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PURPOSE: This theoretical study seeks to understand how the development of ‘Transnational Business Feminism’ in response to the 2008 financial crisis, was implemented in 2013 through Japan’s ‘Womenomics’ program. The paper further examines how efficient this said form of neoliberal feminist economic program was in in addressing vulnerabilities in the Japanese financial system during the ongoing Covid-19 pandemic. Finally, it looks at how the pandemic has shifted conversations around the future of gender and finance in Japan through the Environmental, Social and Governance (ESG) framework.
DESIGN/METHOD: Drawing on a variety of sources, this paper uses a case study research methodology as well as statistical data from a variety of sources to draw theoretical conclusions on the specific case of Japan’s economy.
RESULTS/FINDINGS: This paper reveals that the programs implemented by the Japanese government failed to address existing gender inequalities and systemic risk in the Japanese economy, and that women in Japan were hit much harder by the repercussions of the pandemic, in spite of Womenomics policies.
ORIGINALITY/VALUE: This study offers insights into the effectiveness of neoliberal feminist agendas in addressing systemic financial and economic risk, in order to help optimize the potential of ESG.
Over the last three decades, countries across the Andean region have moved toward legal recognition of indigenous justice systems. This turn toward legal pluralism, however, has been and continues to be heavily contested. The working paper explores a theoretical perspective that aims at analyzing and making sense of this contentious process by assessing the interplay between conflict and (mis)trust. Based on a review of the existing scholarship on legal pluralism and indigenous justice in the Andean region, with a particular focus on the cases of Bolivia and Ecuador, it is argued that manifest conflict over the contested recognition of indigenous justice can be considered as helpful and even necessary for the deconstruction of mistrust of indigenous justice. Still, such conflict can also help reproduce and even reinforce mistrust, depending on the ways in which conflict is dealt with politically and socially. The exploratory paper suggests four proposition that specify the complex and contingent relationship between conflict and (mis)trust in the contested negotiation of pluralist justice systems in the Andean region.
Testing frequency and severity risk under various information regimes and implications in insurance
(2023)
We build on Peter et al. (2017) who examined the benefit of testing frequency risk under various information regimes. We first consider testing only severity risk, and whether the principle of indemnity, i.e. the usual contract term that excludes claims payments above the resulting insured loss, affects the insurance contracts offered and purchased. Under information regimes which are less restrictive (in terms of obtaining and using customer information), it is possible for the insurer to offer different contracts for tested and untested individuals. In the absence of the principle of indemnity, individuals will test their severity risk and a separating equilibrium ensues. With the principle of indemnity, given an actuarially fair pooled contract, individuals will not test for severity under less restrictive information regimes; a pooling equilibrium thus ensues. Under more restrictive information regimes, the insurer offers separating contracts. Individuals will test for severity and purchase appropriate contracts. We also consider testing for both frequency and severity risk. The results here are more varied. The highest gain in efficiency from testing results from one of the more restrictive information regimes. Generally under all information regimes, there is a greater gain in efficiency without the principle of indemnity than with the principle of indemnity.
Can right‐wing terrorism increase support for far‐right populist parties and if so, why? Exploiting quasi‐random variation between successful and failed attacks across German municipalities, we find that successful attacks lead to significant increases in the vote share for the right‐wing, populist Alternative für Deutschland (AfD) party in state elections. Investigating channels, we find that successful attacks lead to differential increases in turnout which are mainly captured by the AfD. Using the German SOEP, a longitudinal panel of individuals, we investigate terror’s impact on individual political attitudes. We first document that people residing in municipalities that experience successful or failed attacks are indistinguishable. We then show that successful terror leads individuals to prefer the AfD, adopt more populist attitudes and report significantly greater political participation at the local level. Terror also leads voters to migrate away from (some) mainstream parties to the AfD. We also find differential media reporting: successful attacks receive more media coverage among local and regional publishers, coverage which makes significantly more use of words related to Islam and terror. Our results hold despite the fact that most attacks are motivated by right‐wing causes and targeted against migrants. Moreover, successful attacks that receive the most media coverage have nearly double the effect on the AfD vote share in state elections and they also increase the AfD vote share in Federal elections, highlighting media salience as a driver of our overall results.
