SAFE working paper
https://safe-frankfurt.de/de/publikationen/working-papers.html
Refine
Year of publication
Document Type
- Working Paper (409)
Language
- English (409)
Has Fulltext
- yes (409)
Is part of the Bibliography
- no (409)
Keywords
- Liquidity (9)
- COVID-19 (7)
- General Equilibrium (7)
- welfare (7)
- Asset Pricing (6)
- ambiguity (6)
- competition (6)
- liquidity (6)
- ESG (5)
- asset pricing (5)
- climate change (5)
- human capital (5)
- systemic risk (5)
- Basel III (4)
- Business Cycle (4)
- Corporate Social Responsibility (4)
- Covid-19 (4)
- Household Finance (4)
- Portfolio choice (4)
- Systemic Risk (4)
- bail-in (4)
- banking (4)
- household finance (4)
- leverage (4)
- peer effects (4)
- prudential supervision (4)
- regulatory arbitrage (4)
- social security (4)
- Artificial Intelligence (3)
- Banking Regulation (3)
- Banking Union (3)
- China (3)
- Contagion (3)
- Corporate Bonds (3)
- Credit Risk (3)
- Entrepreneurship (3)
- Financial Crises (3)
- Financial Crisis (3)
- Financial Stability (3)
- Fragmentation (3)
- Granger Causality (3)
- High-Frequency Trading (3)
- Household finance (3)
- Inside Debt (3)
- Interconnectedness (3)
- Labor income risk (3)
- Liquidity Provision (3)
- Machine learning (3)
- Monetary Policy (3)
- Price Efficiency (3)
- Recursive Preferences (3)
- Retail investors (3)
- Single Supervisory Mechanism (3)
- Solvency II (3)
- Sustainable Finance (3)
- Sustainable Investments (3)
- Unconventional Monetary Policy (3)
- aggregate risk (3)
- banking union (3)
- banks (3)
- capital regulation (3)
- capital structure (3)
- contagion (3)
- corporate governance (3)
- discrimination (3)
- financial literacy (3)
- habit formation (3)
- idiosyncratic risk (3)
- incentives (3)
- incomplete markets (3)
- inequality (3)
- laboratory experiments (3)
- leveraged buyouts (3)
- market discipline (3)
- monetary policy (3)
- political economy (3)
- private equity (3)
- recursive utility (3)
- regulation (3)
- retirement income (3)
- shadow banking (3)
- social interactions (3)
- social preferences (3)
- stochastic volatility (3)
- trading behavior (3)
- volatility (3)
- 401(k) plan (2)
- Asset Allocation (2)
- Asset pricing (2)
- Banks (2)
- Bayesian inference (2)
- Board of Directors (2)
- Bond Markets (2)
- CDS (2)
- Choquet expected utility (2)
- Circuit Breaker (2)
- Collateral Policy (2)
- Compensation Structure (2)
- Competition (2)
- Consumption (2)
- Corporate Debt Structure (2)
- Corporate Governance (2)
- Credit Spread (2)
- Dark Trading (2)
- Disposition Effect (2)
- ECB (2)
- ESG Rating Agencies (2)
- ETFs (2)
- Economic and Monetary Union (2)
- Eligibility premium (2)
- Empirical Asset Pricing (2)
- Endogenous Growth (2)
- Endogenous growth (2)
- Equity Premium (2)
- European Banking Union (2)
- Expected Returns (2)
- FinTech (2)
- Financial Institutions (2)
- Financial literacy (2)
- Fund Flows (2)
- German reunification (2)
- Germany (2)
- Hawkes processes (2)
- Health shocks (2)
- Heterogeneous innovation (2)
- High-Frequency Traders (HFTs) (2)
- Homeownership (2)
- India (2)
- Inequality (2)
- Insurance (2)
- Interest Rate Guarantees (2)
- International Finance (2)
- Jumps (2)
- Learning (2)
- Life Insurance (2)
- Long-run Risk (2)
- Market Fragmentation (2)
- Market Microstructure (2)
- Market Quality (2)
- OTC markets (2)
- P2P lending (2)
- Parameter Elicitation (2)
- Price Discovery (2)
- Product Market Competition (2)
- R&D (2)
- Real Effects (2)
- Regulation (2)
- Retail Investor (2)
- Risk-Taking (2)
- Self-control (2)
- Social Networks (2)
- Stochastic mortality risk (2)
- Systemic risk (2)
- Term Structure of Interest Rates (2)
- Volatility (2)
- Volatility Interruption (2)
- active shareholders (2)
- annuity (2)
- austerity (2)
- bailout (2)
- bank regulation (2)
- bank resolution (2)
- bank runs (2)
- borrowing constraints (2)
- bubbles (2)
- compensation (2)
- confidence (2)
- consumer credit (2)
- consumption (2)
- consumption hump (2)
- consumption-portfolio choice (2)
- cooperation (2)
- credit funds (2)
- credit supply (2)
- crowdfunding (2)
- crowding out (2)
- crowdinvesting (2)
- debt sustainability (2)
- delayed retirement (2)
- dynamic portfolio choice (2)
- equity premium (2)
- euro area (2)
- executive compensation (2)
- financial advice (2)
- financial crisis (2)
- financial regulation (2)
- financial stability (2)
- financing decisions (2)
- financing policy (2)
- fintech (2)
- fiscal policy (2)
- fiscal reaction function (2)
- general equilibrium (2)
- global banks (2)
- green finance (2)
- growth (2)
- heterogeneous agents (2)
- household debt (2)
- individual investor (2)
- individual investors (2)
- insurance (2)
- interbank networks (2)
- investment (2)
- investment decisions (2)
- investments (2)
- jumps (2)
- lifetime income (2)
- liquidity provision (2)
- liquidity risk (2)
- longevity risk (2)
- managerial incentives (2)
- monitoring (2)
- newly founded firms (2)
- non-bank financial intermediation (2)
- optimal investment (2)
- panel VAR (2)
- pension (2)
- pension reform (2)
- persistence (2)
- population aging (2)
- portfolio choice (2)
- predictability (2)
- principles-based regulation (2)
- professional networks (2)
- recapitalization (2)
- retirement age (2)
- return predictability (2)
- risk taking (2)
- risk-taking (2)
- saving (2)
- securities regulation (2)
- social media (2)
- sovereign risk (2)
- stochastic differential utility (2)
- stock market participation (2)
- sustainability (2)
- syndicated loans (2)
- taxes (2)
- transmission (2)
- uncertainty (2)
- unconventional monetary policy (2)
- welfare loss (2)
- 2-Sector Model (1)
- AI borrower classification (1)
- AI enabled credit scoring (1)
- Adverse Selection (1)
- Age (1)
- Algorithmic Discrimination (1)
- Algorithmic transparency (1)
- Amortization payments (1)
- AnaCredit (1)
- Anchoring (1)
- Angel (1)
- Annual General Meeting (1)
- Annuity (1)
- Anonymity (1)
- Anticipated Inflation (1)
- Apache Spark (1)
- Asset Allocation, Contagion (1)
- Asset Liquidation (1)
- Asset Prices (1)
- Asset allocation (1)
- Asymmetric Information (1)
- Asymmetric Tax Regimes (1)
- Austerity Measures (1)
- Bank Bailout (1)
- Bank Capital (1)
- Bank Corporate Governance (1)
- Bank Credit (1)
- Bank Defaults (1)
- Bank Lending (1)
- Bank Recapitalization (1)
- Bank Resolution (1)
- Bank affiliation (1)
- Banking Stability (1)
- Banking Supervision (1)
- Bargaining (1)
- Basel regulation (1)
- Batch Learning (1)
- Bayesian learning (1)
- Belief Formation (1)
- Belief up-dating (1)
- Beliefs (1)
- Big Data (1)
- Big Five (1)
- Big data (1)
- Bitcoin (1)
- Board Appointments (1)
- Bond risk premia (1)
- Broker (1)
- Bubbles (1)
- Bunching (1)
- Business Subsidies (1)
- C corporations (1)
- CAPM (1)
- COVID-19 Pandemic (1)
- COVID-19 news (1)
- Capital Purchase Program (1)
- Car Loans (1)
- Carbon Taxation (1)
- Carbon abatement (1)
- Causal Machine Learning (1)
- Central Clearing (1)
- Central Counterparty Clearing House (CCP) (1)
- Centrality (1)
- Citation Network Analysis (1)
- Climate Change (1)
- Climate change (1)
- Climate change economics (1)
- Clustering (1)
- Co-residence (1)
- CoCo Bond (1)
- CoCo bonds (1)
- Coco bonds (1)
- Cognition (1)
- Collateral (1)
- Collateral Constraint (1)
- Colocation (1)
- Commodities (1)
- Comovements (1)
- Confirmatory Bias (1)
- Connectivity (1)
- Consumer credit (1)
- Consumer financial protection (1)
- Consumption hump (1)
- Consumption-portfolio choice (1)
- Contagion Risk (1)
- Contingent Convertible Capital (1)
- Contract terms (1)
- Coronavirus (1)
- Corporate Distress (1)
- Corporate Groups (1)
- Corporate Name Change (1)
- Corporate concentration (1)
- Corporate financing (1)
- Counterparty Risk (1)
- Creative destruction (1)
- Credit Default Swap (CDS) (1)
- Credit lines (1)
- Creditor Protection (1)
- Cross-Predictability (1)
- Cross-Section of Returns (1)
- Cryptocurrencies (1)
- Cultural Influences on Economic Behavior (1)
- Cumulative prospect theory (1)
- Customer data sharing (1)
- DCC-GARCH (1)
- DSGE models (1)
- Dark Pools (1)
- Data access (1)
- Data portability (1)
- Database linking (1)
- Default (1)
- Delaunay Interpolation (1)
- Democratic Legitimacy (1)
- Demographic Change (1)
- Depreciation (1)
- Derivatives (1)
- Designated Market Makers (DMMs) Market Making (1)
- DiD (1)
- Dictionary (1)
- Different Beliefs (1)
- Digital footprints (1)
- Digitalized Markets (1)
- Disclosure (1)
- Discount Rates (1)
- Discourse (1)
- Disintegration (1)
- Distributed Computing (1)
- Dividend Payments (1)
- Dividend Policy (1)
