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There is a prevalent view outside Greece that promotion of competitiveness is tantamount with price reductions for Greek goods and services. Massive horizontal salary cuts appear, at first, to promote competitiveness by reducing unit labor costs and to reduce fiscal deficits by reducing the wage bill of the public sector. Upon closer look, however, horizontal salary cuts have been much greater than needed for Greek competitiveness, providing an alibi vis a vis the Troika for reforms that are still to be implemented, but at the same time undermining both competitiveness and the potential to reduce public debt through sustainable development.
In den vergangenen Jahrzehnten wurden hohe Garantieverzinsungen in den Lebensversicherungsverträgen vereinbart. Dauert die herrschende Niedrigzinsphase noch einige Jahre an, wird es für einige Lebensversicherungsunternehmen schwierig werden, die gegebenen Langzeitgarantien über ihre Kapitalanlage zu erwirtschaften. Der Gesetzgeber sollte festlegen, dass Versicherungskunden nur an Bewertungsreserven beteiligt werden, die eine Höhe übersteigen, die zur Gewährleistung eines intergenerativen Risikoausgleichs notwendig ist. Weiterhin sollten Versicherungskunden nur an Bewertungsreserven beteiligt werden, die aus Kapitalanlagen entstehen, die nicht festverzinsliche Wertpapiere umfassen.
Am 6. Februar 2013 hat die Bundesregierung den "Entwurf eines Gesetzes zur Abschirmung von Risiken und zur Planung der Sanierung und Abwicklung von Kreditinstituten und Finanzgruppen” veröffentlicht. Artikel 2 des Gesetzesentwurfs sieht vor bei systemrelevanten Finanzinstitutionen das Einlagen- und Kreditgeschäft vom Handelsgeschäft abzutrennen. Die Zielsetzung des Gesetzentwurfs, Kapitalkosten wieder in direkte Abhängigkeit des Risikos von Geschäftsfeldern zu setzen und eine Abwicklung zu erleichtern, die ohne den Einsatz von Steuermitteln gelingen kann, ist begrüßenswert. In seiner derzeitigen Ausgestaltung läuft der Gesetzesentwurf jedoch Gefahr, zwar symbolträchtig zu sein, aber in der Zielerreichung hinsichtlich Stabilität des Finanzmarktes und Schutz von Einlegern und Steuerzahlern hinter den Erwartungen zurückzubleiben.
Die Stellungnahme bezieht sich auf die aktuellen Formulierungsvorschläge für Änderungen am DCGK für börsennotierte deutsche Aktiengesellschaften aus den Plenarsitzungen der Regierungskommission vom 9. Januar und 31. Januar 2013. Der Text enthält zudem Anmerkungen zur Aufsichtsratvergütung, zur Besetzung des Prüfungsausschusses mit Financial Experts, zu Fragen der Mitbestimmung und zu Möglichkeiten der Bündelung der Corporate Governance Berichterstattung.
Gesprächsreihe zu Strukturreformen im Europäischen Bankensektor: Managementvergütung im Bankensektor
(2013)
In der ersten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensektor“ diskutierten Professor Dr. Jan Krahnen und Dr. Thomas Mayer den im Liikanen-Bericht enthaltenen Vorschlag zur Managervergütung im Bankensektor. Der Vorschlag baut auf einem der Kernvorschläge der Liikanen-Kommission auf, nach dem Finanzinstitute gehalten sein sollen, einen Teil ihres Fremdkapitals so zu strukturieren, dass, bei Schieflage des Finanzinstituts, eine Inhaftungnahme der Gläubiger dieses Fremdkapitals möglich wird. Um dies zu erreichen, empfiehlt die Liikanen-Kommission für alle Banken, dass diese einen festgelegten Prozentsatz ihres Kapitals als „Bail-in Anleihen“ begeben müssen. Der Vorschlag zur Managervergütung sieht vor Bail-in Anleihen für die leistungsorientierte und anreizorientierte Entlohnung von Managern einzusetzen, um Anreize zu geben, die Risikopolitik des Unternehmens so zu verankern, dass auch längerfristig keine exorbitanten Risiken auftreten.
What happened in Cyprus
(2013)
This policy letter sheds light on the economic and political backround in Cyprus and provides an analyses of the factors which lead to an intensification of the crisis there. It discusses the severe consequences of the errors made in the recent establishment of an adjustment program for Cyprus by the Europroup for European economic management as a whole.
Mittels des Gesetzes zur zusätzlichen Aufsicht über beaufsichtigte Unternehmen eines Finanzkonglomerats (Konglomerate, die aus mehreren Unternehmen aus verschiedenen Finanzmarktsektoren bestehen, beispielsweise aus dem Bankensektor und dem Versicherungssektor) sollen Regelungslücken geschlossen werden, die insbesondere die Gefahr betreffen, die sich aus der „Ansteckung“ einzelner Finanzkonglomerats-Unternehmen ergeben. Die vorliegende Stellungnahme weist auf eine Inkonsistenz in der beabsichtigten Ansiedlung der Aufsichtskompetenz hin und bietet einen Vorschlag zur Präzisierung der Eigenmittelvorschriften.
Gesprächsreihe zu Strukturreformen im europäischen
Bankensektor : Zukunft der Universalbanken
(2013)
In der zweiten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensektor“ diskutierten Professor Dr. Jan Pieter Krahnen und Dr. Michael Kemmer die Zukunft der Universalbanken. Anlass war der Vorschlag der Liikanen-Kommission, dass Finanzinstitute einen Teil ihres Investmentbankings, den Eigenhandel und das Market-Making, ab einer bestimmten Größenordnung ausgliedern sollen.
Mindfully Resisting the Bandwagon – IT Implementation and Its Consequences in the Financial Crisis
(2013)
Although the ”financial meltdown” between 2007 and 2009 can be substantially attributed to herding behaviour in the subprime market for credit default swaps, a “mindless” IT implementation of participating financial services providers played a major role in the facilitation of the underlying bandwagon. The problem was a discrepancy between two core complementary capabilities: (1.) the (economic-rationalistic) ability to execute financial transactions (to comply with the herd) in milliseconds and (2.) the required contextualized mindfulness capabilities to comprehend the implications of the transactions being executed and the associated IT innovation decisions that enabled these transactions.