This paper investigates stock market reaction to greenwashing by analyzing a new channel whereby companies change their names to green-related ones (i.e., names that evoke green and sustainable sentiments) to persuade the public that their activities are green. The findings reveal a striking positive stock price reaction to the announcement of corporate name changes to green-related names only for companies not involved in green activities at the time of the announcement. However, over an extended period of time, companies unrelated to green activities experience substantial negative abnormal returns if they fail to align their operational focus with the new name after the change.
We present determinacy bounds on monetary policy in the sticky information model. We find that these bounds are more conservative here when the long run Phillips curve is vertical than in the standard Calvo sticky price New Keynesian model. Specifically, the Taylor principle is now necessary directly - no amount of output targeting can substitute for the monetary authority’s concern for inflation. These determinacy bounds are obtained by appealing to frequency domain techniques that themselves provide novel interpretations of the Phillips curve.
This paper examines the performance of 538 sovereign wealth fund (SWF) investments into venture capital, private equity, and real asset funds (“alternative asset funds”) from 52 countries around the world over the years 1995-2020. The data indicate SWFs are significantly slower to fully liquidate and earn lower returns from their investments, particularly from their investments in venture capital funds. The longer duration and lower performance of SWFs is more pronounced for strategic SWFs than savings SWFs. We show that venture capital fund investments are more likely to be in countries with lower quality disclosure indices. SWFs are more often in buyout funds, and in larger funds with a greater number of limited partners. SWF performance is enhanced by having different types of institutional investors in the same limited partnership. Overall, the data indicate sovereign wealth funds make large investments in alternative asset funds with a longer-term view and earn a lower financial return consistent with strategic and political SWF investment motives.
This paper applies structure preserving doubling methods to solve the matrix quadratic underlying the recursive solution of linear DSGE models. We present and compare two Structure-Preserving Doubling Algorithms ( SDAs) to other competing methods – the QZ method, a Newton algorithm, and an iterative Bernoulli approach – as well as the related cyclic and logarithmic reduction algorithms. Our comparison is completed using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium scale New Keynesian model of Smets and Wouters (2007) iteratively. We find that both SDAs perform very favorably relative to QZ, with generally more accurate solutions computed in less time. While we collect theoretical convergence results that promise quadratic convergence rates to a unique stable solution, the algorithms may fail to converge when there is a breakdown due to singularity of the coefficient matrices in the recursion. One of the proposed algorithms can overcome this problem by an appropriate (re)initialization. This SDA also performs particular well in refining solutions of different methods or from nearby parameterizations.
This paper presents and compares Bernoulli iterative approaches for solving linear DSGE models. The methods are compared using nearly 100 different models from the Macroeconomic Model Data Base (MMB) and different parameterizations of the monetary policy rule in the medium-scale New Keynesian model of Smets and Wouters (2007) iteratively. I find that Bernoulli methods compare favorably in solving DSGE models to the QZ, providing similar accuracy as measured by the forward error of the solution at a comparable computation burden. The method can guarantee convergence to a particular, e.g., unique stable, solution and can be combined with other iterative methods, such as the Newton method, lending themselves especially to refining solutions.
Shallow meritocracy
(2023)
Meritocracies aspire to reward hard work and promise not to judge individuals by the circumstances into which they were born. However, circumstances often shape the choice to work hard. I show that people's merit judgments are "shallow" and insensitive to this effect. They hold others responsible for their choices, even if these choices have been shaped by unequal circumstances. In an experiment, US participants judge how much money workers deserve for the effort they exert. Unequal circumstances disadvantage some workers and discourage them from working hard. Nonetheless, participants reward the effort of disadvantaged and advantaged workers identically, regardless of the circumstances under which choices are made. For some participants, this reflects their fundamental view regarding fair rewards. For others, the neglect results from the uncertain counterfactual. They understand that circumstances shape choices but do not correct for this because the counterfactual—what would have happened under equal circumstances—remains uncertain.
Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In their proposed approach, the authors take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, their results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.
Retained earnings and foreign portfolio ownership: implications for the current account debate
(2023)
In some countries, a sizable fraction of savings is derived from corporate savings. Although larger, traded corporations are often co-owned by foreign portfolio investors, current international accounting standards allocate all corporate savings to the host country. This paper suggests a framework to correct for this misleading attribution and applies this concept to Germany. For the years 2012 to 2020, our corrections retrospectively reduce German savings and consequently the German current account surplus by, on average, €11.5bn annually. This amounts to approximately five percent of Germany’s average official current account surplus (€226.6bn) across these years.
