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We show that the net corporate payout yield predicts both the stock market index and house prices and that the log home rent-price ratio predicts both house prices and labor income growth. We incorporate the predictability in a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. We find that households can significantly improve their welfare by optimally conditioning decisions on the predictors. For a modestly risk-averse agent with a 35-year working period and a 15-year retirement period, the present value of the higher average life-time consumption amounts to roughly $179,000 (assuming both an initial wealth and an initial annual income of $20,000), and the certainty equivalent gain is around 5.5% of total wealth (financial wealth plus human capital). Furthermore, every cohort of agents in our model would have benefited from applying predictor-conditional strategies along the realized time series over our 1960-2010 data period.
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from trading in bank business models. Prominent reform proposals are the Volcker Rule in the U.S., the Vickers Report in the UK, and, based on the Liikanen proposal, the Barnier proposal in the EU. A major element of these reforms is to separate “classical” commercial banking activities from securities trading activities, notably from proprietary trading. While the reforms are at different stages of implementation, there is a strong ongoing discussion on what possible economic consequences are to be expected. The goal of this paper is to look at the alternative approaches of these reform proposals and to assess their likely consequences for bank business models, risk-taking and financial stability. Our conclusions can be summarized as follows: First, the focus on a prohibition of only proprietary trading, as envisaged in the current EU proposal, is inadequate. It does not necessarily reduce risk-taking and it likely crowds out desired trading activities, thereby negatively affecting financial stability. Second, there is potentially a better solution to limit excessive trading risk at banks in terms of potential welfare consequences: Trading separation into legally distinct or ring-fenced entities within the existing banking organizations. This kind of separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies across banking, non-proprietary trading and proprietary trading.
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from banks’ trading activities. The goal of this paper is to look at the alternative reforms in the US, the UK and the EU, specifically with respect to the role of proprietary trading. Our conclusions can be summarized as follows: First, the focus on a prohibition of proprietary trading, as reflected in the Volcker Rule in the US and in the current proposal of the European Commission (Barnier proposal), is inadequate. It does not necessarily reduce risk-taking and it is likely to crowd out desired trading activities, thereby possibly affecting financial stability negatively. Second, trading separation into legally distinct or ring-fenced entities within the existing banking organizations, as suggested under the Vickers Report for the UK and the Liikanen proposal for the EU, is a more effective solution. Separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies and risk management across banking, non-proprietary trading and proprietary trading.
This note discusses the basic economics of central clearing for derivatives and the need for a proper regulation, supervision and resolution of central counterparty clearing houses (CCPs). New regulation in the U.S. and in Europe renders the involvement of a central counterparty mandatory for standardized OTC derivatives’ trading and sets higher capital and collateral requirements for non-centrally cleared derivatives.
From a macrofinance perspective, CCPs provide a trade-off between reduced contagion risk in the financial industry and the creation of a significant systemic risk. However, so far, regulation and supervision of CCPs is very fragmented, limited and ignores two important aspects: the risk of consolidation of CCPs on the one side and the competition among CCPs on the other side. i) As the economies of scale of CCP operations in risk and cost reduction can be large, they provide an argument in favor of consolidation, leading at the extreme to a monopoly CCP that poses the ultimate default risk – a systemic risk for the entire financial sector. As a systemic risk event requires a government bailout, there is a public policy issue here. ii) As long as no monopoly CCP exists, there is competition for market share among existing CCPs. Such competition may undermine the stability of the entire financial system because it induces “predatory margining”: a reduction of margin requirements to increase market share.
The policy lesson from our consideration emphasizes the importance of a single authority supervising all competing CCPs as well as of a specific regulation and resolution framework for CCPs. Our general recommendations can be applied to the current situation in Europe, and the proposed merger between Deutsche Börse and London Stock Exchange.
Based on a unique data set of driving behavior we find direct evidence that private information has significant effects on contract choice and risk in automobile insurance. The number of car rides and the relative distance driven on weekends are significant risk factors. While the number of car rides and average speeding are negatively related to the level of liability coverage, the number of car rides and the relative distance driven at night are positively related to the level of first-party coverage. These results indicate multiple and counteracting effects of private information based on risk preferences and driving behavior.