- Dividends (1)
- Double Volume Caps (1)
- Durable consumption (1)
- Duration of Civil Proceedings (1)
- Dynamic Models (1)
- Dynamic Networks (1)
- Dynamic and Reliable Regulation (1)
- Dynamic inconsistency (1)
- E.U. Corporate Law (1)
- ESG Investing (1)
- ESG ratings (1)
- ESM (1)
- EU (1)
- EU countries (1)
- EU industrial production (1)
- Econometrics (1)
- Economics (1)
- Education Subsidy (1)
- Efficiency Wages (1)
- Emissions (1)
- Endogenous Asset Market Participation (1)
- Endogenous gridpoints Method (1)
- Energy Efficiency (1)
- Energy Performance Certificate (1)
- Energy efficiency (1)
- Enriched Digital Footprint (1)
- Entity matching (1)
- Entity resolution (1)
- Entrepreneurial Finance (1)
- Epstein-Zin preferences (1)
- Equilibrium Thinking (1)
- Equity options (1)
- Ethics (1)
- Euro-zone Government Bonds (1)
- European Banking Authority (1)
- European Banking Authority (EBA) (1)
- European Capital Markets Union (1)
- European Central Bank (1)
- European Central Bank (ECB) (1)
- European Commission (1)
- European Investment Bank (1)
- European Market Infrastructure Regulation (EMIR) (1)
- European Stability Mechanism (1)
- European Systemic Risk Board (1)
- European debt crisis (1)
- European integration (1)
- Eurosystem collateral eligibility (1)
- Excess sensitivity (1)
- Execution Cost (1)
- Executive Compensation (1)
- Executive Remuneration (1)
- Expectation Error (1)
- Expectation Formation (1)
- Expectation formation (1)
- Expectations (1)
- Expectation–Maximisation (1)
- Expected credit losses (1)
- Experience (1)
- Experiment (1)
- Experimental Asset Markets (1)
- Experimental Economics (1)
- Experimental Finance (1)
- Explainable machine learning (1)
- Externalities (1)
- Extracurricular Activities (1)
- Extrapolation (1)
- FBSDE (1)
- Fair value accounting (1)
- Family dynamics (1)
- Feedback (1)
- Field Experiment (1)
- Filtering (1)
- Finance and Employment (1)
- Financial Advice (1)
- Financial Constraints (1)
- Financial Distress (1)
- Financial Education (1)
- Financial Frictions (1)
- Financial Literacy (1)
- Financial Market Cycles (1)
- Financial Markets (1)
- Financial Networks (1)
- Financial crisis (1)
- Financial education (1)
- Financial stability (1)
- Financing Conditions (1)
- Financing Constraints (1)
- Financing Costs (1)
- Firm Investment (1)
- Firm valuation (1)
- Firm-bank relationship (1)
- Firms (1)
- Fiscal Policy (1)
- Fiscal Stabilization (1)
- Fiscal policy (1)
- Fiscal theory of the price level (1)
- Fixed-Income (1)
- Flash Crash (1)
- Flight-to-safety (1)
- Formalism (1)
- Formative experiences (1)
- Forward-looking models (1)
- Frictions (1)
- G-SIB (1)
- GDP growth (1)
- GFSY (1)
- GMM Estimation (1)
- Gambling (1)
- Game Theory (1)
- Gender Differences (1)
- General Equilibrium Asset Pricing (1)
- Generations (1)
- German corporate governance (1)
- Germany Inc. (1)
- Gig-economy (1)
- Gini (1)
- Global Temperature (1)
- Governance (1)
- Government (1)
- Government debt (1)
- Granger causality (1)
- Green Nudging (1)
- Green Quantitative Easing (1)
- Greenwashing (1)
- Group Interesterest (1)
- Habit-formation (1)
- Hazard estimation (1)
- Health expenses (1)
- Health jumps (1)
- Heterogeneous Agents (1)
- Heterogeneous Firms (1)
- Heterogeneous Preferences (1)
- Heterogeneous agents (1)
- High Frequency Data (1)
- High-Frequency Trading (HFT) (1)
- High-frequency event study (1)
- Higher Moments of Return (1)
- Home ownership (1)
- Homestead exemptions (1)
- Homophily (1)
- Hong test (1)
- House prices (1)
- Household Portfolios (1)
- Household Wealth (1)
- Household saving (1)
- Hybrid Markets (1)
- IV approach (1)
- Identification (1)
- Idiosyncratic Risk (1)
- Idiosyncratic volatility puzzle (1)
- Immediacy (1)
- Implied volatility (1)
- Impulse-response (1)
- Incentives (1)
- Income and Wealth Inequality (1)
- Incomplete Markets (1)
- Incomplete markets (1)
- Incubator (1)
- Incurred loss model (1)
- Individual Investors (1)
- Individual investors (1)
- Industry Classification (1)
- Inflation (1)
- Inflation Beliefs (1)
- Information Acquisition (1)
- Information Frictions (1)
- Information Production (1)
- Information Treatment (1)
- Information processing (1)
- Infrastructure (1)
- Innovation (1)
- Institution formation (1)
- Institutional Investor (1)
- Institutional Investors’ Ownership (1)
- Insurance Activities (1)
- Insurance Companies (1)
- Integrated Assessment Model (1)
- Interbank Markets (1)
- Interdealer Brokerage (1)
- Interest Rate Risk (1)
- Intermediated work (1)
- International finance (1)
- International relationships (1)
- Investment Styles (1)
- Investment attitudes (1)
- Investment funds (1)
- Investment-Specific Shocks (1)
- Investor behavior (1)
- Investor education (1)
- Investor sentiment (1)
- Investors Heterogeneity (1)
- Job Match Quality (1)
- LBO spillovers (1)
- LBOs (1)
- LSTM neural networks (1)
- Labor Hoarding (1)
- Labor Income Risk (1)
- Labor Markets (1)
- Law Enforcement (1)
- Leading indicator (1)
- Lending (1)
- Leverage (1)
- Leveraged buyouts (1)
- Life Events (1)
- Life Insurance Surrender (1)
- Life Insurers (1)
- Life course transitions (1)
- Life-Cycle Model (1)
- Life-cycle hypothesis (1)
- Liquidity Coinsurance (1)
- Liquidity Risk (1)
- Liquidity Shock (1)
- Liquidity premium (1)
- Liquidity provider incentives (1)
- Liquidity provision (1)
- Living Wills (1)
- Loan loss accounting (1)
- Locus of control (1)
- Long-Run Risk (1)
- Long-run risk (1)
- Loss Sharing (1)
- Loss-aversion (1)
- Lottery stocks (1)
- Low-emission vehicles (1)
- MREL (1)
- MTS Bond Market (1)
- Machine Learning (1)
- Macroeconomics (1)
- Macroprudential policy (1)
- Margin (1)
- Market (in)completeness (1)
- Market Design (1)
- Market Fragility (1)
- Market Liquidity (1)
- Market Structure (1)
- Market efficiency (1)
- Market fragmentation (1)
- Marketplace lending (1)
- Maximum Likelihood (1)
- Mental models (1)
- Meritocracy (1)
- MiFID II (1)
- Minority Shareholder Protection (1)
- Mitigation (1)
- Model Selection (1)
- Model-based regulation (1)
- Monetary Policy Surprises (1)
- Money Market (1)
- Moral Hazar (1)
- Morality (1)
- Mortality risk (1)
- Mortgage design (1)
- Mortgage supply (1)
- Mortgages (1)
- Multi-Layer Network (1)
- Multi-level marketing (1)
- Multilayer networks (1)
- Multitasking (1)
- Mundellian trilemma (1)
- Mutual Funds (1)
- Mutual funds (1)
- Mutually Exciting Processes (1)
- Mutually exciting processes (1)
- NLP (1)
- Narrative Approach (1)
- Net-zero transition (1)
- Network Combination (1)
- Network Communities (1)
- Network theory (1)
- Networks (1)
- Nominal Rigidities (1)
- Non-bank lead arrangers (1)
- Nonlinear solution methods (1)
- Numerical Solution (1)
- OTC Markets (1)
- OTC derivatives (1)
- Obfuscation (1)
- Oil (1)
- Oil market (1)
- On-the-Job Search (1)
- Open banking (1)
- Opening Auction (1)
- Opening Call Auction (1)
- Optimal Regulation (1)
- Optimism (1)
- Over-Confidence (1)
- Overlapping Generations (1)
- Overlapping generations (1)
- Pandemic (1)
- Partial Information (1)
- Paycheck Protection Program (1)
- Pecuniary Externality (1)
- Peer effects (1)
- Peers (1)
- Persistent and Transitory Income Shocks (1)
- Personal Finance (1)
- Personal bankruptcy (1)
- Personality traits (1)
- Petroleum-based Economies (1)
- Pivotality (1)
- Planning (1)
- Policy Effects (1)
- Pollution (1)
- Portfolio Choice (1)
- Portfolio Management (1)
- Portfolio Rebalancing (1)
- Portfolio allocation (1)
- Pre-Opening (1)
- Precautionary Saving (1)
- Preference Stability (1)
- Preference for early resolution of uncertainty (1)
- Preference survey module (1)
- Price Competition (1)
- Price Pressures (1)
- Private equity (1)
- Probability Weighting Function (1)
- Product returns (1)
- Production (1)
- Production Economy (1)
- Program Evaluation (1)
- Progressive Taxation (1)
- Proprietary Trading (1)
- Prosociality (1)
- Prospect Theory (1)
- Prudential filter (1)
- Public Goods (1)
- Public financial news (1)
- Public-Private Partnerships (1)
- Quantile Causality (1)
- Quantitative Easing (1)
- Quantitative easing (1)
- R&D Investment (1)
- R&D expenses (1)
- Rational Inattention (1)
- Real options (1)
- Realization Utility (1)
- Record resolution (1)
- Recursive Utility (1)
- Redemptions (1)
- Referrals (1)
- Related Party Transactions (1)
- Repeated Games (1)
- Repeated Principal-Agent Model (1)
- Repo Specialness (1)
- Reputation (1)
- Resolution Planning (1)
- Responsible investment (1)
- Restructuring (1)
- Return predictability (1)
- Risk Assessment (1)
- Risk Attitudes (1)
- Risk Aversion (1)