Industry concentration and markups in the US have been rising over the last 3-4 decades. However, the causes remain largely unknown. This paper uses machine learning on regulatory documents to construct a novel dataset on compliance costs to examine the effect of regulations on market power. The dataset is comprehensive and consists of all significant regulations at the 6-digit NAICS level from 1970-2018. We find that regulatory costs have increased by $1 trillion during this period. We document that an increase in regulatory costs results in lower (higher) sales, employment, markups, and profitability for small (large) firms. Regulation driven increase in concentration is associated with lower elasticity of entry with respect to Tobin's Q, lower productivity and investment after the late 1990s. We estimate that increased regulations can explain 31-37% of the rise in market power. Finally, we uncover the political economy of rulemaking. While large firms are opposed to regulations in general, they push for the passage of regulations that have an adverse impact on small firms.
Can consumption-based mechanisms generate positive and time-varying real term premia as we see in the data? I show that only models with time-varying risk aversion or models with high consumption risk can independently produce these patterns. The latter explanation has not been analysed before with respect to real term premia, and it relies on a small group of investors exposed to high consumption risk. Additionally, it can give rise to a “consumption-based arbitrageur” story of term premia. In relation to preferences, I consider models with both time-separable and recursive utility functions. Specifically for recursive utility, I introduce a novel perturbation solution method in terms of the intertemporal elasticity of substitution. This approach has not been used before in such models, it is easy to implement, and it allows a wide range of values for the parameter of intertemporal elasticity of substitution.
This paper analyzes the current implementation status of sustainability and taxonomy-aligned disclosure under the Sustainable Finance Disclosure Regulation (SFDR) as well as the development of the SFDR categorization of funds offered via banks in Germany. Examining data provided by WM Group, which consists of more than 10,000 investment funds and 2,000 index funds between September 2022 and March 2023, we have observed a significant proportion of Article 9 (dark green) funds transitioning to Article 8 (light green) funds, particularly among index funds. As a consequence of this process, the profile of the SFDR classes has sharpened, which reflects an increased share of sustainable investments in the group of Article 9 funds. When differentiating between environmental and social investments, the share of environmental investments increased, but the share of social investments decreased in the group of Article 9 funds at the beginning of 2023. The share of taxonomy-aligned investments is very low, but slightly increasing for Article 9 funds. However, by March 2023 only around 1,000 funds have reported their sustainability proportions and this picture might change due to legal changes which require all funds in the scope of the SFDR to report these proportions in their annual reports being published after 1 January 2023.
We develop a quantity-driven general equilibrium model that integrates the term structure of interest rates with the repurchase agreements (repo) market to shed light on the com-bined effects of quantitative easing (QE) on the bond and money markets. We characterize in closed form the endogenous dynamic interaction between bond prices and repo rates, and show (i) that repo specialness dampens the impact of any given quantity of asset pur-chases due to QE on the slope of the term structure and (ii) that bond scarcity resulting from QE increases repo specialness, thus strengthening the local supply channel of QE.
The European low-carbon transition began in the last few decades and is accelerating to achieve net-zero emissions by 2050. This paper examines how climate-related transition indicators of a large European corporate firm relate to its CDS-implied credit risk across various time horizons. Findings show that firms with higher GHG emissions have higher CDS spreads at all tenors, including the 30-year horizon, particularly after the 2015 Paris Agreement, and in prominent industries such as Electricity, Gas, and Mining. Results suggest that the European CDS market is currently pricing, to some extent, albeit small, the exposure to transition risk for a firm across different time horizons. However, it fails to account for a company’s efforts to manage transition risks and its exposure to the EU Emissions Trading Scheme. CDS market participants seem to find challenging to risk-differentiate ETS-participating firms from other firms.