Pursuant to art. 45 of the Solvency II Framework Directive, all insurance undertakings will be obliged to conduct an “Own Risk and Solvency Assessment” (ORSA). ORSA’s relevance is not limited only to the second pillar of Solvency II, where mainly qualitative requirements are to be found. ORSA rather exhibits strong interlinks with the first pillar and its quantitative requirements and may also serve as a trigger for transparency duties which form Solvency II’s third pillar. ORSA may thus be described in some respects as the glue that binds together all three pillars of Solvency II. ORSA is one of the most obvious examples of the supervisory shift from a rules-based to a principles-based approach. As such, ORSA has hitherto been only very roughly defined. Since it is for the undertaking to determine its own specific risk profile and to evaluate whether this risk profile deviates significantly from the assumptions underlying the standard formula, it seems only natural that the supervisor must specify in greater detail what these underlying assumptions are. The most practicable way to do so would be for EIOPA to establish a “standard insurer”, which implies a translation of the assumptions concerning the underlying probability distributions into directly observable characteristics. The creation of the standard insurer would be an important step towards relaxing the insurers’ fear of what ORSA might bring about.
In der dritten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensektor“ diskutierten Professor Dr. Jan Krahnen und Dr. Theodor Weimer die Auswirkungen von Regulierung auf Bankverhalten und Wettbewerb, insbesondere im Hinblick auf die Vorschläge der Liikanen-Kommission. Weimer verwies auf die volkswirtschaftlichen Kosten einer zu strengen Bankenregulierung, u.a. negative Auswirkungen auf die Kreditvergabe. Weimer warnte auch davor, dass man in Europa, und gerade in Deutschland, strenger reguliere als in anderen Ländern. Krahnen erklärte, man habe durch die Liikanen-Vorschläge vor allem das Problem des systemischen Risikos im Bankensektor adressieren wollen. Außerdem sei es ein Ziel der Kommission gewesen, Banken so zu regulieren, dass der Steuerzahler im Krisenfall nicht länger für die Risiken der Banken haften müsse. Es sei notwendig, den Bankensektor zu reformieren, damit Banken abgewickelt werden könnten, auch wenn diese untereinander vernetzt sind.
In dieser Notiz wird ein neues Konzept für eine europäische Einlagensicherung vorgeschlagen, welches den starken politischen Vorbehalten Rechnung trägt, die gegen eine Vergemeinschaftung der Haftung für Bankeinlagen bestehen. Das skizzierte drei-stufige Einlagensicherungsmodell führt existierende nationale Einlagensicherungseinrichtungen weiter, bietet einen europäischen Verlustausgleich und verhindert eine exzessive Risikoübernahme zu Lasten der internationalen Gemeinschaft.
In this note, a new concept for a European deposit guarantee scheme is proposed, which takes account of the strong political reservations against a mutualization of the liability for bank deposits. The three-stage model for deposit insurance outlined in the text builds on existing national deposit guarantee schemes, offering loss compensation on a European level and at the same time preventing excessive risk and moral hazard taking by individual banks.
In this note, a new concept for a European deposit guarantee scheme is proposed, which takes account of the strong political reservations against a mutualization of the liability for bank deposits. The three-stage model for deposit insurance outlined in the text builds on existing national deposit guarantee schemes, offering loss compensation on a European level and at the same time preventing excessive risk and moral hazard taking by individual banks.
The analyses of intersectoral linkages of Leontief (1941) and Hirschman (1958) provide a natural way to study the transmission of risk among interconnected banks and to measure their systemic importance. In this paper we show how classic input-output analysis can be applied to banking and how to derive six indicators that capture different aspects of systemic importance, using a simple numerical example for illustration. We also discuss the relationship with other approaches, most notably network centrality measures, both formally and by means of a simulated network.
This paper analyzes the evolving architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the SSM as a regime that intends to bolster financial stability in the steady state.
By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus under-incentives their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. In this regard, the internal decision making structure of the ECB in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not solve the problem adequately. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical.
The ECB will become a de facto standard setter that competes with the EBA. A likely standoff in the EBA’s Board of Supervisors will lead to a growing gap in regulatory integration between SSM-participants and other EU Member States.
Joining the SSM as a non-euro area Member State is unattractive because the cur-rent legal framework grants no voting rights in the ECB’s ultimate decision making body. It also does not supply a credible commitment opportunity for Member States who seek to bond to high quality supervision.
In this paper we provide new evidence that corporate financing decisions are associated with managerial incentives to report high equity earnings. Managers rely most heavily on debt to finance their asset growth when their future earnings prospects are poor, when they are under pressure due to past declines in earnings, negative past stock returns, and excessively optimistic analyst earnings forecasts, and when the earnings yield is high relative to bond yields so that from an accounting perspective equity is ‘expensive’. Managers of high debt issuing firms are more likely to be newly appointed and also more likely to be replaced in subsequent years. Abnormal returns on portfolios formed on the basis of asset growth and debt issuance are strongly positively associated with the contemporaneous changes in returns on assets and on equity as well as with earnings surprises. This may account for the finding that debt issuance forecasts negative abnormal returns, since debt issuance also forecasts negative changes in returns on assets and on equity and negative earnings surprises. Different mechanisms appear to be at work for firms that retire debt.
In this paper, we propose a novel approach on how to estimate systemic risk and identify its key determinants. For all US financial companies with publicly traded equity options, we extract their option-implied value-at-risks (VaRs) and measure the spillover effects between individual company VaRs and the option-implied VaR of an US financial index. First, we study the spillover effect of increasing company risks on the financial sector. Second, we analyze which companies are most affected if the tail risk of the financial sector increases. We find that key accounting and market valuation metrics such as size, leverage, balance sheet composition, market-to-book ratio and earnings have a significant influence on the systemic risk profile of a financial institution. In contrast to earlier studies, the employed panel vector autoregression (PVAR) estimator allows for a causal interpretation of the results.
This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used.