- Risk Measurement (1)
- Risk Pooling (1)
- Risk Preferences (1)
- Risk Premium (1)
- Risk taking (1)
- Rubin Causal Model (1)
- S corporations (1)
- S&P 500 (1)
- SIFI (1)
- SME Trading (1)
- SRB (1)
- SRF (1)
- Saving puzzles (1)
- Say on Pay (1)
- Screening (1)
- Search Frictions (1)
- Securities Market Regulation (1)
- Securitization (1)
- Segmentation (1)
- Self-Control (1)
- Selling Behavior (1)
- Sentiment Analysis (1)
- Shareholder Letters (1)
- Shareholder Rights Directive (1)
- Short-run Risk (1)
- Signaling (1)
- Similarity (1)
- Similarity encoding (1)
- Sin Stocks (1)
- Single Resolution Mechanism (1)
- Skewness (1)
- Slow-Moving Capital (1)
- Small Business (1)
- Social Security (1)
- Social Security claiming (1)
- Social Security claiming age (1)
- Social media (1)
- Social networks (1)
- Socially responsible investing (1)
- Sociology of Finance (1)
- Sovereign (1)
- Sovereign Bonds (1)
- Sovereign Risk (1)
- Sovereign credit risk (1)
- Sovereign risk (1)
- Sparsity (1)
- Spatial autoregressive model (1)
- Speculation (1)
- Spike–and–Slab prior (1)
- Stages (1)
- Stay-Home (1)
- Stochastic Search Variable Selection (1)
- Stochastic volatility (1)
- Stock Market (1)
- Stock Market Participation (1)
- Stock Markets (1)
- Stock market (1)
- Stock market wealth (1)
- Stockholding (1)
- Stress Test (1)
- Structural Bank Reform (1)
- Structured retail products (1)
- Subjective Survival Beliefs (1)
- Subjective expectations (1)
- Supervision (1)
- Systematic Risk (1)
- Systemic events (1)
- Systemically Important Financial Institutions (1)
- TARP (1)
- TIPS (1)
- TIPS–Treasury puzzle (1)
- TLAC (1)
- Tail Risk (1)
- Tax Cuts and Jobs Act (1)
- Tax Multiplier (1)
- Taxation of Capital (1)
- Technology Adoption (1)
- Technology Park (1)
- Technology spillover (1)
- Term life insurance (1)
- Textual Analysis (1)
- The Community Reinvestment Act (1)
- Time Inconsistency (1)
- Time Preferences (1)
- Time-varying networks (1)
- Tobin tax (1)
- Top Income Taxation (1)
- Toxic Emissions (1)
- Trading (1)
- Trading volume (1)
- Transaction costs (1)
- Transitional Dynamics (1)
- Transparency (1)
- Tree-based models (1)
- Trust Game (1)
- Tunneling (1)
- Turning points (1)
- Twitter (1)
- Uncertainty (1)
- Unconventional Monetary policy (1)
- Utility Functions (1)
- Utility Theory (1)
- Utilization (1)
- VAR estimation (1)
- VaR (1)
- Value-at-risk (1)
- Variance Risk Premium (1)
- Venture Capital (1)
- Venue Choice (1)
- WHO alerts (1)
- Wage Rigidity (1)
- Wage rigidity (1)
- Weak Instruments (1)
- Wealth shocks (1)
- Welfare Costs (1)
- WpHG (1)
- XAI (1)
- Zombie Lending (1)
- adaptation (1)
- adviser (1)
- age (1)
- age limits (1)
- agency (1)
- agglomeration (1)
- allocation bias (1)
- ambiguity premium (1)
- angel finance (1)
- anomalies (1)
- asset markets (1)
- asset prices (1)
- asset purchases (1)
- asset-backed securities (1)
- assetbacked securities (1)
- asymmetric shocks (1)
- attention (1)
- attitudes towards inequality (1)
- auction format (1)
- average treatment effect (1)
- backward stochastic differential equation (1)
- bailouts (1)
- balance of payments (1)
- bank (1)
- bank capital ratios (1)
- bank integration (1)
- bank lending (1)
- bank performance (1)
- bank stability (1)
- banking networks (1)
- banking regulation (1)
- behavioral economics (1)
- belief effect (1)
- belief estimation (1)
- belief formation (1)
- belief updates (1)
- belief updating (1)
- beliefs (1)
- benchmarks (1)
- betting (1)
- bid-ask spread (1)
- bidder surplus (1)
- big data (1)
- biometric risks (1)
- booms (1)
- bounded rationality (1)
- bureaucrats' incentives (1)
- call auctions (1)
- capacity utilization (1)
- capital maintenance (1)
- capital markets (1)
- capital ratios (1)
- caps (1)
- catastrophic events (1)
- catastrophic risk (1)
- central bank policy (1)
- central counter parties (1)
- centralisation (1)
- centrality metrics (1)
- cheating (1)
- client involvement (1)
- climate behavior (1)
- climate policies (1)
- climate risk (1)
- coinvestment (1)
- collateral reuse (1)
- collective action clauses (1)
- commercial banks (1)
- communication (1)
- compensation design (1)
- competitive equilibrium (1)
- competitiveness (1)
- compliance behavior (1)
- conditionality (1)
- confirmatory biases (1)
- conflict of laws (1)
- connected industries (1)
- construction procurement (1)
- consumer education (1)
- consumer protection (1)
- consumption commitments (1)
- consumption-based models (1)
- consumption-portfolio decisions (1)
- contest (1)
- contingent capital (1)
- continuous limit order book (1)
- contract law (1)
- conventional monetary policy (1)
- convergence (1)
- coordination (1)
- corporate bonds (1)
- corporate deposits (1)
- corporate finance (1)
- corporate governance codes (1)
- corporate income tax (1)
- corporate restructuring (1)
- corporate savings (1)
- corporate taxation (1)
- counterfactual analysis (1)
- counterfactual thinking (1)
- credence goods (1)
- credit default swap (1)
- credit rationing (1)
- credit risk (1)
- credit scoring (1)
- credit scoring methodology (1)
- credit scoring regulation (1)
- cross-border insolvency (1)
- cross-section of expected stock returns (1)
- cross-section of stock return (1)
- cross-section of stock returns (1)
- crowdlending (1)
- crowdsponsoring (1)
- current account (1)
- cycle flows (1)
- cyclical liabilities (1)
- dash-for-cash (1)
- debt consolidation (1)
- decentralization theorem (1)
- default (1)
- deleveraging (1)
- democracy (1)
- demographic change (1)
- deregulation (1)
- designated market makers (1)
- dictator game (1)
- die game milk (1)
- differences of opinion (1)
- digital planning tool (1)
- disaster risk (1)
- discourse analysis (1)
- discretionary lending (1)
- distress (1)
- distributional consequences of monetary policy (1)
- divestments (1)
- dividends (1)
- dollar funding (1)
- duration of civil proceedings (1)
- duration of pay (1)
- dynamic correlation (1)
- dynamic inconsistency (1)
- dynamic model (1)
- early retirement (1)
- economic governance (1)
- economic preferences (1)
- economic rationality (1)
- economies of scale (1)
- education (1)
- educational intervention (1)
- elections (1)
- electricity (1)
- emissions trading system (ETS) (1)
- employees (1)
- employer-employee level dataset (1)
- endogenous information acquisition (1)
- endogenous risk (1)
- energy (1)
- energy crisis (1)
- entrepreneurial spawning (1)
- entrepreneurship (1)
- equity (1)
- equity market integration (1)
- erm structure of interest rates (1)
- event study (1)
- exit (1)
- exit strategies (1)
- experiences (1)
- experimental asset markets (1)
- experimental economics (1)
- externalities (1)
- extreme value theory (1)
- factor timing (1)
- fairness (1)
- familiarity (1)
- federal transfers (1)
- fiduciary (1)
- field study (1)
- filtering (1)
- finance (1)
- finance and employment (1)
- finance wage premium (1)
- financial constraints (1)
- financial contracts (1)
- financial disasters (1)
- financial fragility (1)
- financial frictions (1)
- financial institutions (1)
- financial literacy determinants (1)
- financial market (1)
- financial markets (1)
- financial privacy (1)
- financial retrenchment (1)
- financial risk-taking (1)
- financial solidarity (1)
- financial spillover (1)
- financing (1)
- financing constraint (1)
- fire sales (1)
- firm growth (1)
- first-price auctions (1)
- fiscal adjustment (1)
- fiscal austerity (1)
- fiscal decentralization (1)
- fiscal federalism (1)
- fiscal multipliers (1)
- fiscal solidarity (1)
- fiscal stress (1)
- fiscal union (1)
- fixed point approach (1)
- flash crashes (1)
- flexible-hour contracts (1)
- foreign portfolio investment (1)
- fragmentation (1)
- free dividend fallacy (1)
- frequent batch auctions (1)
- funding dry-ups (1)
- game perceptions (1)
- gender wage gap (1)
- genetics (1)
- geographic expansion (1)
- global preference survey (1)
- goal orientation (1)
- government bonds (1)
- green financing (1)
- group identity (1)
- group law (1)
- group size (1)
- habit (1)
- health (1)
- hedge funds (1)
- hedging (1)
- hedging errors (1)
- heterogeneity (1)
- heterogeneous beliefs (1)
- heterogeneous monetary policy response (1)
- heterogeneous wage rigidity (1)
- high consumption volatility (1)
- high-frequency data (1)
- high-frequency traders (HFTs) (1)
- high-frequency trading (1)
- holdout litigation (1)
- household finance (1)
- households (1)
- housing (1)
- housing expenditure share (1)
- ideational shift (1)
- identification (1)
- idle time (1)
- impatience (1)
