a sign of regulatory capture. All to the contrary, this paper documents the central role of regulatory agency in shadow banking’s reconfiguration. It does so by analyzing the European initiatives concerning the regulation of Asset-Backed Commercial Paper (ABCP) and another prime example of shadow banking, Money Market Mutual Funds (MMFs). Based on documentary analysis and expert interviews we trace the way the recently published EU frameworks for MMFs and ABCP have been designed (in particular the STS, CRR and MMF regulation in 2017). Furthermore, we show how they have been transformed in such a way that their final versions allow to re-establish the shadow banking chain linking MMFs, the ABCP market and arguably the regular banking system. This transformation is driven by a new form of pro-active European regulatory agency which aims at creating a regulatory infrastructure able to sustain the orderly flow of real economy debt. Far from being captured by the industry, they did so consciously and in cooperation with private actors in order to maintain a channel for credit creation outside of bank credit, a task made more complicated by the rushed politicized final negotiations coupled with technical complexity. This paper thereby contributes to a new strand of literature, seeing the creation and reconfiguration of the shadow banking system as characterized by the active and conscious role of state actors.
221
We propose a unified framework to measure the effects of different reforms of the pension system on retirement ages and macroeconomic indicators in the face of demographic change. A rich overlapping generations (OLG) model is built and endogenous retirement decisions are explicitly modeled within a public pension system. Heterogeneity with respect to consumption preferences, wage profiles, and survival rates is embedded in the model. Besides the expected direct effects of these reforms on the behavior of households, we observe that feedback effects do occur. Results suggest that individual retirement decisions are strongly influenced by numerous incentives produced by the pension system and macroeconomic variables, such as the statutory eligibility age, adjustment rates, the presence of a replacement rate, and interest rates. Those decisions, in turn, have several impacts on the macro-economy which can create feedback cycles working through equilibrium effects on interest rates and wages. Taken together, these reform scenarios have strong implications for the sustainability of pension systems. Because of the rich nature of our unified model framework, we are able to rank the reform proposals according to several individual and macroeconomic measures, thereby providing important support for policy recommendations on pension systems.
220
We examine how a firms' investment behavior affects the investment of a neighboring firm. Economic theory yields ambiguous predictions regarding the direction of firm peer effects and consistent with earlier work, we find that firms display similar investment behavior within an area using OLS analysis. Exploiting time-variation in the rise of U.S. states' corporate income taxes and utilizing heterogeneity in firms' exposure to increases in corporate income tax rates, we identify the causal impact of local firms' investments. Using this as an instrumental variable in a 2SLS estimation, we find that an increases in local firms' investment reduces the investment of a local peer firm. This effect is more pronounced if local competition among firms is stronger and supports theories that firm investments are strategic substitutes due to competition.
219
We use minutes from 17,000 financial advisory sessions and corresponding client portfolio data to study how active client involvement affects advisor recommendations and portfolio outcomes. We find that advisors confronted with acquiescent clients stick to their standards and recommend expensive but well diversified mutual fund portfolios. However, if clients take an active role in the meetings, advisors deviate markedly from their standards, resulting in poorer portfolio diversification and lower Sharpe ratios. Our findings that advisors cater to client requests parallel the phenomenon of doctors prescribing antibiotics to insistent patients even if inappropriate, and imply that pandering diminishes the quality of advice.
218
This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining.
217
A growing body of literature shows the importance of financial literacy in households' financial decisions. However, fewer studies focus on understanding the determinants of financial literacy. Our paper fills this gap by analyzing a specific determinant, the educational system, to explain the heterogeneity in financial literacy scores across Germany. We suggest that the lower financial literacy observed in East Germany is partially caused by a different institutional framework experienced during the Cold War, more specifically, by the socialist educational system of the GDR which affected specific cohorts of individuals. By exploiting the unique set-up of the German reunification, we identify education as a channel through which institutions and financial literacy are related in the German context.
216
We develop a model that reproduces the average return and volatility spread between sin and non-sin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. We show that when dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. Our empirical analysis supports the model's predictions.