This study investigates the transition from being a listed company with a dispersed ownership structure to being a privately held company with a concentrated ownership structure. We consider a sample of private equity backed portfolio companies to evaluate the consequences of the corporate governance changes on operational performance. Our analysis shows significant positive abnormal growth in several performance ratios for the private period of our sample companies relative to comparable public companies. These performance differences come from the increase in ownership concentration after the leveraged buyout transaction.
We are able to shed light on the black box of restructuring tools private equity investors use to improve the operational performance of their portfolio companies. By building on previous work considering performance evaluation of PE backed companies, we analyze whether private equity improves operating efficiency and which of the typical restructuring tools are the main performance drivers. Using a set of over 300 international leveraged buyout transactions of the last thirty years, we find that while there is vast improvement in operational efficiency, these gains vary considerably. Our top performing transactions are subject to strong equity incentives, frequent asset restructuring and tight control by the investor. Furthermore, investors’ experience has a positive influence while financial leverage has no influence on operational performance.
The paper looks at the determinants of fiscal adjustments as reflected in the primary surplus of countries. Our conjecture is that governments will usually find it more attractive to pursue fiscal adjustments in a situation of relatively high growth, but based on a simple stylized model of government behavior the expectation is that mainly high trust governments will be in a position to defer consolidation to years with higher growth. Overall, our analysis of a panel of European countries provides support for this expectation. The difference in fiscal policies depending on government trust levels may help explaining why better governed countries have been found to have less severe business cycles. It suggests that trust and credibility play an important role not only in monetary policy, but also in fiscal policy.
Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data for the period 1996 to 2006, we find that household demand for real estate is relatively high if the marginal investment in home equity is covered by the exemption. The home equity bias is more pronounced for younger households that face more financial uncertainty and therefore have a higher ex ante probability of bankruptcy.
In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). Within a system of quantile regressions for four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies) we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions. Using daily data, we can trace out the spillover effects over time in a set of impulse response functions and find that they reach their peak after 10 to 15 days.
The paper uses fiscal reaction functions for a panel of euro-area countries to investigate whether euro membership has reduced the responsiveness of countries to shocks in the level of inherited debt compared to the period prior to succession to the euro. While we find some evidence for such a loss in prudence, the results are not robust to changes in the specification, such as an exclusion of Greece from the panel. This suggests that the current debt problems may result to a large extent from preexisting debt levels prior to entry or from a larger need for fiscal prudence in a common currency, while an adverse change in the fiscal reaction functions for most countries does not apply.
We consider the continuous-time portfolio optimization problem of an investor with constant relative risk aversion who maximizes expected utility of terminal wealth. The risky asset follows a jump-diffusion model with a diffusion state variable. We propose an approximation method that replaces the jumps by a diffusion and solve the resulting problem analytically. Furthermore, we provide explicit bounds on the true optimal strategy and the relative wealth equivalent loss that do not rely on results from the true model. We apply our method to a calibrated affine model and fine that relative wealth equivalent losses are below 1.16% if the jump size is stochastic and below 1% if the jump size is constant and γ ≥ 5. We perform robustness checks for various levels of risk-aversion, expected jump size, and jump intensity.
We show that the optimal consumption of an individual over the life cycle can have the hump shape (inverted U-shape) observed empirically if the preferences of the individual exhibit internal habit formation. In the absence of habit formation, an impatient individual would prefer a decreasing consumption path over life. However, because of habit formation, a high initial consumption would lead to high required consumption in the future. To cover the future required consumption, wealth is set aside, but the necessary amount decreases with age which allows consumption to increase in the early part of life. At some age, the impatience outweighs the habit concerns so that consumption starts to decrease. We derive the optimal consumption strategy in closed form, deduce sufficient conditions for the presence of a consumption hump, and characterize the age at which the hump occurs. Numerical examples illustrate our findings. We show that our model calibrates well to U.S. consumption data from the Consumer Expenditure Survey.
SAFE Newsletter : 2013, Q2
(2013)
The efficacy of monetary authority actions depends primarily on the ability of the monetary authority to affect inflation expectations, which ultimately depend on agents' trust. We propose a model embedding trust cycles, as emerging from sequential coordination games between atomistic agents and the policy maker, in a monetary model. Trust affects agents' stochastic discount factor, namely the price of future risk, and their expectation formation process: these effects in turn interact with the monetary transmission mechanism. Using data from the Eurobarometer survey we analyze the link between trust on the one side and the transmission mechanism of shocks and of the policy rate on the other: data show that the two interact significantly and in a way comparable to the obtained in our model.
This paper investigates risk-taking in the liquid portfolios held by a large panel of Swedish twins. We document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth, leading to different risk sensitivities across investors. Human capital, which we estimate directly from individual labor income, also drives risk-taking positively, while internal habit and expenditure commitments tend to reduce it. Our micro findings lend strong support to decreasing relative risk aversion and habit formation preferences. Furthermore, heterogeneous risk sensitivities across investors help reconcile individual preferences with representative-agent models.
We develop a dynamic network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in firesales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by firesales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision.
This paper analyzes the equilibrium pricing implications of contagion risk in a Lucas-tree economy with recursive preferences and jumps. We introduce a new economic channel allowing for the possibility that endowment shocks simultaneously trigger a regime shift to a bad economic state. We document that these contagious jumps have far-reaching asset pricing implications. The risk premium for such shocks is superadditive, i.e. it is 2.5\% larger than the sum of the risk premia for pure endowment shocks and regime switches. Moreover, contagion risk reduces the risk-free rate by around 0.5\%. We also derive semiclosed-form solutions for the wealth-consumption ratio and the price-dividend ratios in an economy with two Lucas trees and analyze cross-sectional effects of contagion risk qualitatively. We find that heterogeneity among the assets with respect to contagion risk can increase risk premia disproportionately. In particular, big assets with a large exposure to contagious shocks carry significantly higher risk premia.
This paper presents a theory that explains why it is beneficial for banks to engage in circular lending activities on the interbank market. Using a simple network structure, it shows that if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. This can serve as an explanation for the observed high interconnectedness between banks and their investment behavior in the run-up to the subprime mortgage crisis.