- implied correlation (1)
- implied volatility (1)
- impulse analysis (1)
- incentive pay (1)
- income dependent inflation (1)
- incomplete information (1)
- independent private values (1)
- individual retirement account (1)
- industrial organization (1)
- inference (1)
- inflation (1)
- inflation swaps (1)
- informal loans (1)
- informal markets (1)
- information demand (1)
- information flow (1)
- information processing (1)
- informativeness principle (1)
- input-output (1)
- institutional investors (1)
- insurance industry (1)
- interbank market (1)
- interbank markets (1)
- interbank network (1)
- interconnections (1)
- interdependent preferences (1)
- interest rate risk (1)
- intergenerational persistence (1)
- internal capital markets (1)
- internal ratings (1)
- international diversification benefits (1)
- international taxation (1)
- inverse probability weighting (1)
- investment behavior (1)
- investment biases (1)
- investment forum (1)
- investment guarantee (1)
- investment mistakes (1)
- investor behavior (1)
- investor protection (1)
- investor sentiment (1)
- isk premiums (1)
- jump risk (1)
- jumps in aggregate consumption (1)
- jumps in the longrun growth rate (1)
- labelling (1)
- labels (1)
- labor demand (1)
- labor hoarding (1)
- labor income (1)
- labor market (1)
- labor mobility (1)
- labor supply (1)
- laboratory experiment (1)
- labour economics (1)
- labour market policies (1)
- large language models (1)
- latency arbitrage (1)
- law and finance (1)
- law enforcement (1)
- learning strategy (1)
- leisure (1)
- lending (1)
- level and slope of implied volatility smile (1)
- life cycle model (1)
- life expectancy (1)
- life-cycle (1)
- life-cycle behavior (1)
- life-cycle household decisions (1)
- life-cycle hypothesis (1)
- life-cycle utility maximization (1)
- lifecycle (1)
- likelihood insensitivity (1)
- limited arbitrage (1)
- liquidity premium (1)
- loan officer (1)
- loan origination (1)
- local projection (1)
- local projections (1)
- locally non-diversifiable risk (1)
- location decisions (1)
- long-run growth (1)
- long-run risk (1)
- longevity (1)
- losses (1)
- lottery-type assets (1)
- lump sum (1)
- macro-prudential policy (1)
- macro-prudential supervision (1)
- macroprudential regulation (1)
- macroprudential supervision (1)
- management compensation (1)
- mandatory disclosure (1)
- marginal propensity to consume (1)
- market design (1)
- market enforcement (1)
- market infrastructure (1)
- market making (1)
- market microstructure (1)
- market price (1)
- market-based (1)
- matching (1)
- maturity (1)
- measure of ambiguity (1)
- media polarization (1)
- mergers and acquisitions (1)
- microdata (1)
- microprudential supervision (1)
- misperception (1)
- mnimum distribution requirements (1)
- monetary policy surprise (1)
- monetary policy surprise shocks (1)
- monetary transmission (1)
- monetary transmission mechanism (1)
- money (1)
- money in the utility function (1)
- money market funds (1)
- mood (1)
- moral hazard (1)
- moral values (1)
- mortgages (1)
- motivated beliefs (1)
- motivated reasoning (1)
- motivation for honesty (1)
- multi-unit auctions (1)
- multiple point of entry (1)
- multiplex networks (1)
- national interest (1)
- natural disasters (1)
- natural experiment (1)
- natural gas (1)
- natural rate (1)
- neoinstitutionalism (1)
- net zero transition (1)
- net-zero arbitrage (1)
- net-zero plans and targets (1)
- network (1)
- network analysis (1)
- network formation (1)
- network model (1)
- networks (1)
- non-Bayesian updates (1)
- non-linear VAR (1)
- non-performing assets (1)
- online borrowing (1)
- open economy (1)
- operational performance (1)
- opinion (1)
- optimal stopping (1)
- optimum currency area (1)
- option prices (1)
- option-implied distribution (1)
- otc derivatives markets (1)
- outgroup derogation (1)
- output fluctuations (1)
- overlapping generations (1)
- ownership concentration (1)
- pandemics (1)
- panel data (1)
- pari passu clauses (1)
- participation (1)
- patents (1)
- paycheck frequency (1)
- pensions (1)
- personality traits (1)
- pessimism (1)
- pharmaceutical industry (1)
- placebo technique (1)
- polarization (1)
- policy (1)
- policy reform (1)
- political behavior (1)
- political economy of bureaucracy (1)
- political polarization (1)
- pooling equilibrium (1)
- portfolio allocation (1)
- portfolio optimization (1)
- precautionary recapitalization (1)
- pricing (1)
- principal components (1)
- principal-agent models (1)
- private benefits of control (1)
- private markets (1)
- private sector involvement (1)
- probability of default (1)
- propensity score (1)
- prudential regulation (1)
- public debt (1)
- public markets (1)
- quantile regression (1)
- rank feedback (1)
- real estate lending (1)
- recent economic crisis (1)
- recursive preferences (1)
- redistribution (1)
- regression adjustment (1)
- regression discontinuity design (1)
- regulatory capture (1)
- rehypothecation (1)
- related party transactions (1)
- relationship lending (1)
- relative performance evaluation (1)
- relative performance feedback (1)
- renting vs. owning home (1)
- repeated games (1)
- replication (1)
- repo market (1)
- reporting (1)
- resiliency (1)
- responsibility (1)
- responsible lending (1)
- retained earnings (1)
- retirement (1)
- retirement expectations (1)
- retirement planning (1)
- return expectations (1)
- reverse mortgage (1)
- risk (1)
- risk management (1)
- risk preference (1)
- risk spillovers (1)
- risk-taking incentives (1)
- safe assets (1)
- salience (1)
- saving behavior (1)
- saving puzzles (1)
- say-on-pay (1)
- school closures (1)
- screening (1)
- seasonal affective disorder (SAD) (1)
- secrecy (1)
- secular stagnation (1)
- securities lending (1)
- self-control (1)
- sentiment (1)
- separating equilibrium (1)
- severance pay caps (1)
- shareholder wealth (1)
- shocks (1)
- short-sale constraints (1)
- single point of entry (1)
- skill-biased technological change (1)
- slumps (1)
- small and medium enterprises (1)
- sniping (1)
- social (1)
- social centralization (1)
- social dilemma (1)
- social dilemmas (1)
- social identity (1)
- social networks (1)
- social norms (1)
- socialist education (1)
- socially responsible consumers (1)
- soft information (1)
- soft law (1)
- solution methods (1)
- solvency shocks (1)
- sophistication (1)
- source dependence (1)
- sovereign debt litigation (1)
- sovereign debt restructuring (1)
- sovereign debt standstill (1)
- spillover effects (1)
- spillovers (1)
- spread premium (1)
- sset pricing (1)
- stable convergence (1)
- stakeholder (1)
- staleness (1)
- state dependency (1)
- state-dependent sensitivity value-at-risk (SDSVaR) (1)
- state-owned enterprises (1)
- statistical discrimination (1)
- stochastic control (1)
- stock demand (1)
- stock market (1)
- stock market crisis (1)
- stock market investment (1)
- stock market volatility (1)
- stock return expectations (1)
- stockholding (1)
- strategic interaction of regulators (1)
- structured finance (1)
- supervisory board (1)
- survey experiments (1)
- sustainable finance (1)
- systematic risk (1)
- systemic importance (1)
- systemic risk, too-interconnected-to-fail (1)
- tail measure (1)
- tax (1)
- tax competition (1)
- tax cut (1)
- tax haven (1)
- tax havens (1)
- tax information exchange (1)
- tax information exchange agreements (1)
- tax intervention (1)
- taxing rights (1)
- taxonomies (1)
- temperature shocks (1)
- term premia (1)
- threshold vector auto-regressive models (1)
- time dependency (1)
- time series momentum (1)
- topic modelling (1)
- trading (1)
- trading activity (1)
- trading strategies (1)
- transactions (1)
- transition risk (1)
- treasury auctions (1)
- trend chasing (1)
- trust (1)
- trust driven expectations (1)
- trust evolutionary games (1)
- trust game (1)
- tunneling (1)
- twin study (1)
- tâtonnement (1)
- unemployment (1)
- utility functions (1)
- validation (1)
- valuation discount (1)
- valuation ratios (1)
- variable annuity (1)
- variance risk premium (1)
- venture capital (1)
- vertical fiscal imbalances (1)
- volatility of volatility (1)
- vulture creditors (1)
- wage hump (1)
- wealth (1)
- weather (1)
- welfare costs (1)
- wholesale shocks (1)
- worker-firm panels (1)
- workforce (1)
- yield spreads (1)
- zero returns (1)
- fiscal multipliers (1)
- fiscal policy (1)
- ΔCoVaR (1)
- financial literacy (1)
Institute
- Center for Financial Studies (CFS) (409) (remove)
113
We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
112
There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.