Intrinsic motivation for honesty is perceived as an important determinant of large and persistent variation in cheating behavior. However, little is known about its actual role due to challenges in obtaining precise measures of motivation for honesty, as well as field outcomes on cheating. We fill these gaps using a unique setting of informal milk markets in India. A novel behavioral experiment, which combines a standard die roll task with Bluetooth technology, is used to measure motivation for honesty of milkmen at both extensive and intensive margins. We then buy milk from the same milkmen and show that cheating in the field, measured by the amount of water added to milk, widens significantly with a milkman’s degree of dishonesty. Additional analyses show that conventional binary measure of motivation for honesty suffers from measurement errors, resulting in underestimation of this association.
The old boy network: the impact of professional networks on remuneration in top executive jobs
(2016)
We investigate the impact of social networks on earnings using a dataset of over 20,000 senior executives of European and US firms. The size of an individual's network of influential former colleagues has a large positive association with current remuneration. An individual at the 75th percentile in the distribution of connections could expect to have a salary nearly 20 per cent higher than an otherwise identical individual at the median. We use a placebo technique to show that our estimates reflect the causal impact of connections and not merely unobserved individual characteristics. Networks are more weakly associated with women's remuneration than with men's. This mainly reflects an interaction between unobserved individual characteristics and firm recruitment policies. The kinds of firm that best identify and advance talented women are less likely to give them access to influential networks than are firms that do the same for the most talented men.
Die aktuelle Diskussion über eine Reform der gesetzlichen Rentenversicherung vermischt Fragen nach dem durchschnittlichen Rentenniveau mit Fragen der Umverteilung von Einkommen im Ruhestand zur Bekämpfung einer etwaigen Altersarmut. Dieser Beitrag kritisiert diesen Ansatz und befasst sich mit fünf Kernaussagen: (1) Die aktuell gültige Rentenformel darf unter keinen Umständen abgeschafft werden. (2) Das Renteneintrittsalter sollte an die durchschnittliche Restlebenserwartung nach dem Erreichen des 65. Lebensjahres gekoppelt werden. (3) Eine Integration der Flüchtlinge in den Arbeitsmarkt wird das Rentenniveau in den Jahren 2030 bis 2040 stützen. (4) Sollte trotz allem die Altersarmut steigen, so kann dem durch die Einführung einer Mindestrente begegnet werden. (5) Die private Altersvorsorge muss weiter gestützt werden.
Im Nachgang der Finanz- und Wirtschaftskrise beobachten wir derzeit sehr niedrige Renditen im „sicheren“ Anlagebereich auf dem Geldmarkt und für Staatsanleihen. Gleichzeitig sind Aktienkurse massiv gestiegen und zeichnen sich seit Beginn 2015 durch eine Seitwärtsbewegung aus. Die Ursachen für diese Entwicklung sind teilweise bekannt: Niedrige Zinssätze aufgrund einer expansiven Geldpolitik gepaart mit hoher Unsicherheit an den Märkten reduzieren die Auswahl attraktiver Kapitalanlagemöglichkeiten erheblich. Doch wie wird sich die langfristige Entwicklung gestalten, wenn oder falls die Wirkungen der jüngsten Finanz- und Wirtschaftskrise nachlassen? Gibt es einen langfristigen Trend? Spiegelt sich dieser Trend etwa bereits heute in den niedrigen Renditen wider?
Vor mehr als einem Jahrzehnt, also bereits einige Jahre vor der jüngsten Finanz- und Wirtschaftskrise, wurde wiederholt die sogenannte „Asset Market Meltdown“-Hypothese postuliert. Nach dieser Hypothese würden in den dreißiger Jahren dieses Jahrhunderts die Kapitalrenditen stark sinken, wenn die „Babyboomer“-Generation in den Ruhestand gehe und infolgedessen Kapital aus dem Wertpapiermarkt abziehe. Heute wird eine ähnliche Debatte unter dem Stichwort „säkulare Stagnation“ geführt. Danach bestehe die Gefahr, dass die nächsten Jahrzehnte durch niedrige Wachstumsraten geprägt sein und negative Realzinsen gar zur Normalität werden könnten. Dieser Beitrag geht der Frage nach, inwiefern die demographische Entwicklung für eine solche Stagnation verantwortlich ist.