Basel III and CEO compensation in banks: pay structures as a regulatory signal : [March 6, 2013]
(2013)
This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea of the proposed regulation is to utilize the compensation scheme to drive a wedge between the interests of top management and shareholders to counteract shareholder risk-shifting incentives. The decisive advantage of this approach compared to existing regulation is that the regulator does not need to be able to properly measure the bank investment risk, which has been shown to be a difficult task during the 2008-2009 financial crisis.
We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.
Euro area data show a positive connection between sovereign and bank risk, which increases with banks’ and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks’ runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk.
This paper studies the relation between firm value and a firm's growth options. We find strong empirical evidence that (average) Tobin's Q increases with firm-level volatility. However, the significance mainly comes from R&D firms, which have more growth options than non-R&D firms. By decomposing firm-level volatility into its systematic and unsystematic part, we also document that only idiosyncratic volatility (ivol) has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Single sorting according to the size of idiosyncratic volatility, we only find a significant ivol anomaly for non-R&D portfolios, whereas in a four-factor model the portfolio alphas of R&D portfolios are all positive. Double sorting on idiosyncratic volatility and R&D expenses also reveals these differences between R&D and non-R&D firms. To simultaneously control for several explanatory variables, we also run panel regressions of portfolio alphas which confirm the relative importance of idiosyncratic volatility that is amplified by R&D expenses.
We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index.
We test whether investor mood affects trading with data on all stock market transactions in Finland, utilizing variation in daylight and local weather. We find some evidence that environmental mood variables (local weather, length of day, daylight saving and lunar phase) affect investors’ direction of trade and volume. The effect magnitudes are roughly comparable to those of classical seasonals, such as the Monday effect. The statistical significance of the mood variables is weak in many cases, however. Only very little of the day-to-day variation in trading is collectively explained by all mood variables and calendar effects, but lower frequency variation seems connected to holiday seasons.
We use unique data from financial advisers’ professional exam scores and combine it with other variables to create an index of financial sophistication. Using this index to explain long-term stock return expectations, we find that more sophisticated financial advisers tend to have lower return expectations. A one standard deviation increase in the sophistication index reduces expected returns by 1.1 percentage points. The effect is stronger for emerging market stocks (2.3 percentage points). The sophistication effect contributes 60% to the model fit, while employer fixed effects combined contribute less than 30%. These results help understand the formation of potentially excessively optimistic expectations.
A natural experiment in which customer-owned mutual companies converted to publicly listed firms created a plausibly exogenous shock to the stock market participation status of tens of thousands of people. We find the shock changed the way people vote in the affected areas, with a 10% increase in share-ownership rate being followed by a 1.3%–3.1% increase in right-of-center vote share. The institutional details and additional tests suggest that wealth, liquidity, and tax-related incentives cannot fully explain the results. A plausible explanation is that the associated increase in the salience of stock ownership causes a shift in voters’ attention.
The European Commission recently put forward a proposal for a regulation to amend and strengthen the 2009 version of the EU's rules on the regulation of credit rating agencies ("CRA3"). Among other things, Art. 35a of the draft proposal introduces strict liability for rating agencies. This liability proposal is at odds with the aim to strengthen competition in the rating sector and could have a chilling effect on capital markets. The paper analyses existing rules on civil liability of rating agencies under different legal systems. Subsequently, the provision under Art. 35a of the Draft Proposal is examinded more closely. Suggestions on possible improvemts of the proposal are made.
SAFE Newsletter : 2013, Q1
(2013)
SAFE Newsletter
(2013)
The Center of Excellence SAFE – “Sustainable Architecture for Finance in Europe” – is a cooperation of the Center for Financial Studies and Goethe University Frankfurt. It is funded by the LOEWE initiative of the State of Hessen (Landes-Offensive zur Entwicklung wissenschaftlich-ökonomischer Exzellenz). SAFE brings together more than 40 professors and just as many junior researchers who are all dedicated to conducting research in support of a sustainable financial architecture. The Center has two main pillars: excellent research on all important topics related to finance; and policy advice, including the dissemination of relevant research findings to European decision makers from the realms of politics, regulation and administration.
In order to promote a fruitful exchange with interested parties from politics, academia, business and the media, SAFE issues a newsletter on a quarterly basis. This aims to provide an overview of the Center‘s ongoing research and policy activities. The SAFE Newsletter succeeds the House of Finance Newsletter, which was published between 2009 and 2012.
SAFE is based at Goethe University’s House of Finance however extends beyond by drawing on scholars from other parts of Goethe University as well as from fellow research institutions. The Center builds on the reputation of the House of Finance institutions, serving as an interdisciplinary think tank on the issue of finance.
Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We uncover an additional factor contributing to debt culture, namely social influences emanating from the perceived average income of peers. Using unique information from a representative household survey of the Dutch population that circumvents the need to define the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing – especially among those who consider themselves poorer than their peers – and on indebtedness, suggesting a link to financial distress. We check the robustness of our results using several approaches to rule out spurious associations and handle correlated effects.
In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks.
This paper investigates how an office-motivated incumbent can use transparency enhancement on public spending to signal his budgetary management ability and win re-election. We show that when the incumbent faces a popular challenger, transparency policy can be an effective signaling device. A more popular challenger can reduce the probability to enhance transparency, while voters can be better off due to a more informative signaling. It is also shown that a higher level of public interest in fiscal issues can increase the probability of enhancing transparency, while voters can be worse off by a less informative signaling.
This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation.
This paper investigates the effect of anticipated/experienced regret and pride on individual investors’ decisions to hold or sell a winning or losing investment, in the form of the disposition effect. As expected the results suggest that in the loss domain, low anticipated regret predicts a greater probability of selling a losing investment. While in the gain domain, high anticipated pride indicates a greater probability of selling a winning investment. The effects of high experienced regret/pride on the selling probability are found as well. An unexpected finding is that regret (pride) seems to be not only relevant for the loss (gain) domain, but also for the gain (loss) domain. In addition, this paper presents evidence of interconnectedness between anticipated and experienced emotions. The authors discuss the implications of these findings and possible avenues for further research.