111
The pressure on tax haven countries to engage in tax information exchange shows first effects on capital markets. Empirical research suggests that investors do react to information exchange and partially withdraw from previous secrecy jurisdictions that open up to information exchange. While some of the economic literature emphasizes possible positive effects of tax havens, the present paper argues that proponents of positive effects may have started from questionable premises, in particular when it comes to the effects that tax havens have for emerging markets like China and India.
110
n this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the importance of two different channels through which academic talent is transmitted across generations (persistence of innate ability vs. the impact of parental education) for the optimal design of these policies and model different forms of labor as imperfect substitutes, thereby generating general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers. We show that subsidizing higher education has important redistributive benefits, by shrinking the college wage premium in general equilibrium. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
109
This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.
From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities.
Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
108
In an experimental setting in which investors can entrust their money to traders, we investigate how compensation schemes affect liquidity provision and asset prices. Investors face a trade-off between risk and return. At the benefit of a potentially higher return, they can entrust their money to a trader. However this investment is risky, as the trader might not be trustworthy. Alternatively, they can opt for a safe but low return. We study how subjects solve this trade-off when traders are either liable for losses or not, and when their bonuses are either capped or not. Limited liability introduces a conflict of interest because it makes traders value the asset more than investors. To limit losses, investors should thus restrict liquidity provision to force traders to trade at a lower price. By contrast, bonus caps make traders value the asset less than investors. This should encourage liquidity provision and decrease prices. In contrast to these predictions, we find that under limited liability investors contribute to asset price bubbles by increasing liquidity provision and that caps fail to tame bubbles. Overall, giving investors skin in the game fosters financial stability.
107
Since August 2009, German legislation allows for voluntary Say on Pay Votes (SoPV) during Annual General Meetings (AGMs). We examine 1,169 AGMs of all German listed firms with more than 10,000 agenda items over the period 2010-2013 to identify (1) determinants and approval rates of voluntary SoPVs, (2) the effect of voluntary SoPVs on AGM participation, and (3) the effect of SoP on executive compensation. Our data reveals that in the first four years of the voluntary say on pay regime every second firm in our sample has opted for having a SoPV. The propensity for a SoPV increases with firm size, abnormal executive compensation and free float of shares. Indeed, smaller firms with concentrated ownership do not only have a lower propensity for a SoPV, but also show a higher propensity to opt for only limited disclosure of executive compensation. Approval rates of SoPVs are lower than the approval rate for the average AGM agenda item and this effect is stronger in (i) widely held firms as well as in (ii) firms with abnormal executive compensation. Additionally, SoPVs actually can increase AGM participation; however, this result is particularly evident for widely held firms. Finally, we find stronger pay for performance elements within total executive compensation, particularly when the effect of executive compensation is lagged over the years following the vote. Overall, our results are consistent with the view that firms use voluntary SoPV to gain legitimation for executive remuneration policies in firms with low ownership concentration. This is enforced, where (small) shareholders consider executive compensation a part of the agency problem of listed firms, and where (small) shareholders consider SoPVs as a possibility to actively influence corporate decisions, with these decisions leading to a higher degree of alignment between executive management boards and shareholders.
106
The standard view suggests that removing barriers to entry and improving judicial enforcement reduces informality and boosts investment and growth. However, a general equilibrium approach shows that this conclusion may hold to a lesser extent in countries with a constrained supply of funds because of, for example, a more concentrated banking sector or lower financial openness. When the formal sector grows larger in those countries, more entrepreneurs become creditworthy, but the higher pressure on the credit market limits further capital accumulation. We show empirical evidence consistent with these predictions.
105
n the EU there are longstanding and ongoing pressures towards a tax that is levied on the EU level to substitute for national contributions. We discuss conditions under which such a transition can make sense, starting from what we call a "decentralization theorem of taxation" that is analogous to Oates (1972) famous result that in the absence of spill-over effects and economies of scale decentralized public good provision weakly dominates central provision. We then drop assumptions that turn out to be unnecessary for this results. While spill-over effects of taxation may call for central rules for taxation, as long as spill-over effects do not depend on the intra-regional distribution of the tax burden, decentralized taxation plus tax coordination is found superior to a union-wide tax.
104
Do markets correct individual behavioral biases? In an experimental asset market, we compare the outcomes of a standard market economy to those of a an island economy that removed market interactions. We observe asset price bubbles in the market economy while prices are stable in the island economy. We also find that subjects took more risk following larger losses, resulting in larger prices and consistent with a gambling for resurrection motive. This motive can translate into bubbles in the market economy because higher prices increase average losses and thus reinforce the desire to resurrect. By contrast, the absence of such a strategic complementarity in island economies can explain the more stable outcome. These results suggest that markets do not correct behavioral biases, rather the contrary.
103
This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shift-contagion. All the increases in correlation we have witnessed over the last years come from larger shocks propagated with higher intensity across Europe.
102
Research on interbank networks and systemic importance is starting to recognise that the web of exposures linking banks balance sheets is more complex than the single-layer-of-exposure paradigm. We use data on exposures between large European banks broken down by both maturity and instrument type to characterise the main features of the multiplex structure of the network of large European banks. This multiplex network presents positive correlated multiplexity and a high similarity between layers, stemming both from standard similarity analyses as well as a core-periphery analyses of the different layers. We propose measures of systemic importance that fit the case in which banks are connected through an arbitrary number of layers (be it by instrument, maturity or a combination of both). Such measures allow for a decomposition of the global systemic importance index for any bank into the contributions of each of the sub-networks, providing a useful tool for banking regulators and supervisors. We use the dataset of exposures between large European banks to illustrate the proposed measures.
101
Although banks are at the center of systemic risk, there are other institutions that contribute to it. With the publication of the leveraged lending guideline in March 2013, the U.S. regulators show that they are especially worried about the private equity firms with their high-risk deals. Given these risks and the interconnectedness of the banks through the LBO loan syndicates, I shed light on the impact of a bank’s LBO loan exposure on its systemic risk. By using 3,538 observations between 2000 and 2013 from 165 global banks, I show that banks with higher LBO exposure also have a higher level of systemic risk. Other loan purposes do not show this positive relationship. The main drivers influencing this relationship positively are the bank’s interconnectedness to other LBO financing banks and its size. Lending experience with a specific PE sponsor, experience with leading LBO syndicates or a bank’s credit rating, however, lead to a lower impact of the LBO loan exposure on systemic risk.
100
In the mid-1990s, institutional investors entered the syndicated loan market and started to serve borrowers as lead arrangers. Why are non-banks able to compete for this role against banks? How do the composition of syndicates and loan pricing differ among lead arrangers? By using a dataset of 12,847 leveraged loans between 1997 and 2012, I aim to answer these questions. Non-banks benefit from looser regulatory requirements, have industry expertise which helps them in the screening and monitoring of borrowers and focus on firms that ask for loans only instead of additional cross-selling of other services. I can show that non-banks specialize on more opaque and less experienced borrowers, are more likely than banks to choose participants that help to reduce potentially higher information asymmetries and earn 105 basis points more than banks.
99
This paper analyzes the influence Leveraged Buyouts (LBOs) have on the operating performance of the LBO target companies’ direct competitors. A unique and hand-collected data set on LBOs in the United States in the period 1985-2009 allows us to analyze the effects different restructuring activities as part of the LBO have on the competitors’ revenues. These restructuring activities include changes to leverage, governance, or operating business, as well as M&A activities of the LBO target company. We find that although LBOs itself have a negative influence on competitors’ revenue growth, some restructuring mechanisms might actually benefit competing companies.
98
The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding non-convertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Furthermore, our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.
97
I assess how Basel III, Solvency II and the low interest rate environment will affect the financial connection between the bank and insurance sector by changing the funding patterns of banks as well as the investment strategies of life insurance companies. Especially for life insurance companies, the current low interest rate environment poses a key risk since declining returns on investments jeopardize the guaranteed return on life insurance contracts, a core component of traditional life insurance contracts in several European countries. I consider a contingent claim framework with a direct financial connection between banks and life insurers via bank bonds. The results indicate that life insurers' demand for bank bonds increases over the mid-term but ultimately declines in the long-run. Since life insurers are the largest purchasers of bank bonds in Europe, banks could lose one of their main funding sources. In addition, I show that shareholder value driven life insurers' appetite for risk increases when the gap between asset return and liability growth diminishes. To check the robustness of the findings, I calibrate a prolonged low interest rate scenario. The results show that the insurer's risk appetite is even higher when interest rates remain persistently low. A sensitivity analysis regarding industry-specific regulatory safety levels reveals that contagion between bank and life insurer is driven by the insurers' demand for bank bonds which itself depends on the regulatory safety level of banks.
96
The creation of the Banking Union is likely to come with substantial implications for the governance of Eurozone banks. The European Central Bank, in its capacity as supervisory authority for systemically important banks, as well as the Single Resolution Board, under the EU Regulations establishing the Single Supervisory Mechanism and the Single Resolution Mechanism, have been provided with a broad mandate and corresponding powers that allow for far-reaching interference with the relevant institutions’ organisational and business decisions. Starting with an overview of the relevant powers, the present paper explores how these could – and should – be exercised against the backdrop of the fundamental policy objectives of the Banking Union. The relevant aspects directly relate to a fundamental question associated with the reallocation of the supervisory landscape, namely: Will the centralisation of supervisory powers, over time, also lead to the streamlining of business models, corporate and group structures of banks across the Eurozone?