We designed and fielded an experimental module in the 2014 HRS which seeks to measure older persons’ willingness to voluntarily defer claiming of Social Security benefits. In addition we evaluate the stated willingness of older individuals to work longer, depending on the Social Security incentives offered to delay claiming their benefits. Our project extends previous work by analyzing the results from our HRS module and comparing findings from other data sources, which included very much smaller samples of older persons. We show that half of the respondents would delay claiming if no work requirement were in place under the status quo, and only slightly fewer, 46 percent, with a work requirement. We also asked respondents how large a lump sum they would need with or without a work requirement. In the former case, the average amount needed to induce delayed claiming was about $60,400, while when part-time work was required, the average was $66,700. This implies a low utility value of leisure foregone of only $6,300, or about 10 percent of older households’ income.
owards their best performing products; and also extend the range of products sold to that market. We develop a theoretical model of multiproduct firms and derive the specific demand and cost conditions needed to generate these product-mix reallocations. Our theoretical model highlights how the increased competition from demand shocks in export markets - and the induced product mix reallocations - induce productivity changes within the firm. We then empirically test for this connection between the demand shocks and the productivity of multi-product firms exporting to those destinations. We find that the effect of those demand shocks on productivity are substantial - and explain an important share of aggregate productivity fluctuations for French manufacturing.
In a field study with more than 1.500 customers of an online-broker we test what happens when investors receive repeated feedback on their investment success in a monthly securities account report. The reports show investors’ last year’s returns, costs, their current level of risk and their portfolio diversification. We find that receiving a report results in investors trading less, diversifying more and having higher risk-adjusted returns. Results are robust to controlling for potential play money accounts and changes in report designs. We also find that investors who are less likely to subscribe equally benefit from the report.
Prestige and loan pricing
(2016)
We find that prestigious companies pay lower spreads and upfront fees on their loans despite the fact that prestige does not predict default risk over the life of the loan. Using survey data on firm-level prestige, we show that a one standard deviation increase in prestige reduces loan spreads by 6.18% per year and upfront fees by 22.86%. We identify causal effects (i) using fraud by industry peers as an instrument for borrower prestige and (ii) exploiting a regression discontinuity around rank 100 of the prestige survey. Banks that lend to prestigious firms attract more business afterwards compared to otherwise similar institutions. Moreover, the effect of prestige on upfront fees is particularly strong for new bank relationships. Our findings suggest that prestigious firms receive cheaper funding because the associated lending relationship helps banks establish valuable credentials they use to compete for future borrowers.
Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank’s balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.
This paper explores the impact of immigrants on the imports, exports and productivity of service- producing firms in the U.K. Immigrants may substitute for imported intermediate inputs (offshore production) and they may impact the productivity of the firm as well as its export behavior. The first effect can be understood as the re-assignment of offshore productive tasks to immigrant workers. The second can be seen as a productivity or cost cutting effect due to immigration, and the third as the effect of immigrants on specific bilateral trade costs. We test the predictions of our model using differences in immigrant inflows across U.K. labor markets, instrumented with an enclave-based instrument that distinguishes between aggregate and bilateral immigration, as well as immigrant diversity. We find that immigrants increase overall productivity in service-producing firms, revealing a cost cutting impact on these firms. Immigrants also reduce the extent of country-specific offshoring, consistent with a reallocation of tasks and, finally, they increase country-specific exports, implying an important role in reducing communication and trade costs for services.
This paper uses recent legislation in Austria to establish a link between sovereign reputation and yield spreads. In 2009, Hypo Alpe Adria International, a bank previously co-owned by the regional government of Carinthia, had been nationalized by Austria’s central government in order to avoid a default triggering multi-billion Euro local government guarantees. In 2015, special legislation retroactively introduced collective action clauses allowing a haircut on both the bonds and the guarantees while avoiding formal default. We document that legislative and administrative action designed to partly abrogate the guarantees resulted in a loss of reputation, leading to higher yield spreads for sovereign debt. Our analysis of covered bonds uncovers an increase in yield spreads on the secondary market and a deterioration of primary market conditions.