215
In the last decade, central bank interventions, flights to safety, and the shift in derivatives clearing resulted in exceptionally high demand for high quality liquid assets, such as German treasuries, in the securities lending market besides the traditional repo market activities. Despite the high demand, the realizable securities lending income has remained economically negligible for most beneficial owners. We provide empirical evidence of pricing inefficiencies in the non-transparent, oligopolistic securities lending market for German treasuries from 2006 to 2015. Consistent with Duffie, Gârleanu and Pedersen (2005)’s theory, we find that the less connected market participants’ interests are underrepresented, evident in the longer maturity segment, where lenders are more likely to be conservative passive investors, such as pension funds and insurance firms. The low price elasticity in this segment hinders these beneficial owners to fully capitalize on the additional income from securities lending, giving rise to important negative welfare implications.
214
In this study we investigate which economic ideas were prevalent in the macroprudential discourse post-crises in order to understand the availability of ideas for reform minded agents. We base our analysis on new findings in the field of ideational shifts and regulatory science, which posit that change-agents engage with new ideas pragmatically and strategically in their effort to have their economic ideas institutionalized. We argue that in these epistemic battles over new regulation, scientific backing by academia is the key resource determining the outcome. We show that the present reforms implemented internationally follow this pattern. In our analysis we contrast the entire discourse on systemic risk and macroprudential regulation with Borio’s initial 2003 proposal for a macroprudential framework. We find that mostly cross-sectional measures targeted towards increasing the resilience of the financial system rather than inter-temporal measures dampening the financial cycle have been implemented. We provide evidence for the lacking support of new macroprudential thinking within academia and argue that this is partially responsible for the lack of anti-cyclical macroprudential regulation. Most worryingly, the financial cycle is largely absent in the academic discourse and is only tacitly assumed instead of fully fledged out in technocratic discourses, pointing to the possibility that no anti-cyclical measures will be forthcoming.
213
To estimate demand for labor, we use a combination of detailed employment data and the outcomes of procurement auctions, and compare the employment of the winner of an auction with the employment of the second ranked firm (i.e. the runner-up firm). Assuming similar ex-ante winning probabilities for both firms, we may view winning an auction as an exogenous shock to a firm’s production and its demand for labor. We utilize daily data from almost 900 construction firms and about 3,000 auctions in Austria in the time period 2006 until 2009. Our main results show that the winning firm significantly increases labor demand in the weeks following an auction but only in the years before the recent economic crisis. It employs about 80 workers more after the auction than the runner-up firm. Most of the adjustment takes place within one month after the demand shock. Winners predominantly fire fewer workers after winning than runner-up firms. In the crisis, however, firms do not employ more workers than their competitors after winning an auction. We discuss explanations like labor hoarding and productivity improvements induced by the crisis as well discuss implications for fiscal and stimulus policy in the crisis.
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.
202
Germany Inc. was an idiosyncratic form of industrial organization that put financial institutions at the center. This paper argues that the consumption of private benefits in related party transactions by these key agents can be understood as a compensation for their coordinating and monitoring function in Germany Inc. As a consequence, legal tools apt to curb tunneling remained weak in Germany from the perspective of outside shareholders. While banks were in a position to use their firm-level knowledge and influence to limit rent-seeking by other related parties, their own behavior was not subject to meaningful controls. With the dismantling of Germany Inc. banks seized their monitoring function and left an unprecedented void with regard to related party transactions. Hence, a “traditionalist” stance which opposes law reform for related party transactions in Germany negatively affects capital market development, growth opportunities and ultimately social welfare.
201
We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
200
This paper investigates the roles psychological biases play in empirically estimated deviations between subjective survival beliefs (SSBs) and objective survival probabilities (OSPs). We model deviations between SSBs and OSPs through age-dependent inverse S-shaped probability weighting functions (PWFs), as documented in experimental prospect theory. Our estimates suggest that the implied measures for cognitive weakness, likelihood insensitivity, and those for motivational biases, relative pessimism, increase with age. We document that direct measures of cognitive weakness and motivational attitudes share these trends. Our regression analyses confirm that these factors play strong quantitative roles in the formation of subjective survival beliefs. In particular, cognitive weakness is an increasingly important contributor to the overestimation of survival chances in old age.