Recent regulatory measures such as the European Union’s AI Act re-quire artificial intelligence (AI) systems to be explainable. As such, under-standing how explainability impacts human-AI interaction and pinpoint-ing the specific circumstances and groups affected, is imperative. In this study, we devise a formal framework and conduct an empirical investiga-tion involving real estate agents to explore the complex interplay between explainability of and delegation to AI systems. On an aggregate level, our findings indicate that real estate agents display a higher propensity to delegate apartment evaluations to an AI system when its workings are explainable, thereby surrendering control to the machine. However, at an individual level, we detect considerable heterogeneity. Agents possess-ing extensive domain knowledge are generally more inclined to delegate decisions to AI and minimize their effort when provided with explana-tions. Conversely, agents with limited domain knowledge only exhibit this behavior when explanations correspond with their preconceived no-tions regarding the relationship between apartment features and listing prices. Our results illustrate that the introduction of explainability in AI systems may transfer the decision-making control from humans to AI under the veil of transparency, which has notable implications for policy makers and practitioners that we discuss.
Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent price setting, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a "global monetary cycle" with other countries importing the monetary stance of the U.S. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. Thanks to the dominance of the dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare than other economies. Although international cooperation benefits other countries by improving global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to sustain.
In his speech at the conference „The SNB and its Watchers“, Otmar Issing, member of the ECB Governing Council from its start in 1998 until 2006, takes a look back at more than twenty years of the conference series „The ECB and Its Watchers“. In June 1999, Issing established this format together with Axel Weber, then Director of the Center for Financial Studies, to discuss the monetary policy strategy of the newly founded central bank with a broad circle of participants, that is academics, bank economists and members of the media on a „neutral ground“. At the annual conference, the ECB and its representatives would play an active role and engage in a lively exchange of view with the other participants. Over the years, Volker Wieland took over as organizer of the conference series, which also was adopted by other central banks. In his contribution at the second conference „The SNB and its Watchers“, Issing summarizes the experience gained from over twenty years of the ECB Watchers Conference.
This paper develops and implements a backward and forward error analysis of and condition numbers for the numerical stability of the solutions of linear dynamic stochastic general equilibrium (DSGE) models. Comparing seven different solution methods from the literature, I demonstrate an economically significant loss of accuracy specifically in standard, generalized Schur (or QZ) decomposition based solutions methods resulting from large backward errors in solving the associated matrix quadratic problem. This is illustrated in the monetary macro model of Smets and Wouters (2007) and two production-based asset pricing models, a simple model of external habits with a readily available symbolic solution and the model of Jermann (1998) that lacks such a symbolic solution - QZ-based numerical solutions miss the equity premium by up to several annualized percentage points for parameterizations that either match the chosen calibration targets or are nearby to the parameterization in the literature. While the numerical solution methods from the literature failed to give any indication of these potential errors, easily implementable backward-error metrics and condition numbers are shown to successfully warn of such potential inaccuracies. The analysis is then performed for a database of roughly 100 DSGE models from the literature and a large set of draws from the model of Smets and Wouters (2007). While economically relevant errors do not appear pervasive from these latter applications, accuracies that differ by several orders of magnitude persist.
Standard applications of the consumption-based asset pricing model assume that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurables. As a consequence, energy consumption affects the pricing function as a separate factor. Variation in energy consumption betas explains a large part of the premia related to value, investment, and operating profitability. For example, value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the oil supply shocks that also affect households.
An unfamiliar term in the not-too-distant past, “net zero” has become a headline-maker in the business and financial world with the growing importance of climate change. Succumbing to increasing pressure, companies and financial institutions around the world have come to adopt net-zero transition plans and targets, pledging to hit certain emission-reduction targets in a long-term period. Moreover, regulators around the world have started to require the disclosure or adoption of net-zero transition plans and targets.
However, an unintended consequence of net-zero transition commitments has been the increased popularity of divestments. That is, many firms seeking to fulfill a net-zero plan are passing on carbon-intensive assets (i.e., oil, gas, and coal assets) to other firms that are likely to be non-committal to environmental goals or that operate under less pressure from investors, stakeholders, and regulators. Such divestments, technically mergers and acquisitions (M&A) transactions, present an ideal opportunity to improve a divesting firm’s environmental record and reach ambitious net-zero goals, creating the impression that an emission reduction has occurred. However, the key is how acquiring firms handle these assets. If they continue operating as before, there will not be an overall improvement for the global climate. Worse, such assets can be operated by new owners in a way that causes more emissions. In any case, such divestments undermine the credibility and value of net-zero ambitions by allowing firms to reach targets by simply divesting assets.
This article explores the reasons and motivations for divestments or, more broadly M&As of carbon-intensive assets and explains why the increased role of net-zero commitments can be undermined by those transactions. We provide some evidence to illustrate the landscape of such transactions and the concerns they give rise to. Lastly, we explore several policy options to address the problem.