We analyze global data about electricity generation and document that the risk exposure of a firm’s owners and its workers depends on competitors’ ability or willingness to change their output in response to productivity shocks. Competitor inflexibility appears to be a risk factor: the sales of firms with more inflexible competitors respond more strongly to aggregate sales shocks. As a consequence, competitor inflexibility also affects the stability of firms’ total wage- and dividend-payments. Firms with relatively flexible competitors appear to smoothen both wages and dividends, but an increase in competitor inflexibility is associated with less dividend-smoothing and more wage-smoothing. Our evidence supports the idea that labor productivity risk associated with competitor inflexibility should be borne by firms’ shareholders, rather than by their workers.
Studies employing micro price data suggest that price dispersion is larger between regions in different countries than between regions in the same country. To investigate the strength of this border effect, deviations from the law of one price are used in most studies to provide statistical evidence on the effect of borders on price dispersion. I propose an alternative measure of the economic costs of borders which has an explicit welfare-theoretic foundation. Employing a unique micro price data set from households in Belgium, Germany and the Netherlands I provide evidence on the economic importance of price differences for households. I find that price dispersion within countries has only small economic importance, but that price dispersion between Belgium and Germany (and Belgium and the Netherlands) has considerable economic importance.
This paper studies the role of the Community Reinvestment Act (CRA) in the recent US housing boom-bust cycle. Using a difference-in-differences matching estimation, I find that the enhancement of CRA enforcement in 1998 caused a 7.7 percentage points increase in annual growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts relative to a group of similar-income CRA-ineligible census tracts within the same state. Financial institutions which are not subject to the CRA, however, do not show any change in their mortgage supply between these two types of census tracts after 1998. I take advantage of this exogenous shift in mortgage supply within an instrumental variable framework to identify the causal effect of mortgage supply on housing prices. I find that every 1 percentage point higher annual growth rate of mortgage supply leads to 0.3 percentage points higher annual growth rate of housing prices. Reduced form regressions show that CRA-eligible neighborhoods experienced higher house price growth during the boom and sharper decline during the bust period. I use placebo tests to confirm that this effect is in fact channeled through the shift in mortgage supply by CRA-regulated banks and not by unobserved demand factors. Furthermore, my results indicate that CRA-induced mortgages went to borrowers with lower FICO scores, carried higher interest rates, and encountered more frequent delinquencies.
Amid increasing regulation, structural changes of the market and Quantitative Easing as well as extremely low yields, concerns about the market liquidity of the Eurozone sovereign debt markets have been raised. We aim to quantify illiquidity risks, especially such related to liquidity dry-ups, and illiquidity spillover across maturities by examining the reaction to illiquidity shocks at high frequencies in two ways:
a) the regular response to shocks using a variance decomposition and,
b) the response to shocks in the extremes by detecting illiquidity shocks and modeling those as ultivariate Hawkes processes.
We find that:
a) market liquidity is more fragile and less predictable when an asset is very illiquid and,
b) the response to shocks in the extremes is structurally different from the regular response.
In 2015 long-term bonds are less liquid and the medium-term bonds are liquid, although we observe that in the extremes the medium-term bonds are increasingly driven by illiquidity spillover from the long-term titles.
Low risk anomalies?
(2016)
This paper shows theoretically and empirically that beta- and volatility-based low risk anomalies are driven by return skewness. The empirical patterns concisely match the predictions of our model which generates skewness of stock returns via default risk. With increasing downside risk, the standard capital asset pricing model increasingly overestimates required equity returns relative to firms' true (skew-adjusted) market risk. Empirically, the profitability of betting against beta/volatility increases with firms' downside risk. Our results suggest that the returns to betting against beta/volatility do not necessarily pose asset pricing puzzles but rather that such strategies collect premia that compensate for skew risk.
This study looks at the interrelationship between fiscal policy and safe assets as there is surprisingly little analysis about this beyond fleeting references. The study argues that from a certain point more public debt will not “buy” more safety: countries face a kind of “safe-assets Laffer curve” with a maximum amount of safe assets at some level of indebtedness. The position and “stability” of this curve depend on a number of national and international factors, including the international risk appetite and, as a more recent factor, QE policies by central banks. The study also finds evidence of declining safe assets as reflected in government debt ratings.