199
This paper is the national report for Germany prepared for the to the 20th General Congress of the International Academy of Comparative Law 2018 and gives an overview of the regulation of crowdfunding in Germany and the typical design of crowdfunding campaigns under this legal framework. After a brief survey of market data, it delineates the classification of crowdfunding transactions in German contract law and their treatment under the applicable conflict of laws regime. It then turns to the relevant rules in prudential banking regulation and capital market law. It highlights disclosure requirements that flow from both contractual obligations of the initiators of campaigns vis-à-vis contributors and securities regulation (prospectus regime). After sketching the most important duties of the parties involved in crowdfunding, the report also looks at the key features of the respective transactions’ tax treatment.
198
This paper revisits the macroeconomic effects of the large-scale asset purchase programmes launched by the Federal Reserve and the Bank of England from 2008. Using a Bayesian VAR, we investigate the macroeconomic impact of shocks to asset purchase announcements and assess changes in their effectiveness based on subsample analysis. The results suggest that the early asset purchase programmes had significant positive macroeconomic effects, while those of the subsequent ones were weaker and in part not significantly different from zero. The reduced effectiveness seems to reflect in part better anticipation of asset purchase programmes over time, since we find significant positive macroeconomic effects when we consider shocks to survey expectations of the Federal Reserve’s last asset purchase programme. Finally, in all estimations we find a significant and persistent positive impact of asset purchase shocks on stock prices.
196
Coordination of circuit breakers? Volume migration and volatility spillover in fragmented markets
(2018)
We study circuit breakers in a fragmented, multi-market environment and investigate whether a coordination of circuit breakers is necessary to ensure their effectiveness. In doing so, we analyze 2,337 volatility interruptions on Deutsche Boerse and research whether a volume migration and an accompanying volatility spillover to alternative venues that continue trading can be observed. Different to prevailing theoretical rationale, trading volume on alternative venues significantly decreases during circuit breakers on the main market and we do not find any evidence for volatility spillover. Moreover, we show that the market share of the main market increases sharply during a circuit breaker. Surprisingly, this is amplified with increasing levels of fragmentation. We identify high-frequency trading as a major reason for the vanishing trading activity on the alternative venues and give empirical evidence that a coordination of circuit breakers is not essential for their effectiveness as long as market participants shift to the dominant venue during market stress.
195
We investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease volatility in the post interruption phase. Unfortunately, this decrease in volatility comes at the cost of decreased liquidity. Regarding design parameters, we find tighter price ranges and shorter durations to support volatility interruptions in achieving their goals.
194
I present a new business cycle model in which decision making follows a simple mental process motivated by neuroeconomics. Decision makers first compute the value of two different options and then choose the option that offers the highest value, but with errors. The resulting model is highly tractable and intuitive. A demand function in level replaces the traditional Euler equation. As a result, even liquid consumers can have a large marginal propensity to consume. The interest rate affects consumption through the cost of borrowing and not through intertemporal substitution. I discuss the implications for stimulus policies.
193
This paper analyses whether the post-crisis regulatory reforms developed by global-standard-setting bodies have created appropriate incentives for different types of market participants to centrally clear Over-The-Counter (OTC) derivative contracts. Beyond documenting the observed facts, we analyze four main drivers for the decision to clear: 1) the liquidity and riskiness of the reference entity; 2) the credit risk of the counterparty; 3) the clearing member’s portfolio net exposure with the Central Counterparty Clearing House (CCP) and 4) post trade transparency. We use confidential European trade repository data on single-name Sovereign Credit Derivative Swap (CDS) transactions, and show that for all the transactions reported in 2016 on Italian, German and French Sovereign CDS 48% were centrally cleared, 42% were not cleared despite being eligible for central clearing, while 9% of the contracts were not clearable because they did not satisfy certain CCP clearing criteria. However, there is a large difference between CCP clearing members that clear about 53% of their transactions and non-clearing members, even those that are subject to counterparty risk capital requirements, that almost never clear their trades. Moreover, we find that diverse factors explain clearing members’ decision to clear different CDS contracts: for Italian CDS, counterparty credit risk exposures matter most for the decision to clear, while for French and German CDS, margin costs are the most important factor for the decision. Clearing members use clearing to reduce their exposures to the CCP and largely clear contracts when at least one of the traders has a high counterparty credit risk.