Universitätspublikationen
Refine
Year of publication
- 2014 (146) (remove)
Document Type
- Working Paper (146) (remove)
Language
- English (146) (remove)
Has Fulltext
- yes (146)
Is part of the Bibliography
- no (146)
Keywords
- financial crisis (6)
- monetary policy (6)
- transparency (4)
- Household Finance (3)
- Labor income risk (3)
- Portfolio choice (3)
- Systemic risk (3)
- asset pricing (3)
- financial literacy (3)
- shadow banking (3)
Institute
- Wirtschaftswissenschaften (127)
- Center for Financial Studies (CFS) (117)
- Sustainable Architecture for Finance in Europe (SAFE) (74)
- House of Finance (HoF) (71)
- Rechtswissenschaft (10)
- Institute for Monetary and Financial Stability (IMFS) (6)
- Exzellenzcluster Die Herausbildung normativer Ordnungen (4)
- Gesellschaftswissenschaften (3)
- Informatik (2)
- Institut für sozial-ökologische Forschung (ISOE) (2)
We analyze the risk premium on bank bonds at origination with a special focus on the role of implicit and explicit public guarantees and the systemic relevance of the issuing institutions. By looking at the asset swap spread on 5,500 bonds, we find that explicit guarantees and sovereign creditworthiness have a substantial effect on the risk premium. In addition, while large institutions still enjoy lower issuance costs linked to the TBTF framework, we find evidence of enhanced market disciple for systemically important banks which face, since the onset of the financial crisis, an increased premium on bond placements.
Banks' financial distress, lending supply and consumption expenditure : [version december 2013]
(2014)
The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms' investment, where even temporary adverse credit supply shocks are associated with significant real effects.
he observed hump-shaped life-cycle pattern in individuals' consumption cannot be explained by the classical consumption-savings model. We explicitly solve a model with utility of both consumption and leisure and with educational decisions affecting future wages. We show optimal consumption is hump shaped and determine the peak age. The hump results from consumption and leisure being substitutes and from the implicit price of leisure being decreasing over time; more leisure means less education, which lowers future wages, and the present value of foregone wages decreases with age. Consumption is hump shaped whether the wage is hump shaped or increasing over life.
Consumption-based asset pricing with rare disaster risk : a simulated method of moments approach
(2014)
The rare disaster hypothesis suggests that the extraordinarily high postwar U.S. equity premium resulted because investors ex ante demanded compensation for unlikely but calamitous risks that they happened not to incur. Although convincing in theory, empirical tests of the rare disaster explanation are scarce. We estimate a disaster-including consumption-based asset pricing model (CBM) using a combination of the simulated method of moments and bootstrapping. We consider several methodological alternatives that differ in the moment matches and the way to account for disasters in the simulated consumption growth and return series. Whichever specification is used, the estimated preference parameters are of an economically plausible size, and the estimation precision is much higher than in previous studies that use the canonical CBM. Our results thus provide empirical support for the rare disaster hypothesis, and help reconcile the nexus between real economy and financial markets implied by the consumption-based asset pricing paradigm.
I numerically solve realistically calibrated life cycle consumption-investment problems in continuous time featuring stochastic mortality risk driven by jumps, unspanned labor income as well as short-sale and liquidity constraints and a simple insurance. I compare models with deterministic and stochastic hazard rate of death to a model without mortality risk. Mortality risk has only minor effects on the optimal controls early in the life cycle but it becomes crucial in later years. A diffusive component in the hazard rate of death has no significant impact, whereas a jump component is desired by the agent and influences optimal controls and wealth evolution. The insurance is used to ensure optimal bequest such that there is no accidental bequest. In the absence of the insurance, the biggest part of bequest is accidental.
The pi-calculus is a well-analyzed model for mobile processes and mobile computations.
While a lot of other process and lambda calculi that are core languages of higher-order concurrent and/or functional programming languages use a contextual semantics observing the termination behavior of programs in all program contexts, traditional program equivalences in the pi-calculus are bisimulations and barbed testing equivalences, which observe the communication capabilities of processes under reduction and in contexts.
There is a distance between these two approaches to program equivalence which makes it hard to compare the pi-calculus with other languages. In this paper we contribute to bridging this gap by investigating a contextual semantics of the synchronous pi-calculus with replication and without sums.
To transfer contextual equivalence to the pi-calculus we add a process Stop as constant which indicates success and is used as the base to define and analyze the contextual equivalence which observes may- and should-convergence of processes.
We show as a main result that contextual equivalence in the pi-calculus with Stop conservatively extends barbed testing equivalence in the (Stop-free) pi-calculus. This implies that results on contextual equivalence can be directly transferred to the (Stop-free) pi-calculus with barbed testing equivalence.