Fund companies regularly send shareholder letters to their investors. We use textual analysis to investigate whether these letters’ writing style influences fund flows and whether it predicts performance and investment styles. Fund investors react to the tone and content of shareholder letters: A less negative tone leads to higher net flows. Thus, fund companies can use shareholder letters as a tactical instrument to influence flows. However, at the same time, a dishonest communication that is not consistent with the fund’s actual performance decreases flows. A positive writing style predicts higher idiosyncratic risk as well as more style bets, while there is no consistent predictive power for future performance.
In order to reach climate neutrality by 2050, the European Union is taking action in the form of extensive sustainability regulations with the aim to push the private sector towards sustainable economic activities. In this context, a new instrument to finance a company’s sustainability transition has been developed: the sustainability-linked bond (SLB). This paper analyzes the SLB market’s efficiency in attracting those companies that are most crucial for a successful sustainability transition, namely carbon-intensive companies and companies that are lagging behind in their sustainability transition, defined as ESG laggards. By developing a conceptual framework for the SLB market and running a probit and logit regression estimation, this paper shows that the SLB market efficiently attracts carbon-intensive companies, but fails to attract ESG laggards. Moreover, the paper identifies four success factors for the SLB market to improve its future accessibility and credibility.
Biodiversity loss poses a significant threat to the global economy and affects ecosystem services on which most large companies rely heavily. The severe financial implications of such a reduced species diversity have attracted the attention of companies and stakeholders, with numerous calls to increase corporate transparency. Using textual analysis, this study thus investigates the current state of voluntary biodiversity reporting of 359 European blue-chip companies and assesses the extent to which it aligns with the upcoming disclosure framework of the Task Force on Nature-related Financial Disclosures (TNFD). The descriptive results suggest a substantial gap between current reporting practices and the proposed TNFD framework, with disclosures largely lacking quantification, details and clear targets. In addition, the disclosures appear to be relatively unstandardized. Companies in sectors or regions exposed to higher nature-related risks as well as larger companies are more likely to report on aspects of biodiversity. This study contributes to the emerging literature on nature-related risks and provides detailed insights on the extent of the reporting gap in light of the upcoming standards.
Investors' return expectations are pivotal in stock markets, but the reasoning behind these expectations remains a black box for economists. This paper sheds light on economic agents' mental models -- their subjective understanding -- of the stock market, drawing on surveys with the US general population, US retail investors, US financial professionals, and academic experts. Respondents make return forecasts in scenarios describing stale news about the future earnings streams of companies, and we collect rich data on respondents' reasoning. We document three main results. First, inference from stale news is rare among academic experts but common among households and financial professionals, who believe that stale good news lead to persistently higher expected returns in the future. Second, while experts refer to the notion of market efficiency to explain their forecasts, households and financial professionals reveal a neglect of equilibrium forces. They naively equate higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. Third, a series of experimental interventions demonstrate that these naive forecasts do not result from inattention to trading or price responses but reflect a gap in respondents' mental models -- a fundamental unfamiliarity with the concept of equilibrium.
Mamma mia! Revealing hidden heterogeneity by PCA-biplot : MPC puzzle for Italy's elderly poor
(2023)
I investigate consumption patterns in Italy and use a PCA-biplot to discover a consumption puzzle for the elderly poor. Data from the third wave (2017) of the Eurosystem’s Household Finance and Consumption Survey (HFCS) indicate that Italian poor old-aged households boast lower levels of the marginal propensity to consume (MPC) than suggested by the dominant consumption models. A customized regression analysis exhibits group differences with richer peers to be only half as large as prescribed by a traditional linear regression model. This analysis has benefited from a visualization technique for high-dimensional matrices related to the unsupervised machine learning literature. I demonstrate that PCA-biplots are a useful tool to reveal hidden relations and to help researchers to formulate simple research questions. The method is presented in detail and suggestions on incorporating it in the econometric modeling pipeline are given.
Central clearing counterparties (CCPs) were established to mitigate default losses resulting from counterparty risk in derivatives markets. In a parsimonious model, we show that clearing benefits are distributed unevenly across market participants. Loss sharing rules determine who wins or loses from clearing. Current rules disproportionately benefit market participants with flat portfolios. Instead, those with directional portfolios are relatively worse off, consistent with their reluctance to voluntarily use central clearing. Alternative loss sharing rules can address cross-sectional disparities in clearing benefits. However, we show that CCPs may favor current rules to maximize fee income, with externalities on clearing participation.