After nearly two decades of US leadership during the 1980s and 1990s, are Europe’s venture capital (VC) markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amid an overall VC performance slump with no encouraging news? We attempt to answer these questions by tracking over 40,000 VC-backed firms stemming from six industries in 13 European countries and the US between 1985 and 2009; determining the type of exit – if any – each particular firm’s investors choose for the venture.
Venture capital (VC) investment has long been conceptualized as a local business , in which the VC’s ability to source, syndicate, fund, monitor, and add value to portfolio firms critically depends on their access to knowledge obtained through their ties to the local (i.e., geographically proximate) network. Consistent with the view that local networks matter, existing research confirms that local and geographically distant portfolio firms are sourced, syndicated, funded, and monitored differently. Curiously, emerging research on VC investment practice within the United States finds that distant investments, as measured by “exits” (either initial public offering or merger & acquisition) out-perform local investments. These findings raise important questions about the assumed benefits of local network membership and proximity. To more deeply probe these questions, we contrast the deal structure of cross-border VC investment with domestic VC investment, and contrast the deal structure of cross-border VC investments that include a local
partner with those that do not. Evidence from 139,892 rounds of venture capital financing in the period 1980-2009 suggests that cross-border investment practice, in terms of deal sourcing, syndication, and performance indeed change with proximity, but that monitoring practices do not. Further, we find that the inclusion of a local partner in the investment syndicate yields surprisingly few benefits. This evidence, we argue, raises important questions about VC investment practice as well as the ability of firms to capture and lever the presumed benefits of network membership.
From its early post-war catch-up phase, Germany’s formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses. Exports have powered the dynamic phases and helped emerge from stagnation. Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries’ standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany’s ability to act as global locomotive has been limited. With increasing competition in its traditional areas of manufacturing, a more domestically-driven growth dynamic, especially in the production and delivery of services, will be good for Germany and for the global economy. Absent such an effort, German growth will remain constrained, and Germany will play only a modest role in spurring growth elsewhere.
In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus.
We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.
Editorial
01 Foreword
Research & Policy
01 WP 12/06: Central Banks - Paradise Lost
02 Staff Member Profile
Events
01 The ECB and Its Watchers XIV
02 Greece: Getting Here and Moving Forward
03 Beyond Our Means: Why America Spends While the World Saves 04 How can Macro-Prudential Regulation be Effective?
05 Globalization and Pluralization of States. Why there will be no “United States of Europe”
06 Deutsche Bank Prize in Financial Economics 2013: Preview
Last but not least
01 Christian Leuz will visit Frankfurt with Humboldt Research Award
02 LOEWE center "Sustainable Architecture for Finance in Europe"
03 New Senior Fellows at CFS
In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.
The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.
We argue that the U.S. personal saving rate’s long stability (1960s–1980s), subsequent steady decline (1980s–2007), and recent substantial rise (2008–2011) can be interpreted using a parsimonious ‘buffer stock’ model of consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between ‘target’ and actual wealth, with the target determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the long-term saving decline, while fluctuations in wealth and uncertainty capture the bulk of the business-cycle variation.
This paper investigates whether preference interactions can explain why risk preferences change over time and across contexts. We conduct an experiment in which subjects accept or reject gambles involving real money gains and losses. We introduce within-subject variation by alternating subjectively liked music and disliked music in the background. We find that favourite music increases risk-taking, and disliked music suppresses risk-taking, compared to a baseline of no music. Several theories in psychology propose mechanisms by which mood affects risktaking, but none of them fully explain our results. The results are, however, consistent with preference complementarities that extend to risk preference.
Wie in der Medizin muss der Therapie die Diagnose vorausgehen. Allzu viele Vorschläge zur Lösung der Krise gehen nicht zuletzt deshalb in die falsche Richtung, weil sie eine adäquate Ursachenanalyse vermissen lassen. Wird der Fiskalpakt Europa aus der Krise führen? Die Europäische Währungsordnung ist ein Produkt politischer Entscheidungen, gegossen in europäisches und nationales Recht. Wie glaubwürdig ist das Versprechen, durch neues Recht, härtere vertragliche Bestimmungen, Fehlverhalten in Zukunft zu verhindern, wenn das geltende Recht so gering geachtet wird?
We analyze the implications of the governance structure in academic faculties for their recruitment decisions when competing for new researchers. The value to individual members through social interaction within the faculty depends on the average status of their fellow members. In recruitment decisions, incumbent members trade off the effect of entry on average faculty status against alternative uses of the recruitment budget if no entry takes place. We show that the best candidates join the best faculties but that they receive lower wages than some lesser ranking candidates. We also study the allocation of surplus created by the entry of a new faculty member and show that faculties with symmetric status distributions maximize their joint surplus under majority voting.
This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.
This paper studies constrained portfolio problems that may involve constraints on the probability or the expected size of a shortfall of wealth or consumption. Our first contribution is that we solve the problems by dynamic programming, which is in contrast to the existing literature that applies the martingale method. More precisely, we construct the non-separable value function by formalizing the optimal constrained terminal wealth to be a (conjectured) contingent claim on the optimal non-constrained terminal wealth. This is relevant by itself, but also opens up the opportunity to derive new solutions to constrained problems. As a second contribution, we thus derive new results for non-strict constraints on the shortfall of inter¬mediate wealth and/or consumption.
Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing, especially among those who consider themselves poorer than their peers; and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects.
Trading under limited pre-trade transparency becomes increasingly popular on financial markets. We provide first evidence on traders’ use of (completely) hidden orders which might be placed even inside of the (displayed) bid-ask spread. Employing TotalView-ITCH data on order messages at NASDAQ, we propose a simple method to conduct statistical inference on the location of hidden depth and to test economic hypotheses. Analyzing a wide cross-section of stocks, we show that market conditions reflected by the (visible) bid-ask spread, (visible) depth, recent price movements and trading signals significantly affect the aggressiveness of ’dark’ liquidity supply and thus the ’hidden spread’. Our evidence suggests that traders balance hidden order placements to (i) compete for the provision of (hidden) liquidity and (ii) protect themselves against adverse selection, front-running as well as ’hidden order detection strategies’ used by high-frequency traders. Accordingly, our results show that hidden liquidity locations are predictable given the observable state of the market.