We analyze the contextual ordering, prove some nontrivial process equivalences, and provide proof tools for showing contextual equivalences. Among them are a context lemma, and new notions of sound applicative similarities for may- and should-convergence.
9.01 This chapter outlines the development of Contingent Convertible Securities (CoCos) for financial institutions from their theoretical origins to their current form under the European Union’s Fourth Capital Requirements Directive framework and its Bank Recovery and Resolution Directive and examines the effect the framework and the directive have had on their design and ability to fulfill the ends for which they were initially conceived. It examines this from two viewpoints: the policy goals CoCos are meant to achieve and the corporate law issues raised by the requirements of CRD IV. On the policy side we conclude that CRD IV and the RRD have significantly limited the amount of CoCos a financial institution is likely to issue, but expanded their possible forms by including write-down as well as convertible structures and narrowed the differences between them and pure regulatory bail-in structures, thus calling into question whether they are truly ‘going concern’ rather than ‘gone concern’ capital. On the company law side we conclude that a number of issues, in particular the limits on an authorization of management to issue CoCos and shares, the scope of the shareholders’ right of pre-emption, the concept of dilution and the distinction between contributions in cash and in kind merit closer attention than they appear to have received in the current discussion on CoCos.
We examine the relationship between household wealth and self-control. Although self-control has been linked to consumption and financial behavior, its measurement remains an open issue. We employ a definition of self-control failure that follows literature in psychology, suggesting that three factors can render self-control defective: lack of planning, lack of monitoring, and lack of commitment to pre-set plans. Our measure combines those three ingredients and can be computed using a standard representative survey. We find that self-control failure is strongly associated with different household net wealth measures and with self-assessed financial distress.
This paper contrasts the recent European initiatives on regulating corporate groups with alternative approaches to the phenomenon. In doing so it pays particular regard to the German codified law on corporate groups as the polar opposite to the piecemeal approach favored by E.U. legislation.
It finds that the European Commission’s proposal to submit (significant) related party transactions to enhanced transparency, outside fairness review, and ex ante shareholder approval is both flawed in its design and based on contestable assumptions on informed voting of institutional investors. In particular, the contemplated exemption for transactions with wholly owned subsidiaries allows controlling shareholders to circumvent the rule extensively. Moreover, vesting voting rights with (institutional) investors will not lead to the informed assessment that is hoped for, because these investors will rationally abstain from active monitoring and rely on proxy advisory firms instead whose competency to analyze non-routine significant related party transactions is questionable.
The paper further delineates that the proposed recognition of an overriding interest of the group requires strong counterbalances to adequately protect minority shareholders and creditors. Hence, if the Commission choses to go down this route it might end up with a comprehensive regulation that is akin to the unpopular Ninth Company Law Directive in spirit, though not in content. The latter prediction is corroborated by the pertinent parts of the proposal for a European Model Company Act.
We examine the effects of credit default swaps (CDS), a major type of over-the-counter derivative, on the corporate liquidity management of the reference firms. CDS help firms to access the credit market since the lenders can hedge their credit risk more easily using these contracts. However, CDS-protected creditors can be tougher in debt renegotiations and less willing to support distressed borrowers, causing some firms to become more cautious. Consequently, we find that firms hold significantly more cash after the inception of CDS trading on their debt. The increase in cash holdings by CDS firms is more pronounced for financially constrained firms and firms facing higher refinancing risk. Moreover, bank relationships and outstanding credit facilities intensify the CDS effect on cash holding. Finally, firms with greater financial expertise hold more cash when their debt is referenced by CDS. These findings suggest that CDS, which are primarily a risk management tool for lenders, induce firms to adopt more conservative liquidity policies.
Expressivist theories of punishment, according to which a penal sanction articulates or expresses a certain meaning to the offender, to the victim and to society, become more and more prominent among the traditional theories of punishment as retribution or deterrence. What these theories have in common is the idea that the conveyance of the meaning is in need of a communicative action, and that the penal sanction is such a communicative act. This article argues that pure communicative theories of punishment face great difficulties in generating any justification for hard treatment. One challenge is that certain types of sanctions – in particularly, hard treatment – restrict the communicative opportunities of the incarcerated individual; which generates a paradox, in that it turns punishment into a communicative action of non-communication. Beyond that, moreover, all practices of hard treatment potentially become unnecessary, if expressing the moral message of censure constitutes a kind of action in itself, and as such, itself a treatment of the offender, embedded in a communicative relationship between offender, victim and society; such that we may be able to think of the history of punishment as a development where hard treatment becomes more and more unnecessary for the conveyance of the message.