Flows of funds run by banks or by firms that belong to the same financial group as a bank are less volatile and less sensitive to bad past performance. This enables bank-affiliated funds to better weather distress and to hold lower precautionary cash buffers in comparison with their unaffiliated peers. Banks provide liquidity support to distressed affiliated funds by buying shares of those funds that are experiencing large outflows. This, in turn, diminishes the severity of strategic complementarities in investors’ redemptions. Liquidity support and other benefits of bank affiliation are conditional on the financial health of the parent company. Distress in the banking system spills over to the mutual fund sector via ownership links. Our research high-lights substantial dependencies between the banking system and the asset management industry, and identifies an important channel via which financial stability risks depend on the organisational structure of the financial sector.
Life insurance convexity
(2023)
Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per year. We show that these fire sales are fueled by surrender value guarantees and insurers’ long-term investments.
Measuring and reducing energy consumption constitutes a crucial concern in public policies aimed at mitigating global warming. The real estate sector faces the challenge of enhancing building efficiency, where insights from experts play a pivotal role in the evaluation process. This research employs a machine learning approach to analyze expert opinions, seeking to extract the key determinants influencing potential residential building efficiency and establishing an efficient prediction framework. The study leverages open Energy Performance Certificate databases from two countries with distinct latitudes, namely the UK and Italy, to investigate whether enhancing energy efficiency necessitates different intervention approaches. The findings reveal the existence of non-linear relationships between efficiency and building characteristics, which cannot be captured by conventional linear modeling frameworks. By offering insights into the determinants of residential building efficiency, this study provides guidance to policymakers and stakeholders in formulating effective and sustainable strategies for energy efficiency improvement.
My aim in this paper is to make the debates about epistemic injustice fruitful for an analysis of trust in the knowledge of others. Epistemic trust is understood here in a broad sense: not only as trust in scientific knowledge or expert knowledge, but also as trust in implicit, positioned and experience-based knowledge. Using insights from discussions of epistemic injustice, I argue for three interrelated theses:
1. Questions of epistemic trust and trustworthiness cannot be answered with reference to individual virtue alone; rather, they have a structural component.
2. The rationality of epistemic trust must be analyzed against the background of social structures and social relations of domination.
3. Epistemic trust is (also) a political phenomenon and epistemically just relations depend on political transformation processes that promote equality.
This research focuses on the cost of financing green projects on the primary bond market and tests for a potential price differential between green bonds issued by government entities and those issued by supranational and private sector issuers. Our findings indicate that government entities benefit from more favorable pricing conditions worldwide. This advantage is growing over time and particularly pronounced for sovereigns and municipal authorities. Our analysis also reveals that country-specific factors, such as strong political commitment to address climate change, low income level and high degree of indebtedness are significant predictors of the pricing spread across bonds.
This paper documents that the bond investments of insurance companies transmit shocks from insurance markets to the real economy. Liquidity windfalls from household insurance purchases increase insurers' demand for corporate bonds. Exploiting the fact that insurers persistently invest in a small subset of firms for identification, I show that these increases in bond demand raise bond prices and lower firms' funding costs. In response, firms issue more bonds, especially when their bond underwriters are well connected with investors. Firms use the proceeds to raise investment rather than equity payouts. The results emphasize the significant impact of investor demand on firms' financing and investment activities.
Most insurers in the European Union determine their regulatory capital requirements based on the standard formula of Solvency II. However, there is evidence that the standard formula inaccurately reflects insurers’ risk situation and may provide misleading steering incentives. In the second pillar, Solvency II requires insurers to perform a so-called “Own Risk and Solvency Assessment” (ORSA). In their ORSA, insurers must establish their own risk measurement approaches, including those based on scenarios, in order to derive suitable risk assessments and address shortcomings of the standard formula. The idea of this paper is to identify scenarios in such a way that the standard formula in connection with the ORSA provides a reliable basis for risk management decisions. Using an innovative method for scenario identification, our approach allows for a simple but relatively precise assessment of marginal and even non-marginal portfolio changes. We numerically evaluate the proposed approach in the context of market risk employing an internal model from the academic literature and the Solvency Capital Requirement (SCR) calculation under Solvency II.