Das Ergebnis des Volksentscheids im Vereinigten Königreich ist ein Weckruf. Alle Entscheidungsträger der Europäischen Union und ihrer Mitgliedstaaten sind aufgerufen, grundlegende Reformen der Verfassung einer Europäischen Union, möglicherweise nur noch einer europäischen „Kontinentalunion“ unverzüglich in Angriff zu nehmen. Unverzüglich bedeutet, einen Reformprozess nicht erst dann zu beginnen, wenn die Verhandlungen über ein Austrittsabkommen beendet worden sind. Eine Rückentwicklung der Europäischen Union zu einer bloßen Wirtschaftsgemeinschaft dürfte dabei keine Lösung sein. Es ist jetzt angezeigt, offen und – notfalls kontrovers – zu diskutieren, wie ein künftiger Bundesstaat auf europäischer Ebene aussehen könnte.
Understanding the shift from micro to macro-prudential thinking: a discursive network analysis
(2016)
While some economists argued for macro-prudential regulation pre-crisis, the macro-prudential approach and its emphasis on endogenously created systemic risk have only gained prominence post-crisis. Employing discourse and network analysis on samples of the most cited scholarly works on banking regulation as well as on systemic risk (60 sources each) from 1985 to 2014, we analyze the shift from micro to macro-prudential thinking in the shift to the post crisis period. Our analysis demonstrates that the predominance of formalism, particularly, partial equilibrium analysis along with the exclusion of historical and practitioners’ styles of reasoning from banking regulatory studies impeded economists from engaging seriously with the endogenous sources of systemic risk prior to the crisis. Post-crisis, these topics became important in this discourse, but the epistemological failures of banking regulatory studies pre-crisis were not sufficiently recognized. Recent attempts to conceptualize and price systemic risk as a negative externality point to the persistence of formalism and equilibrium thinking, with its attending dangers of incremental innovation due to epistemological barriers constrains theoretical progress, by excluding observed phenomena, which cannot yet be accommodated in mathematical models.
This paper investigates the potential implications of say on pay on management remuneration in Germany. We try to shed light on some key aspects by presenting quantitative data that allows us to gauge the pertinent effects of the German natural experiment that originates with the 2009 amendments to the Stock Corporation Act of 1965. In order to do this, we deploy a hand-collected data set for Germany's major firms (i.e. DAX 30), for the years 2006-2012. Rather than focusing exclusively on CEO remuneration we collected data for all members of the management board for the whole period under investigation. We observe that the compensation packages of management board members of Germany's DAX30-firms are quite closely linked to key performance measures. In addition, we find that salaries increase with the size of the company and that ownership concentration has no significant effect on compensation. Also, our findings suggest that the two-tier system seems to matter a lot when it comes to compensation. However, it would be misleading to state that we see no significant impact of the introduction of the German say on pay-regime. Our findings suggest that supervisory boards anticipate shareholder-behavior.
Using two datasets containing demographically representative samples of the Dutch population, I study how lifetime experiences of aggregate labor market conditions affect personality. Three sets of findings are reported. First, experienced aggregate unemployment is negatively correlated with the levels of all Big Five personality traits, except for conscientiousness (no significant correlation). Second, in panel data models with individual fixed effects I find that changes in experienced aggregate unemployment cause changes in emotional stability and agreeableness for men, and conscientiousness for women. The correlation is positive, and effects are economically large. Thirdly, I report suggestive evidence that the main driver is experienced aggregate unemployment, instead of other macroeconomic variables as experienced GDP, stock market returns or inflation. Taken together, these findings suggest that changes in Big Five personality traits are systematically related to experienced aggregate labor market conditions.