In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.
We investigate the decisions of listed firms to go private once again. We start by revealing that while a significant number of firms which go public is VC-backed, an overproportional share of these VC-backed firms go private later on (they stay on the exchange for an average of 8.5 years). We interpret this very robust pattern such that IPOs of VC-backed firms are to a large extent a temporary rather than a permanent feature of the corporate governance of these firms. We investigate various potential hypotheses why VCs actually seem to be able to bring marginal firms to the exchange by relating the going-private decisions to various characteristics of the IPO market as well as to VC characteristics. We find strong support for the certification ability of VCs: more experienced and reputable VCs are more able to bring marginal firms to public exchanges via an IPOs. These marginal firms backed-by more reputable and experienced VCs are more likely to go private later on. Hence, our analysis suggests that IPOs backed by experienced VCs are most likely to be a temporary rather than the final stage in the life of the portfolio firm. We find no support that reputable VCs underprice their IPO-exits more implying that they have no need to leave more money on the table to take the marginal firms public.
I evaluate the effect of inflation targeting on inflation and how it interacts with product market deregulation during the disinflationary process in the 1990s. Using a sample of 21 OECD countries, I show that, after controlling for product market deregulation, the effect of inflation targeting is quantitatively important and statistically significant. Moreover, product market deregulation also matters in particular in countries that adopted an inflation targeting regime. I propose a New Keynesian Phillips curve with an explicit role for market deregulation to rationalize the empirical evidence.
Insurance contracts are often complex and difficult to verify outside the insurance relation. We show that standard one-period insurance policies with an upper limit and a deductible are the optimal incentive-compatible contracts in a competitive market with repeated interaction. Optimal group insurance policies involve a joint upper limit but individual deductibles and insurance brokers can play a role implementing such contracts for the group of clients. Our model provides new insights and predictions about the determinants of insurance.
Central banks have recently introduced new policy initiatives, including a policy called ‘Quantitative Easing’ (QE). Since it has been argued by the Bank of England that “Standard economic models are of limited use in these unusual circumstances, and the empirical evidence is extremely limited” (Bank of England, 2009b), we have taken an entirely empirical approach and have focused on the QE-experience, on which substantial data is available, namely that of Japan (2001-2006). Recent literature on the effectiveness of QE has neglected any reference to final policy goals. In this paper, we adopt the view that ultimately effectiveness will be measured by whether it will be able to “boost spending” (Bank of England, 2009b) and “will ultimately be judged by their impact on the wider macroeconomy” (Bank of England, 2010). In line with a widely held view among leading macroeconomists from various persuasions, while attempting to stay agnostic and open-minded on the distribution of demand changes between real output and inflation, we have thus identified nominal GDP growth as the key final policy goal of monetary policy. The empirical research finds that the policy conducted by the Bank of Japan between 2001 and 2006 makes little empirical difference while an alternative policy targeting credit creation (the original definition of QE) would likely have been more successful.
The lessons from QE and other 'unconventional' monetary policies - evidence from the Bank of England
(2011)
This paper investigates the effectiveness of the ‘quantitative easing’ policy, as implemented by the Bank of England in March 2009. Similar policies had been previously implemented in Japan, the U.S. and the Eurozone. The effectiveness is measured by the impact of Bank of England policies (including, but not limited to QE) on nominal GDP growth – the declared goal of the policy, according to the Bank of England. Unlike the majority of the literature on the topic, the general-to-specific econometric modeling methodology (a.k.a. the ‘Hendry’ or ‘LSE’ methodology) is employed for this purpose. The empirical analysis indicates that QE as defined and announced in March 2009 had no apparent effect on the UK economy. Meanwhile, it is found that a policy of ‘quantitative easing’ defined in the original sense of the term (Werner, 1994) is supported by empirical evidence: a stable relationship between a lending aggregate (disaggregated M4 lending, i.e. bank credit for GDP transactions) and nominal GDP is found. The findings imply that BoE policy should more directly target the growth of bank credit for GDP-transactions.
Using life-history survey data from eleven European countries, we investigate whether childhood conditions, such as socioeconomic status, cognitive abilities and health problems influence portfolio choice and risk attitudes later in life. After controlling for the corresponding conditions in adulthood, we find that superior cognitive skills in childhood (especially mathematical abilities) are positively associated with stock and mutual fund ownership. Childhood socioeconomic status, as indicated by the number of rooms and by having at least some books in the house during childhood, is also positively associated with the ownership of stocks, mutual funds and individual retirement accounts, as well as with the willingness to take financial risks. On the other hand, less risky assets like bonds are not affected by early childhood conditions. We find only weak effects of childhood health problems on portfolio choice in adulthood. Finally, favorable childhood conditions affect the transition in and out of risky asset ownership, both by making divesting less likely and by facilitating investing (i.e., transitioning from non-ownership to ownership).
The unintended consequences of the debt ... will increased government expenditure hurt the economy?
(2011)
In 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial increase in fiscal expenditure is considered by providing a novel analysis of the most relevant recent experience in similar circumstances, namely that of Japan in the 1990s. Then a weak economy with risk-averse banks seemed to require some of the largest peacetime fiscal stimulation programmes on record, albeit with disappointing results. The explanations provided by the literature and their unsatisfactory empirical record are reviewed. An alternative explanation, derived from early Keynesian models on the ineffectiveness of fiscal policy is presented in the form of a modified Fisher-equation, which incorporates the recent findings in the credit view literature. The model postulates complete quantity crowding out. It is subjected to empirical tests, which were supportive. Thus evidence is found that fiscal policy, if not supported by suitable monetary policy, is likely to crowd out private sector demand, even in an environment of falling or near-zero interest rates. As a policy conclusion it is pointed out that by changing the funding strategy, complete crowding out can be avoided and a positive net effect produced. The proposed framework creates common ground between proponents of Keynesian views (as held, among others, by Blinder and Solow), monetarist views (as held in particular by Milton Friedman) and those of leading contemporary macroeconomists (such as Mankiw).