This literature survey explores the potential avenues for the design of a green auto asset-backed security by focusing on the European auto securitization market. In this context, we examine the entire value chain of the securitization process to understand the incentives and interests involved at various stages of the transaction. We review recent regulatory developments, feasibility concerns, and potential designs of a sustainable securitization framework. Our study suggests that a Green Auto ABS should be based on both a green use of proceeds and a green collateral-based methodology.
Using German and US brokerage data we find that investors are more likely to sell speculative stocks trading at a gain. Investors’ gain realizations are monotonically increasing in a stock’s speculativeness. This translates into a high disposition effect for speculative and a much lower disposition effect for non-speculative stocks. Our findings hold across asset classes (stocks, passive, and active funds) and explain cross-sectional differences in investor selling behavior which previous literature attributed primarily to investor demographics. Our results are robust to rank or attention effects and can be linked to realization utility and rolling mental account.
We study the redistributive effects of inflation combining administrative bank data with an information provision experiment during an episode of historic inflation. On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion. Once they receive information on the debt-erosion channel, households update upwards their beliefs about nominal debt and their own real net wealth. These changes in beliefs causally affect actual consumption and hypothetical debt decisions. Our findings suggest that real wealth mediates the sensitivity of consumption to inflation once households are aware of the wealth effects of inflation.
Homeownership rates differ widely across European countries. We document that part of this variation is driven by differences in the fraction of adults co-residing with their par-ents. Comparing Germany and Italy, we show that in contrast to homeownership rates per household, homeownership rates per individual are very similar during the first part of the life cycle. To understand these patterns, we build an overlapping-generations model where individuals face uninsurable income risk and make consumption-saving and housing tenure decisions. We embed an explicit intergenerational link between children and parents to cap-ture the three-way trade-off between owning, renting, and co-residing. Calibrating the model to Germany we explore the role of income profiles, housing policies, and the taste for inde-pendence and show that a combination of these factors goes a long way in explaining the differential life-cycle patterns of living arrangements between the two countries.
Homeownership rates differ widely across European countries. We document that part of this variation is driven by differences in the fraction of adults co-residing with their parents. Comparing Germany and Italy, we show that in contrast to homeownership rates per household, homeownership rates per individual are very similar during the first part of the life cycle. To understand these patterns, we build an overlapping-generations model where individuals face uninsurable income risk and make consumption-saving and housing tenure decisions. We embed an explicit intergenerational link between children and parents to capture the three-way trade-off between owning, renting, and co-residing. Calibrating the model to Germany we explore the role of income profiles, housing policies, and the taste for independence and show that a combination of these factors goes a long way in explaining the differential life-cycle patterns of living arrangements between the two countries.
This paper examines the causes and consequences of hedge fund investments in exchange traded funds (ETFs) using U.S. data from 1998 to 2018. The data indicate that transient hedge funds and quasi-indexer hedge funds are substantially more likely to invest in ETFs. Unexpected hedge fund inflows cause a rise in ETF investments, and the economic significance of unexpected flow is more than twice as large for transient than quasi-indexer hedge funds. ETF investment is in general associated with lower hedge fund performance. But when ETF investment is accompanied by an increase in total flow and unexpected flow, the negative impact of ETF holdings on performance is mitigated. The data are consistent with the view that hedge fund ETF investment unrelated to unexpected flow is an agency cost of delegated portfolio management.
I have assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. I find that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced. I also find that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.
How does group identity affect belief formation? To address this question, we conduct a series of online experiments with a representative sample of individuals in the US. Using the setting of the 2020 US presidential election, we find evidence of intergroup preference across three distinct components of the belief formation cycle: a biased prior belief, avoid-ance of outgroup information sources, and a belief-updating process that places greater (less) weight on prior (new) information. We further find that an intervention reducing the salience of information sources decreases outgroup information avoidance by 50%. In a social learn-ing context in wave 2, we find participants place 33% more weight on ingroup than outgroup guesses. Through two waves of interventions, we identify source utility as the mechanism driving group effects in belief formation. Our analyses indicate that our observed effects are driven by groupy participants who exhibit stable and consistent intergroup preferences in both allocation decisions and belief formation across all three waves. These results suggest that policymakers could reduce the salience of group and partisan identity associated with a policy to decrease outgroup information avoidance and increase policy uptake.