I analyze a critical illness insurance in a consumption-investment model over the life cycle. I solve a model with stochastic mortality risk and health shock risk numerically. These shocks are interpreted as critical illness and can negatively affect the expected remaining lifetime, the health expenses, and the income. In order to hedge the health expense effect of a shock, the agent has the possibility to contract a critical illness insurance. My results highlight that the critical illness insurance is strongly desired by the agents. With an insurance profit of 20%, nearly all agents contract the insurance in the working stage of the life cycle and more than 50% of the agents contract the insurance during retirement. With an insurance profit of 200%, still nearly all working agents contract the insurance, whereas there is little demand in the retirement stage.
One of the motivations for establishing a European banking union was the desire to break the ties with between national regulators and domestic financial institutions in order to prevent regulatory capture. However, supervisory authority over the financial sector at the national level can also have valuable public benefits. The aim of this policy letter is to detail these public benefits in order to counter discussions that focus only on conflicts of interest. It is informed by an analysis of how financial institutions interacted with policy-makers in the design of national bank rescue schemes in response to the banking crisis of 2008. Using this information, it discusses the possible benefits of close cooperation between financial institutions and regulators and analyzes these in the wake of a European banking union.
Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.
We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board’s Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in non-boom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the sluggish pickup in consumption after 2008. First, households may have optimally adjusted to lower wealth by reducing their demand for debt and implicitly, their demand for consumption. Alternatively, banks may have been more reluctant to lend in areas with pronounced real estate declines. Our evidence is consistent with the second explanation. Renters with low risk scores, compared to homeowners in the same markets, reduced their levels of nonmortgage debt and credit card debt more in counties where house prices fell more. The contrast suggests that the observed reductions in aggregate borrowing were more driven by cutbacks in the provision of credit than by a demand-based response to lower housing wealth.
We document and study international differences in both ownership and holdings of stocks, private businesses, homes, and mortgages among households aged fifty or more in thirteen countries, using new and comparable survey data. We employ counterfactual techniques to decompose observed differences across the Atlantic, within the US, and within Europe into those arising from differences in population characteristics and differences in economic environments. We then correlate the latter differences to country-level indicators. Ownership across the range of the assets considered tends to be more widespread among US households. We document that shortly prior to the current crisis, US households tended to invest larger amounts in stocks and smaller ones in homes, and to have larger mortgages in older age, even controlling for characteristics. This is consistent with the high prevalence of negative equity associated with the current crisis. More generally, we find that differences in household characteristics often play a small role, while differences in economic environments tend to explain most of the observed differences in ownership rates and in amounts held. The latter differences are much more pronounced among European countries than among US regions, suggesting further potential for harmonization of policies and institutions.
Most simulated micro-founded macro models use solely consumer-demand aggregates in order to estimate deep economy-wide preference parameters, which are useful for policy evaluation. The underlying demand-aggregation properties that this approach requires, should be easy to empirically disprove: since household-consumption choices differ for households with more members, aggregation can be rejected if appropriate data violate an affine equation regarding how much individuals benefit from within-household sharing of goods. We develop a survey method that tests the validity of this equation, without utility-estimation restrictions via models. Surprisingly, in six countries, this equation is not rejected, lending support to using consumer-demand aggregates.
Does austerity pay off?
(2014)
Policy makers often implement austerity measures when the sustainability of public finances is in doubt and, hence, sovereign yield spreads are high. Is austerity successful in bringing about a reduction in yield spreads? We employ a new panel data set which contains sovereign yield spreads for 31 emerging and advanced economies and estimate the effects of cuts of government consumption on yield spreads and economic activity. The conditions under which austerity takes place are crucial. During times of fiscal stress, spreads rise in response to the spending cuts, at least in the short-run. In contrast, austerity pays off, if conditions are more benign.
Regulation of investor access to financial products is often based on product familiarity indicated by previous use. The underlying premise that lack of familiarity with a product class causes unwarranted participation is difficult to test. This paper uses household-level data from the ‘experiment’ of German reunification that (exogenously) offered to East Germans access to capitalist products (exogenously) unfamiliar to them. We compare the evolution of post-unification participation of former East and West Germans in financial products, controlling for relevant household characteristics. We vary familiarity differentials by considering (i) both unfamiliar ‘capitalist’ products (stocks, bonds, and consumer credit) and ones available in the East (savings accounts and life insurance); and (ii) cohorts with different exposure to capitalism. We find that East Germans participated immediately in unfamiliar risky securities, at rates comparable to West Germans of similar characteristics. They phased out disproportionate participation in previously familiar assets as familiarity with capitalist products grew. They were more likely to use consumer debt, partly to catch up with richer new peers. We find no signs of abrupt participation drops that could suggest mistakes or regret related to lack of familiarity.
This essay reviews a cornerstone of the European Banking Union project, the resolution of systemically important banks. The focus is on the inherent conflict between a possible intervention by resolution authorities, conditional on a crisis situation, and effective prevention prior to a crisis. Moreover, the paper discusses the rules for bail-in debt and conversion rules for different layers of debt. Finally, some organizational requirements to achieve effective resolution results will be analyzed.