95
This paper examines the dynamic relationship between credit risk and liquidity in the sovereign bond market in the context of the European Central Bank (ECB) interventions. Using a comprehensive set of liquidity measures obtained from a detailed, quote-level dataset of the largest interdealer market for Italian government bonds, we show that changes in credit risk, as measured by the Italian sovereign credit default swap (CDS) spread, generally drive the liquidity of the market: a 10% change in the CDS spread leads a 11% change in the bid-ask spread. This relationship is stronger, and the transmission is faster, when the CDS spread is above the 500 basis point threshold, estimated endogenously, and can be ascribed to changes in margins and collateral, as well as clientele effects. Moreover, we show that the Long-Term Refinancing Operations (LTRO) intervention by the ECB weakened the sensitivity of the liquidity provision by the market makers to changes in the Italian government's credit risk. We also document the importance of market-wide and dealer-specific funding liquidity measures in determining the market liquidity for Italian government bonds.
94
This paper explores how banks adjust their risk-based capital ratios and asset allocations following an exogenous shock to their asset quality caused by Hurricane Katrina in 2005. We find that independent banks based in the disaster areas increase their risk-based capital ratios after the hurricane, while those part of a bank holding company do not. The effect on independent banks mainly comes from the subgroup of high-capitalized banks. These banks increase their holdings in government securities and reduce loans to non-financial firms. Hence, banks that become more stable achieve this at the cost of reduced lending.
93
A number of recent studies regress a "narratively" identified measure of a macroeconomic shock directly on an outcome variable. In this note, we argue that this approach can be viewed as the reduced-form regression of an instrumental variable approach in which the narrative time series is used as an instrument for an endogenous series of interest. This motivates evaluating the validity of narrative measures through the lens of a randomized experiment. We apply our framework to four recently constructed narrative measures of tax shocks by Romer and Romer (2010), Cloyne (2013), and Mertens and Ravn (2012). All of them turn out to be weak instruments for observable measures of taxes. After correcting for weak instruments, we find that using any of the considered narrative tax measures as an instrument for cyclically adjusted tax revenues yields tax multiplier estimates that are indistinguishable from zero. We conclude that the literature currently understates the uncertainty associated with quantifying the tax multiplier.
92
This paper studies a dynamic stochastic general equilibrium model involving climate change. Our model allows for damages on economic growth resulting from global warming. In the calibration, we capture effects from climate change and feedback effects on the temperature dynamics. We solve for the optimal state-dependent abatement policy. In our simulations, the costs of this policy measured in terms of lost GDP growth are moderate. On the other hand, postponing abatement action could reduce the probability that the climate can be stabilized. For instance, waiting for 10 years reduces this probability from 60% to 30%. Waiting for another 10 years leads to a probability that is less than 10%. Finally, doing nothing opens the risk that temperatures might explode and economic growth decreases significantly.
91
The banking system is highly interconnected and these connections can be conveniently represented as an interbank network. This survey presents a systematic overview of the recent advances in the theoretical literature on interbank networks. We assess our current understanding of the structure of interbank networks, of how network characteristics affect contagion in the banking system and of how banks form connections when faced with the possibility of contagion and systemic risk. In particular, we highlight how the theoretical literature on interbank networks offers a coherent way of studying interconnections, contagion processes and systemic risk, while emphasizing at the same time the challenges that must be addressed before general results on the link between the structure of the interbank network and financial stability can be established. The survey concludes with a discussion of the policy relevance of interbank network models with a special focus on macroprudential policies and monetary policy.
90
This paper investigates whether a fiscal stimulus implies a different impact for flexible and rigid labour markets. The analysis is done for 11 advanced OECD economies. Using quarterly data from 1999 to 2013, I estimate a panel threshold structural VAR model in which regime switches are determined by OECD’s employment protection legislation index. My empirical results indicate significant differences between rigid and flexible labour markets regarding the impact of the fiscal stimulus on output and unemployment. While the impulse response of real GDP to a government spending shock is positive and more effective in flexible labour markets, it has less impact in the rigid ones. Moreover, it is found that a fiscal stimulus leads to higher overall unemployment in highly regulated countries.
89
Does exchange of information between tax authorities influence multinationals' use of tax havens?
(2015)
Since the mid-1990s, countries offering tax systems that facilitate international tax avoidance and evasion have been facing growing political pressure to comply with the internationally agreed standards of exchange of tax information. Using data of German investments in tax havens, we find evidence that the conclusion of a bilateral tax information exchange agreement (TIEA) is associated with fewer operations in tax havens and the number of German affiliates has on average decreased by 46% compared to a control group. This suggests that firms invest in tax havens not only for their low tax rates but also for the secrecy they offer.
88
Most recent regulations establish that resolution of global banking groups shall be done according to bail-in procedures and following a Single Point of Entry (SPE) as opposed to a Multiple Point of Entry (MPE) approach. The latter requires parent holding of global groups to put up front the equity capital needed to absorb losses possibly emerging in foreign subsidiaries-branches. No model rationalized so far such resolution regime. We build a model of optimal design of resolution regimes and compare three regimes: SPE with cooperative authorities, SPE with non-cooperative authorities and MPE (ring-fencing). We find that the costs for bondholders of bail-inable instruments is generally higher under noncooperative regimes and ring-fencing. We also find that in those cases banks have ex ante incentives to reduce their exposure in foreign assets. We also examine recent case studies that help us rationalize the model results.
87
We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.
86
Based on a sample of university students, we provide field and laboratory evidence that a small scale training intervention has a both statistically and economically significant effect on subjective and objective assessments of financial knowledge. We also show that for a large part of students whose self-assessed financial knowledge has improved we do not find an increase in their actual skills.
85
We set up and solve a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. The model features habit formation for housing consumption, which leads to optimal decisions closer in line with empirical observations. Our model can explain (i) that stock investments are low or zero for many young agents and then gradually increasing over life, (ii) that the housing expenditure share is age- and wealth-dependent, (iii) that perishable consumption is more sensitive to wealth and income shocks than housing consumption, and (iv) that non-housing consumption is hump-shaped over life.
84
This paper investigates whether exchanging the Social Security delayed retirement credit, currently paid as an increase in lifetime annuity benefits, for a lump sum would induce later claiming and additional work. We show that people would voluntarily claim about half a year later if the lump sum were paid for claiming any time after the Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age. Overall, people will work one-third to one-half of the additional months, compared to the status quo. Those who would currently claim at the youngest ages are likely to be most responsive to the offer of a lump sum benefit.
83
This paper studies a two-country production economy with complete and frictionless financial markets and international trade of final goods in which competition in R&D leads to endogenous new firm creation and economic growth. Current monopolists ("incumbents") and potential new firms ("entrants") compete in developing patents domestically. I find that this induces negative spillover in consumption, i.e. home country's consumption decreases in response to positive productivity shocks in the foreign country. Second, there is positive spillover in R&D expenditures, i.e. home country's R&D expenditures increase in response to positive foreign productivity shocks, which is consistent with empirical evidence on international technology diffusion. Furthermore, the stylized fact in international macroeconomics that the cross-country correlation of consumption growth is significantly lower than the one of output growth is explained by the model. Fourth, net exports are negatively correlated with output as in the data. Fifth, the model matches the high comovement of the risk-free rates and stock returns across countries. Finally, the model produces a positive value premium.
82
Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations — France, Germany and Italy — to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of a consumption equivalent variation.
81
In the aftermath of the global financial crisis, both resolution planning, i.e. contingency planning by both regulated institutions and public authorities in order to prepare their actions in financial crisis, and concepts for structural bank reform have been identified as possible solutions to ending “Too Big To Fail” and foster market discipline among bank owners, bank managers and investors in bank debt. Both concepts thus complement the global quest for reliable procedures and tools for bank resolution that would minimise systemic implications once large and complex financial institutions have reached the stage of insolvency. Given the complex task of orchestrating swift and effective resolution actions, especially with regard to cross-border banking groups and financial conglomerates, planning ahead in good times has since been widely recognised as crucial for enhancing resolvability. At least part of the impediments to resolution will be found in organisational, financial and legal complexity that has evolved in banks and groups over time. To remove these impediments, interference with existing corporate and group structures is all but inevitable. However, in both international standard setting and at the European Union level, issues related to resolution planning (within the context of bank resolution reform) and structural banking reforms to date have been discussed rather separately. This lack of consistency is questionable, given the obvious need to reconcile both approaches in order to facilitate effective implementation and enforcement especially with regard to large, complex banking groups. Based on an analysis both of the Bank Recovery and Resolution Directive and the SRM Regulation, this paper explores how these problems could be dealt with within the context of the European Banking Union.
80
Europe's debt crisis casts doubt on the effectiveness of fiscal austerity in highly-integrated economies. Closed-economy models overestimate its effectiveness, because they underestimate tax-base elasticities and ignore cross-country tax externalities. In contrast, we study tax responses to debt shocks in a two-country model with endogenous utilization that captures those externalities and matches the capital-tax-base elasticity. Quantitative results show that unilateral capital tax hikes cannot restore fiscal solvency in Europe, and have large negative (positive) effects at "home" ("abroad"). Restoring solvency via either Nash competition or Cooperation reduces (increases) capital (labor) taxes significantly, and leaves countries with larger debt shocks preferring autarky.
79
After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government’s shift to austerity policies in 2010 on subsequent growth.