A key technology driving the digital transformation of the economy is artificial intelligence (AI). It has gained a high degree of public attention with the initial release of the chatbot ChatGPT, which demonstrates the potential of generative AI (GAI) as a relatively new segment within AI. It is widely expected that GAI will shape the future of many industries and society in the coming years. This article provides a brief overview of the foundations of generative AI (“GAI”) including machine learning and what distinguishes it from other fields of AI. Furthermore, we look at important players in this emerging market, possible use cases and the expected economic potential as of today. It is apparent that, once again, a few US-based Big Tech firms are about to dominate this emerging technology and that the European tech sector is falling further behind. Finally, we conclude that the recently adopted Digital Markets Act (DMA) and the Digital Service Act (DSA) as well as the upcoming AI Act should be reviewed to ensure that the regulatory framework of European digital markets keeps up with the accelerated development of AI.
In crisis times, insurance companies might feel the pressure to present an investment portfolio performance that is superior to the market, since investment portfolios back the claims of policyholders and serve as a signal for the claims’ safety. I investigate how a stock market crisis as experienced over the course of the Covid-19 pandemic influences insurance firms’ decisions on the allocation of their corporate bond portfolio. I find that insurers shift their portfolio holdings towards lower credit risk assets as financial market conditions tighten. This tendency seems to be restricted by the liquidity risk of high-yield assets, and the credit risk of lower-rated investment grade assets. Both effects lead to an increase in the fraction of less liquid assets during the crash and the recovery.
This paper investigates retirees’ optimal purchases of fixed and variable longevity income annuities using their defined contribution (DC) plan assets and given their expected Social Security benefits. As an alternative, we also evaluate using plan assets to boost Social Security benefits through delayed claiming. We determine that including deferred income annuities in DC accounts is welfare enhancing for all sex/education groups examined. We also show that providing access to well-designed variable deferred annuities with some equity exposure further enhances retiree wellbeing, compared to having access only to fixed annuities. Nevertheless, for the least educated, delaying claiming Social Security is preferred, whereas the most educated benefit more from using accumulated DC plan assets to purchase deferred annuities.
We document the structure of firm-bank relationships across the eleven largest euro area countries and present new stylised facts using novel data from the recent credit registry of the Eurosystem - AnaCredit. We look at the number of banking relationships, reliance on the main bank, credit instruments, loan maturity and interest rates. The granularity of the data allows us to account for cross country differences in firm characteristics. Firms in Southern European countries borrow from a larger number of banks and obtain a lower share of credit from the main bank compared to those in Northern European countries. They also tend to borrow more on short term, more expensive instruments and to obtain loans with shorter maturity. This is consistent with the hypothesis that Southern European countries rely less on relationship banking and obtain credit less conducive to firm growth, in line with the smaller average size of Southern European firms. Instead, no clear pattern emerges in terms of interest rates, consistent with the idea that banks appropriate part of the surplus generated by relationship lending through higher rates.
Fabo, Janˇcokov ́a, Kempf, and P ́astor (2021) show that papers written by central bank researchers find quantitative easing (QE) to be more effective than papers written by academics. Weale and Wieladek (2022) show that a subset of these results lose statistical significance when OLS regressions are replaced by regressions that downweight outliers. We examine those outliers and find no reason to downweight them. Most of them represent estimates from influential central bank papers published in respectable academic journals. For example, among the five papers finding the largest peak effect of QE on output, all five are published in high-quality journals (Journal of Monetary Economics, Journal of Money, Credit and Banking, and Applied Economics Letters), and their average number of citations is well over 200. Moreover, we show that these papers have supported policy communication by the world’s leading central banks and shaped the public perception of the effectiveness of QE. New evidence based on quantile regressions further supports the results in Fabo et al. (2021).
A key solution for public good provision is the voluntary formation of institutions that commit players to cooperate. Such institutions generate inequality if some players decide not to participate but cannot be excluded from cooperation benefits. Prior research with small groups emphasizes the role of fairness concerns with positive effects on cooperation. We show that effects do not generalize to larger groups: if group size increases, groups are less willing to form institutions generating inequality. In contrast to smaller groups, however, this does not increase the number of participating players, thereby limiting the positive impact of institution formation on cooperation.