Eurobonds zur Bewältigung der europäischen Krise? : Wegweisung zu einer modernen Entwicklungsunion
(2011)
Die aktuelle Debatte um den Umgang mit der Verschuldung Griechenlands und anderer EWU Staaten berührt die Grundlagen europäischer Wirtschaftspolitik. Die nächsten Schritte sind wohl abzuwägen, um über eine unmittelbare Kriseneindämmung hinaus eine langfristige Stabilisierung der wirtschaftlichen und politischen Strukturen in der Eurozone zu erreichen.
Eine funktionsfähige Wirtschafts- und Währungsunion hat ihren Preis. Sie ist aber auch von großem Nutzen, gerade für Deutschland und die wettbewerbsstarken Regionen, die insbesondere vom einheitlichen Binnenmarkt und der monetären Stabilität profitieren. Das rechtfertigt zugleich
eine Unterstützung ökonomisch schwächerer Mitglieder der Union durch die stärkeren. Historisch waren Währungsunionen ohne einen derartigen minimalen fiskalischen Ausgleich nicht dauerhaft. Deshalb sind, wenn man die Währungsunion aufrechterhalten will, zwei Extrempositionen - keine Transfers, um keinen Preis ebenso wie deren Gegenteil: jedwedes Defizit wird bedingungslos finanziert - nicht zielführend. Ein kompletter Haftungsausschluss (no bail-out) ist nicht glaubwürdig, solange unabweisbare Schuldenschnitte von insolventen Staaten oder Regionen (wegen Überschuldung) nicht möglich sind, weil sie innerhalb eines stark integrierten Bankenmarktes potentiell unkontrollierbare Rückwirkungen auslösen. Andererseits liefe die unkonditionierte, dauerhafte Finanzierung regionaler Ungleichgewichte auf Transfervolumina hinaus, die eine Überforderung der Transfergeber darstellten. Sie führte vor allem zu einer Perpetuierung der Probleme, weil Anreize zur letztlich unabdingbaren Anpassung fehlten. Damit bleiben zur Schaffung der Voraussetzungen einer funktionsfähigen Währungsunion nur Optionen, die zwischen den Polen liegen.
Editorial Prodigal Italy Greece Spain? Events 01
DB Prize 2011: Award Ceremony in honor of Kenneth Rogoff 02
DB Prize 2011: CFS Symposium in honor of Kenneth Rogoff 03
Is the Euro Zone on its Way to Fiscal Union? 04
CFS Visitors Program - Pistaferri 05
Krugman’s Perspective on the Crisis 06
IMF Post-Annual Meetings Policy Discussion 07
International Conference on Payout Policy – Foundations and Trends 08
MONFISPOL – Final conference 09
CFS - EIEF Conference on Household Finance
We review arguments for and against reserve requirements and conclude that the main question is whether a distinction between money creation and intermediation can be made. We argue that such a distinction can be made in a money-in-advance economy and show that if the money-in-advance constraint is universally binding then reserve requirements on checkable accounts have no effect on intermediation. We then proceed to show that in a model in which trade is uncertain and sequential, a fractional reserve banking system gives rise to endogenous monetary shocks. These endogenous monetary shocks lead to fluctuations in capacity utilisation and waste. When the moneyin-advance constraint is universally binding, a 100% reserve requirement on checkable accounts can eliminate this waste.
Capturing the zero: a new class of zero-augmented distributions and multiplicative error processes
(2011)
We propose a novel approach to model serially dependent positive-valued variables which realize a non-trivial proportion of zero outcomes. This is a typical phenomenon in financial time series observed at high frequencies, such as cumulated trading volumes. We introduce a flexible point-mass mixture distribution and develop a semiparametric specification test explicitly tailored for such distributions. Moreover, we propose a new type of multiplicative error model (MEM) based on a zero-augmented distribution, which incorporates an autoregressive binary choice component and thus captures the (potentially different) dynamics of both zero occurrences and of strictly positive realizations. Applying the proposed model to high-frequency cumulated trading volumes of both liquid and illiquid NYSE stocks, we show that the model captures the dynamic and distributional properties of the data well and is able to correctly predict future distributions.
This paper addresses the open debate about the usefulness of high-frequency (HF) data in large-scale portfolio allocation. Daily covariances are estimated based on HF data of the S&P 500 universe employing a blocked realized kernel estimator. We propose forecasting covariance matrices using a multi-scale spectral decomposition where volatilities, correlation eigenvalues and eigenvectors evolve on different frequencies. In an extensive out-of-sample forecasting study, we show that the proposed approach yields less risky and more diversified portfolio allocations as prevailing methods employing daily data. These performance gains hold over longer horizons than previous studies have shown.
The direct financial impact of the financial crisis has been to deal a heavy blow to investment-based pensions; many workers lost a substantial portion of their retirement saving. The financial sector implosion produced an economic crisis for the rest of the economy via high unemployment and reduced labor earnings, which reduced household contributions to Social Security and some private pensions. Our research asks which types of individuals were most affected by these dual financial and economic shocks, and it also explores how people may react by changing their consumption, saving and investment, work and retirement, and annuitization decisions. We do so with a realistically calibrated lifecycle framework allowing for time-varying investment opportunities and countercyclical risky labor income dynamics. We show that households near retirement will reduce both short- and long-term consumption, boost work effort, and defer retirement. Younger cohorts will initially reduce their work hours, consumption, saving, and equity exposure; later in life, they will work more, retire later, consume less, invest more in stocks, save more, and reduce their demand for private annuities. Keywords: Financial Crisis , Household Finance , Cycle Portfolio Choice , Labor Supply Classification: D1, G11, G23, G35, J14, J26, J32
We make three points. First, the decade before the financial crisis in 2007 was characterized by a collapse in the yield on TIPS. Second, estimated VARs for the federal funds rate and the TIPS yield show that while monetary policy shocks had negligible effects on the TIPS yield, shocks to the latter had one-to-one effects on the federal funds rate. Third, these findings can be rationalized in a New Keynesian model.