78
Austerity
(2014)
We shed light on the function, properties and optimal size of austerity using the standard sovereign model augmented to include incomplete information about credit risk. Austerity is defined as the shortfall of consumption from the level desired by a country and supported by its repayment capacity. We find that austerity serves as a tool for securing a more favorable loan package; that it is associated with over-investment even when investment does not create collateral; and that low risk borrowers may favor more to less severe austerity. These findings imply that the amount of fresh funds obtained by a sovereign is not a reliable measure of austerity suffered; and that austerity may actually be associated with higher growth. Our analysis accommodates costly signalling for gaining credibility and also assigns a novel role to spending multipliers in the determination of optimal austerity.
77
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.
76
We show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks. Simulation of fiscal plans adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending. The difference between tax-based and spending-based adjustments appears not to be explained by accompanying policies, including monetary policy. It is mainly due to the different response of business confidence and private investment.
75
In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk. Exploiting the staggered introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 0.5 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly. Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach. Counter to the stated objectives, the introduction of complex regulation adversely affected the credit risk of financial institutions. Overall, our results highlight the pitfalls of complex regulation and suggest that simpler rules may increase the efficacy of financial regulation.
74
We analyze the implications of the structure of a network for asset prices in a general equilibrium model. Networks are represented via self- and mutually exciting jump processes, and the representative agent has Epstein-Zin preferences. Our approach provides a exible and tractable unifying foundation for asset pricing in networks. The model endogenously generates results in accordance with, e.g., the robust-yetfragile feature of financial networks shown in Acemoglu, Ozdaglar, and Tahbaz-Salehi (2014) and the positive centrality premium documented in Ahern (2013). We also show that models with simpler preference assumptions cannot generate all these findings simultaneously.
73
On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.
73 [ver 2015]
Based on a cognitive notion of neo-additive capacities reflecting likelihood insensitivity with respect to survival chances, we construct a Choquet Bayesian learning model over the life-cycle that generates a motivational notion of neo-additive survival beliefs expressing ambiguity attitudes. We embed these neo-additive survival beliefs as decision weights in a Choquet expected utility life-cycle consumption model and calibrate it with data on subjective survival beliefs from the Health and Retirement Study. Our quantitative analysis shows that agents with calibrated neo-additive survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival chances. Our neo-additive life-cycle model can therefore simultaneously accommodate three important empirical findings on household saving behavior.
72
This paper investigates extensions of the method of endogenous gridpoints (ENDGM) introduced by Carroll (2006) to higher dimensions with more than one continuous endogenous state variable. We compare three different categories of algorithms: (i) the conventional method with exogenous grids (EXOGM), (ii) the pure method of endogenous gridpoints (ENDGM) and (iii) a hybrid method (HYBGM). ENDGM comes along with Delaunay interpolation on irregular grids. Comparison of methods is done by evaluating speed and accuracy. We find that HYBGM and ENDGM both dominate EXOGM. In an infinite horizon model, ENDGM also always dominates HYBGM. In a finite horizon model, the choice between HYBGM and ENDGM depends on the number of gridpoints in each dimension. With less than 150 gridpoints in each dimension ENDGM is faster than HYBGM, and vice versa. For a standard choice of 25 to 50 gridpoints in each dimension, ENDGM is 1.4 to 1.7 times faster than HYBGM in the finite horizon version and 2.4 to 2.5 times faster in the infinite horizon version of the model.
71
When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.
71 [v.2]
When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations. We derive the equilibrium dynamics in closed form and show that joint presence of both risks leads to over-proportional risk exposure for households. This implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks in isolation. We measure this through interaction effects which appear even though the two risks are orthogonal by construction. While the interactions unambiguously increase the welfare benefits from insurance, they can in- or decrease the welfare costs from crowding out of capital formation. The net effect depends on the relative strengths of the opposing forces.
70
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.
69
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.
68
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
67
Previous research has documented strong peer effects in risk taking, but little is known about how such social influences affect market outcomes. The consequences of social interactions are hard to isolate in financial data, and theoretically it is not clear whether peer effects should increase or decrease risk sharing. We design an experimental asset market with multiple risky assets and study how exogenous variation in real-time information about the portfolios of peer group members affects aggregate and individual risk taking. We find that peer information ameliorates under-diversification that occurs in a market without such information. One reason is that peer information increases risk aversion and induces a concern for relative income position that may reduce or amplify risk taking, depending on whether the context highlights the most or least successful trader. Thus, contrary to conventional wisdom, we show that social interactions may help to reduce earnings volatility in financial markets, and we discuss implications for institutional design.
66
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.
65
Low interest rates are becoming a threat to the stability of the life insurance industry, especially in countries such as Germany, where products with relatively high guaranteed returns sold in the past still represent a prominent share of the total portfolio. This contribution aims to assess and quantify the effects of the current low interest rate phase on the balance sheet of a representative German life insurer, given the current asset allocation and the outstanding liabilities. To do so, we generate a stochastic term structure of interest rates as well as stock market returns to simulate investment returns of a stylized life insurance business portfolio in a multi-period setting. Based on empirically calibrated parameters, we can observe the evolution of the life insurers' balance sheet over time with a special focus on their solvency situation. To account for different scenarios and in order to check the robustness of our findings, we calibrate different capital market settings and different initial situations of capital endowment. Our results suggest that a prolonged period of low interest rates would markedly affect the solvency situation of life insurers, leading to relatively high cumulative probability of default for less capitalized companies.
64
This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades.
63
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.
62
In this paper we investigate the implications of providing loan officers with a compensation structure that rewards loan volume and penalizes poor performance versus a fixed wage unrelated to performance. We study detailed transaction information for more than 45,000 loans issued by 240 loan officers of a large commercial bank in Europe. We examine the three main activities that loan officers perform: monitoring, originating, and screening. We find that when the performance of their portfolio deteriorates, loan officers increase their effort to monitor existing borrowers, reduce loan origination, and approve a higher fraction of loan applications. These loans, however, are of above-average quality. Consistent with the theoretical literature on multitasking in incomplete contracts, we show that loan officers neglect activities that are not directly rewarded under the contract, but are in the interest of the bank. In addition, while the response by loan officers constitutes a rational response to a time allocation problem, their reaction to incentives appears myopic in other dimensions.
61
The implications of delegating fiscal decision making power to sub-national governments has become an area of significant interest over the past two decades, in the expectation that these reforms will lead to better and more efficient provision of public goods and services. The move towards decentralization has, however, not been homogeneously implemented on the revenue and expenditure side: decentralization has materialized more substantially on the latter than on the former, creating "vertical fiscal imbalances". These imbalances measure the extent to which sub-national governments’ expenditures are financed through their own revenues. This mismatch between own revenues and expenditures may have negative consequences for public finances performance, for example by softening the budget constraint of sub-national governments. Using a large sample of countries covering a long time period from the IMF’s Government Finance Statistics Yearbook, this paper is the first to examine the effects of vertical fiscal imbalances on fiscal performance through the accumulation of government debt. Our findings suggest that vertical fiscal imbalances are indeed relevant in explaining government debt accumulation, and call for a degree of caution when promoting fiscal decentralization.
60
We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about how inside debt features affect the relation between credit spreads and compensation components. First, inside debt reduces credit spreads only if it is unsecured. Second, inside debt exerts important indirect effects on the role of equity incentives: When inside debt is large and unsecured, equity incentives increase credit spreads; When inside debt is small or secured, this effect is weakened or reversed. We test our model on a sample of U.S. public firms with traded CDS contracts, finding evidence supportive of our predictions. To alleviate endogeneity concerns, we also show that our results are robust to using an instrumental variable approach.
59
We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about how inside debt features affect the relation between credit spreads and compensation components. First, inside debt reduces credit spreads only if it is unsecured. Second, inside debt exerts important indirect effects on the role of equity incentives: When inside debt is large and unsecured, equity incentives increase credit spreads; When inside debt is small or secured, this effect is weakened or reversed. We test our model on a sample of U.S. public firms with traded CDS contracts, finding evidence supportive of our predictions. To alleviate endogeneity concerns, we also show that our results are robust to using an instrumental variable approach.
58
The Eurozone fiscal crisis has created pressure for institutional harmonization, but skeptics argue that cultural predispositions can prevent convergence in behavior. Our paper derives a robust cultural classification of European countries and utilizes unique data on natives and immigrants to Sweden. Classification based on genetic distance or on Hofstede’s cultural dimensions fails to identify a single ‘southern’ culture but points to a ‘northern’ culture. Significant differences in financial behavior are found across cultural groups, controlling for household characteristics. Financial behavior tends to converge with longer exposure to common institutions, but is slowed down by longer exposure to original institutions.
57
This is a chapter for a forthcoming volume Oxford Handbook of Financial Regulation (Oxford University Press 2014) (eds. Eilís Ferran, Niamh Moloney, and Jennifer Payne). It provides an overview of EU financial regulation from the first banking directive up until its most recent developments in the aftermath of the financial crisis, focusing on the multiple layers of multi-level governance and their characteristic conceptual difficulties. Therefore the paper discusses the need to accommodate cross-border capital flows following from the EU internal market and the resulting regulatory strategies. This includes a brief overview of the principle of home country control and the ensuing Financial Services Action Plan. Dealing with the accommodation of cross-border capital flows and their regulation necessarily require an orchestration of the underlying supervisory structures, which is therefore also discussed. In the aftermath of the financial crisis of 2007-09 an additional aspect of necessary orchestration has emerged, that is the need to control systemic risk. Specific attention is paid to microprudential supervision by the newly established European Supervisory Authorities and macroprudential supervision in the European Banking Union, the latter’s underlying drivers and the accompanying Single Supervisory Mechanism, including the SSM’s institutional framework as well as the consideration of its rationales and the Single Resolution Mechanism closely linked to it.