Steueroasen besitzen drei wichtige Merkmale, die aus der Sicht von Steuerhinterziehern und Steuervermeidern anderer Länder besondere Anziehungskraft haben. Sie bieten niedrige Steuersätze für alle oder für bestimmte Kapitaleinkommen. Sie weisen eine hohe politische Stabilität und funktionierende Institutionen auf. Schließlich verbinden sie dies mit einem hohen Maß an faktischer Intransparenz in den Besitzstrukturen von Briefkastenfirmen sowie einer ausgeprägten Vertraulichkeit von Bankdaten. Unter Führung der OECD hat sich in den letzten Jahren der politische Druck auf die internationalen Steueroasen erhöht und zu einer Reihe von bilateralen und multilateralen Abkommen zum Informationsaustausch geführt. Da diese Abkommen nicht alle Steueroasen umfassen, haben sie die Gesamtanlagen in den Steueroasen allerdings bisher nur in sehr geringem Umfang reduzieren können. In Deutschland werden die internationalen Abkommen der letzten Jahre von Seiten der Steuerpolitik aber bereits als Erfolg verbucht und eine stärker progressive Besteuerung von Kapitaleinkünften diskutiert. Falls weiterhin ein Teil der einschlägigen Steueroasen dem Informationsaustausch fernbleibt, bietet es sich an, auf bilateralem Wege Verhandlungen aufzunehmen oder den Druck über multilaterale Verfahren und Sanktionen zu erhöhen.
The global financial crisis and the ensuing criticism of macroeconomics have inspired researchers to explore new modeling approaches. There are many new models that deliver improved estimates of the transmission of macroeconomic policies and aim to better integrate the financial sector in business cycle analysis. Policy making institutions need to compare available models of policy transmission and evaluate the impact and interaction of policy instruments in order to design effective policy strategies. This paper reviews the literature on model comparison and presents a new approach for comparative analysis. Its computational implementation enables individual researchers to conduct systematic model comparisons and policy evaluations easily and at low cost. This approach also contributes to improving reproducibility of computational research in macroeconomic modeling. Several applications serve to illustrate the usefulness of model comparison and the new tools in the area of monetary and fiscal policy. They include an analysis of the impact of parameter shifts on the effects of fiscal policy, a comparison of monetary policy transmission across model generations and a cross-country comparison of the impact of changes in central bank rates in the United States and the euro area. Furthermore, the paper includes a large-scale comparison of the dynamics and policy implications of different macro-financial models. The models considered account for financial accelerator effects in investment financing, credit and house price booms and a role for bank capital. A final exercise illustrates how these models can be used to assess the benefits of leaning against credit growth in monetary policy.
We examine the dynamics of assets under management (AUM) and management fees at the portfolio manager level in the closed-end fund industry. We find that managers capitalize on good past performance and favorable investor perception about future performance, as reflected in fund premiums, through AUM expansions and fee increases. However, the penalties for poor performance or unfavorable investor perception are either insignificant, or substantially mitigated by manager tenure. Long tenure is generally associated with poor performance and high discounts. Our findings suggest substantial managerial power in capturing CEF rents. We also document significant diseconomies of scale at the manager level.
Chen and Zadrozny (1998) developed the linear extended Yule-Walker (XYW) method for determining the parameters of a vector autoregressive (VAR) model with available covariances of mixed-frequency observations on the variables of the model. If the parameters are determined uniquely for available population covariances, then, the VAR model is identified. The present paper extends the original XYW method to an extended XYW method for determining all ARMA parameters of a vector autoregressive moving-average (VARMA) model with available covariances of single- or mixed-frequency observations on the variables of the model. The paper proves that under conditions of stationarity, regularity, miniphaseness, controllability, observability, and diagonalizability on the parameters of the model, the parameters are determined uniquely with available population covariances of single- or mixed-frequency observations on the variables of the model, so that the VARMA model is identified with the single- or mixed-frequency covariances.
We assess the degree of market fragmentation in the euro-area corporate bond market by disentangling the determinants of the risk premium paid on bonds at origination. By looking at over 2,400 bonds we are able to isolate the country-specific effects which are a suitable indicator of the market fragmentation. We find that, after peaking during the sovereign debt crisis, fragmentation shrank in 2013 and receded to pre-crisis levels only in 2014. However, the low level of estimated market fragmentation is coupled with a still high heterogeneity in actual bond yields, challenging the consistency of the new equilibrium.
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