There is ample empirical evidence documenting widespread financial illiteracy and limited pension knowledge. At the same time, the distribution of wealth is widely dispersed and many workers arrive on the verge of retirement with few or no personal assets. In this paper, we investigate the relationship between financial literacy and household net worth, relying on comprehensive measures of financial knowledge designed for a special module of the DNB (De Nederlandsche Bank) Household Survey. Our findings provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth. Moreover, we discuss two channels through which financial literacy might facilitate wealth accumulation. First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium. Second, financial literacy is positively related to retirement planning, and the development of a savings plan has been shown to boost wealth. Overall, financial literacy, both directly and indirectly, is found to have a strong link to household wealth. JEL Classification: D91, D12, J26 Keywords: Financial Education, Savings and Wealth Accumulation, Retirement Preparation, Knowledge of Finance and Economics, Overconfidence, Stock Market Participation
This paper outlines a new method for using qualitative information to analyze the monetary policy strategy of central banks. Quantitative assessment indicators that are extracted from a central bank's public statements via the balance statistic approach are employed to estimate a Taylor-type rule. This procedure allows to directly capture a policymaker's assessments of macroeconomic variables that are relevant for its decision making process. As an application of the proposed method the monetary policy of the Bundesbank is re-investigated with a new dataset. One distinctive feature of the Bundesbank's strategy consisted of targeting growth in monetary aggregates. The analysis using the proposed method provides evidence that the Bundesbank indeed took into consideration monetary aggregates but also real economic activity and inflation developments in its monetary policy strategy since 1975. JEL Classification: E52, E58, N14 Keywords: Monetary Policy Rule, Statement Indicators, Bundesbank, Monetary Targeting
This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies. JEL Classification: G01, G18, G33 Keywords: Systemic Risk, Systemic Risk Charge, Systemic Risk Fund, Macroprudential Supervision, Shapley Value, Financial Network
Since World War II, direct stock ownership by households has largely been replaced by indirect stock ownership by financial institutions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside a pension plan. This finding is important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices. JEL Classification: G10, G20, H22, H30 Keywords: Capital Gains Tax, Income Tax, Stock Ownership, Bond Ownership, Inflation, Bracket Creep, Pension Funds
Do firms buy their stock at bargain prices? : Evidence from actual stock repurchase disclosure
(2011)
We use new data from SEC filings to investigate how S&P 500 firms execute their open market repurchase programs. We find that smaller S&P 500 firms repurchase less frequently than larger firms, and at a price which is significantly lower than the average market price. Their repurchase activity is followed by a positive and significant abnormal return which lasts up to three months after the repurchase. These findings do not hold for large S&P 500 firms. Our interpretation is that small firms repurchase strategically, whereas the repurchase activity of large firms is more focused on the disbursement of free cash. JEL Classification: G14, G30, G35 Keywords: Stock Repurchases, Stock Buybacks, Payout Policy, Timing, Bid-Ask Spread, Liquidity
This paper studies the impact of the concentration of control, the type of controlling shareholder and the dividend tax preference of the controlling shareholder on dividend policy for a panel of 220 German firms over 1984-2005. While the concentration of control does not have an effect on the dividend payout, there is strong evidence that the type of controlling shareholder matters as family controlled firms have high dividend payouts whereas bank controlled firms have low dividend payouts. However, there is no evidence that the dividend preference of the large shareholder has an impact on the dividend decision. JEL Classification: G32, G35 Keywords: Dividend Policy, Payout Policy, Lintner Dividend Model, Tax Clientele Effects, Corporate Governance
"Buffer-stock" models of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of such models, including the existence of a target wealth ratio and the proposition that aggregate consumption growth equals aggregate income growth in a small open economy populated by buffer stock savers. JEL Classification: D81, D91, E21 Keywords: Precautionary Saving, Buffer Stock Saving, Marginal Propensity to Consume, Permanent Income Hypothesis
This thesis consist of three chapters of which each investigates a topic from financial and monetary economics. In the first chapter a novel method to analyze the monetary policy of central banks is presented. In the second chapter (joint work with Professor Michael Binder, Goethe-University Frankfurt) the effects of conditional loan programs of the International Monetary Fund (IMF) on participating countries' output growth are investigated. In the third chapter (joint work with Professor Jan Pieter Krahnen, Goethe-University Frankfurt) a network model of interconnected bank balance sheets which gives rise to systemic risk is developed and used to analyze the implications of a bank levy related to banks' contribution to systemic risk. All three chapters give important insights to the policy design of macroeconomic institutions such as central banks, the IMF, and agencies charged with macroprudential supervision.
Measuring confidence and uncertainty during the financial crisis: evidence from the CFS survey
(2011)
The CFS survey covers individual situations of banks and other companies of the financial sector during the financial crisis. This provides a rare possibility to analyze appraisals, expectations and forecast errors of the core sector of the recent turmoil. Following standard ways of aggregating individual survey data, we first present and introduce the CFS survey by comparing CFS indicators of confidence and predicted confidence to ifo and ZEW indicators. The major contribution is the analysis of several indicators of uncertainty. In addition to well established concepts, we introduce innovative measures based on the skewness of forecast errors and on the share of ‘no response’ replies. Results show that uncertainty indicators fit quite well with pattern of real and financial time series of the time period 2007 to 2010. Business Sentiment , Financial Crisis , Survey Indicator , Uncertainty CFS working paper series, 2010, 18. Revised Version July 2011
I investigate the effect of transparency on the borrowing costs of Emerging Markets Economies. Transparency is measured by whether or not the countries publish the IMF Article IV Staff report and the Reports on the Observance of Standards and Codes (ROSC). Using difference-in-difference estimation, I study the effect on the sovereign credit spreads for 18 Emerging Market Economies over the period 1999-2007. I show that the effect of publishing the Article IV reports is negligible while publishing the ROSC matters, leading to a reduction in the spreads of over 15% in the samples 1999-2006 and 1999-2007. JEL Classification: F33, F34, G15 Keywords: Sovereign Bond Markets, Transparency, Emerging Market Economies
This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks’ policy decisions, as is done in the ECB’s encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks’ inflation target. JEL Classification: E44, E52, E58 Keywords: Inflation Targeting, Asset Prices, Financial Stability, ECB