56
This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i) agents have recursive preferences; (ii) economic growth is endogenously driven by investments in R&D; (iii) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short- and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years.
55
This paper provides a systematic analysis of individual attitudes towards ambiguity, based on laboratory experiments. The design of the analysis allows to capture individual behavior across various levels of ambiguity, ranging from low to high. Attitudes towards risk and attitudes towards ambiguity are disentangled, providing pure measures of ambiguity aversion. Ambiguity aversion is captured in several ways, i.e. as a discount factor net of a risk premium, and as an estimated parameter in a generalized utility function. We find that ambiguity aversion varies across individuals, and with the level of ambiguity, being most prominent for intermediate levels. Around one third of subjects show no aversion, one third show maximum aversion, and one third show intermediate levels of ambiguity aversion, while there is almost no ambiguity seeking. While most theoretical work on ambiguity builds on maxmin expected utility, our results provide evidence that MEU does not adequately capture individual attitudes towards ambiguity for the majority of individuals. Instead, our results support models that allow for intermediate levels of ambiguity aversion. Moreover, we find risk aversion to be statistically unrelated to ambiguity aversion on average. Taken together, the results support the view that ambiguity is an important and distinct argument in decision making under uncertainty.
54 [v.2]
We investigate the relationship between anchoring and the emergence of bubbles in experimental asset markets. We show that setting a visual anchor at the fundamental value (FV) in the first period only is sufficient to eliminate or to significantly reduce bubbles in laboratory asset markets. If no FV-anchor is set, bubble-crash patterns emerge. Our results indicate that bubbles in laboratory environments are primarily sparked in the first period. If prices are initiated around the FV, they stay close to the FV over the entire trading horizon. Our insights can be related to initial public offerings and the interaction between prices set on pre-opening markets and subsequent intra-day price dynamics.
54
We investigate the relationship between anchoring and the emergence of bubbles in experimental asset markets. We show that setting a visual anchor at the fundamental value (FV) in the first period only is sufficient to eliminate or to significantly reduce bubbles in laboratory asset markets. If no FV-anchor is set, bubble-crash patterns emerge. Our results indicate that bubbles in laboratory environments are primarily sparked in the first period. If prices are initiated around the FV, they stay close to the FV over the entire trading horizon. Our insights can be related to initial public offerings and the interaction between prices set on pre-opening markets and subsequent intra-day price dynamics.
53
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.
52
We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/representative agent can be characterized by a specific semilinear partial differential equation. To date, the solution to this equation has mostly been approximated by Campbell-Shiller techniques, without addressing general issues of existence and uniqueness. We develop a novel approach that rigorously constructs the solution by a fixed point argument. We prove that under regularity conditions a solution exists and establish a fast and accurate numerical method to solve consumption-portfolio and asset pricing problems with recursive preferences and unspanned risk. Our setting is not restricted to affine asset price dynamics. Numerical examples illustrate our approach.
51
We study self- and cross-excitation of shocks in the Eurozone sovereign CDS market. We adopt a multivariate setting with credit default intensities driven by mutually exciting jump processes, to capture the salient features observed in the data, in particular, the clustering of high default probabilities both in time (over days) and in space (across countries). The feedback between jump events and the intensity of these jumps is the key element of the model. We derive closed-form formulae for CDS prices, and estimate the model by matching theoretical prices to their empirical counterparts. We find evidence of self-excitation and asymmetric cross-excitation. Using impulse-response analysis, we assess the impact of shocks and a potential policy intervention not just on a single country under scrutiny but also, through the effect on cross-excitation risk which generates systemic sovereign risk, on other interconnected countries.
50
Exit strategies
(2014)
We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using a macromodel where banks choose their capital structure and are subject to runs. Under a Taylor rule, the post-crisis interest rate hits the zero lower bound (ZLB) and remains there for several years. In that condition, pre-announced and fast fiscal consolidations dominate - based on output and inflation performance and bank stability - alternative strategies incorporating various degrees of gradualism and surprise. We also examine an alternative monetary strategy in which the interest rate does not reach the ZLB; the benefits from fiscal consolidation persist, but are more nuanced.
49
We study the behavioral underpinnings of adopting cash versus electronic payments in retail transactions. A novel theoretical and experimental framework is developed to primarily assess the impact of sellers’ service fees and buyers’ rewards from using electronic payments. Buyers and sellers face a coordination problem, independently choosing a payment method before trading. In the experiment, sellers readily adopt electronic payments but buyers do not. Eliminating service fees or introducing rewards significantly boosts the adoption of electronic payments. Hence, buyers’ incentives play a pivotal role in the diffusion of electronic payments but monetary incentives cannot fully explain their adoption choices. Findings from this experiment complement empirical findings based on surveys and field data.
48
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.
47
This paper explores consequences of consumer education on prices and welfare in retail financial markets when some consumers are naive about shrouded add-on prices and firms try to exploit it. Allowing for different information and pricing strategies we show that education is unlikely to push firms to disclose prices towards all consumers, which would be socially efficient. Instead, price discrimination emerges as a new equilibrium. Further, due to a feedback on prices, education that is good for consumers who become sophisticated may be bad for consumers who stay naive and even for the group of all consumers as a whole
46
This paper makes a conceptual contribution to the effect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the beneficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives. We find that central bank supply of liquidity quite generally increases systemic risk.
45
Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in interbank markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We use a simple model to show that undiversifiable liquidity risk, i.e. the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversifiable liquidity risk hold more capital. We posit that empirically banks that are more exposed to undiversifiable liquidity risk are less active on interbank markets. Therefore, we test for the existence of a negative relationship between bank capital and interbank market activity and find support in a large sample of U.S. commercial banks.
44
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.
43
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.
42
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.
41
In this paper, we study the effect of proportional transaction costs on consumption-portfolio decisions and asset prices in a dynamic general equilibrium economy with a financial market that has a single-period bond and two risky stocks, one of which incurs the transaction cost. Our model has multiple investors with stochastic labor income, heterogeneous beliefs, and heterogeneous Epstein-Zin-Weil utility functions. The transaction cost gives rise to endogenous variations in liquidity. We show how equilibrium in this incomplete-markets economy can be characterized and solved for in a recursive fashion. We have three main findings. One, costs for trading a stock lead to a substantial reduction in the trading volume of that stock, but have only a small effect on the trading volume of the other stock and the bond. Two, even in the presence of stochastic labor income and heterogeneous beliefs, transaction costs have only a small effect on the consumption decisions of investors, and hence, on equity risk premia and the liquidity premium. Three, the effects of transaction costs on quantities such as the liquidity premium are overestimated in partial equilibrium relative to general equilibrium.
40 [Ver. juni 2015]
This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy long-term life insurance that can only be revised at significant costs, which makes insurance decisions sticky. Furthermore, a revision is only possible as long as the insured person is healthy. A second important feature of our model is that the labor income of the wage earner is unspanned. We document that the combination of unspanned labor income and the stickiness of insurance decisions reduces the long-term insurance demand significantly. This is because an income shock induces the need to reduce the insurance coverage, since premia become less affordable. Since such a reduction is costly and families anticipate these potential costs, they buy less protection at all ages. In particular, young families stay away from long-term life insurance markets altogether. Our results are robust to adding short-term life insurance, annuities and health insurance.
35
Advances in technology and several regulatory initiatives have led to the emergence of a competitive but fragmented equity trading landscape in the US and Europe. While these changes have brought about several benefits like reduced transaction costs, regulators and market participants have also raised concerns about the potential adverse effects associated with increased execution complexity and the impact on market quality of new types of venues like dark pools. In this article we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, as well as the resulting implications for investors' welfare. We start with the literature that views exchanges as natural monopolies due to presence of network externalities, and then examine studies which challenge this view by focusing on trader heterogeneity and other aspects of the microstructure of equity markets.
34
We analyze the equilibrium in a two-tree (sector) economy with two regimes. The output of each tree is driven by a jump-diffusion process, and a downward jump in one sector of the economy can (but need not) trigger a shift to a regime where the likelihood of future jumps is generally higher. Furthermore, the true regime is unobservable, so that the representative Epstein-Zin investor has to extract the probability of being in a certain regime from the data. These two channels help us to match the stylized facts of countercyclical and excessive return volatilities and correlations between sectors. Moreover, the model reproduces the predictability of stock returns in the data without generating consumption growth predictability. The uncertainty about the state also reduces the slope of the term structure of equity. We document that heterogeneity between the two sectors with respect to shock propagation risk can lead to highly persistent aggregate price-dividend ratios. Finally, the possibility of jumps in one sector triggering higher overall jump probabilities boosts jump risk premia while uncertainty about the regime is the reason for sizeable diffusive risk premia.
29
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.
27
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.
26
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.
25
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.
24
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.
23
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.
22
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.
21
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.
20
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.
19
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.
18
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.
17
16
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.
16 [Version 2015]
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 quantities known only in the true model. We apply our method to a calibrated affine model. Our findings are threefold: Jumps matter more, i.e. our approximation is less accurate, if (i) the expected jump size or (ii) the jump intensity is large. Fixing the average impact of jumps, we find that (iii) rare, but severe jumps matter more than frequent, but small jumps.
15
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.
14
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.
13
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.
12
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.
11
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.
11 [neue Version]
There has been a considerable debate about whether disaster models can rationalize the equity premium puzzle. This is because empirically disasters are not single extreme events, but long-lasting periods in which moderate negative consumption growth realizations cluster. Our paper proposes a novel way to explain this stylized fact. By allowing for consumption drops that can spark an economic crisis, we introduce a new economic channel that combines long-run and short-run risk. First, we document that our model can match consumption data of several countries. Second, it generates a large equity risk premium even if consumption drops are of moderate size.
10
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.