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This paper examines the performance of 538 sovereign wealth fund (SWF) investments into venture capital, private equity, and real asset funds (“alternative asset funds”) from 52 countries around the world over the years 1995-2020. The data indicate SWFs are significantly slower to fully liquidate and earn lower returns from their investments, particularly from their investments in venture capital funds. The longer duration and lower performance of SWFs is more pronounced for strategic SWFs than savings SWFs. We show that venture capital fund investments are more likely to be in countries with lower quality disclosure indices. SWFs are more often in buyout funds, and in larger funds with a greater number of limited partners. SWF performance is enhanced by having different types of institutional investors in the same limited partnership. Overall, the data indicate sovereign wealth funds make large investments in alternative asset funds with a longer-term view and earn a lower financial return consistent with strategic and political SWF investment motives.
This paper examines the causes and consequences of hedge fund investments in exchange traded funds (ETFs) using U.S. data from 1998 to 2018. The data indicate that transient hedge funds and quasi-indexer hedge funds are substantially more likely to invest in ETFs. Unexpected hedge fund inflows cause a rise in ETF investments, and the economic significance of unexpected flow is more than twice as large for transient than quasi-indexer hedge funds. ETF investment is in general associated with lower hedge fund performance. But when ETF investment is accompanied by an increase in total flow and unexpected flow, the negative impact of ETF holdings on performance is mitigated. The data are consistent with the view that hedge fund ETF investment unrelated to unexpected flow is an agency cost of delegated portfolio management.
This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household labor productivity takes two values, one of which is zero, and where households have logutility we provide a complete analytical characterization of the optimal consumption insurance contract, the stationary consumption distribution and the equilibrium aggregate capital stock and interest rate. Under parameter restrictions, there is a unique stationary equilibrium with partial consumption insurance and a stationary consumption distribution that takes a truncated Pareto form. The unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. The paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in Krueger and Uhlig (2006).
We analyze efficient risk-sharing arrangements when the value from deviating is determined endogenously by another risk sharing arrangement. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any coalition formed (joined) after deviations rely on a belief in future cooperation which we term "trust". We treat the contracting conditions of original and deviation coalitions symmetrically and show that higher trust tightens incentive constraints since it facilitates the formation of deviating coalitions. As a consequence, although trust facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of trust and efficient allocations might feature resource burning or utility burning: trust is indeed a double-edged sword.
Employing the art-collection records of Burton and Emily Hall Tremaine, we consider whether early-stage art investors can be understood as venture capitalists. Because the Tremaines bought artists’ work very close to an artwork’s creation, with 69% of works in our study purchased within one year of the year when they were made, their collecting practice can best be framed as venture-capital investment in art. The Tremaines also illustrate art collecting as social-impact investment, owing to their combined strategy of art sales and museum donations for which the collectors received a tax credit under US rules. Because the Tremaines’ museum donations took place at a time that U.S. marginal tax rates from 70% to 91%, the near “donation parity” with markets, creating a parallel to ESG investment in the management of multiple forms of value.
Venture capital (VC) funds backed by large multi-fund families tend to perform substantially better due to cross-fund cash flows (CFCFs), a liquidity support mechanism provided by matching distributions and capital calls within a VC fund family. The dynamics of this mechanism coincide with the sensitivity of different stage projects owing to market liquidity conditions. We find that the early-stage funds demand relatively more intra-family CFCFs than later-stage funds during liquidity stress periods. We show that the liquidity improvement based on the timing of CFCF allocation reflects how fund families arrange internal liquidity provision and explains a large part of their outperformance.
Lack of privacy due to surveillance of personal data, which is becoming ubiquitous around the world, induces persistent conformity to the norms prevalent under the surveillance regime. We document this channel in a unique laboratory---the widespread surveillance of private citizens in East Germany. Exploiting localized variation in the intensity of surveillance before the fall of the Berlin Wall, we show that, at the present day, individuals who lived in high-surveillance counties are more likely to recall they were spied upon, display more conformist beliefs about society and individual interactions, and are hesitant about institutional and social change. Social conformity is accompanied by conformist economic choices: individuals in high-surveillance counties save more and are less likely to take out credit, consistent with norms of frugality. The lack of differences in risk aversion and binding financial constraints by exposure to surveillance helps to support a beliefs channel.
Supranational supervision
(2022)
We exploit the establishment of a supranational supervisor in Europe (the Single Supervisory Mechanism) to learn how the organizational design of supervisory institutions impacts the enforcement of financial regulation. Banks under supranational supervision are required to increase regulatory capital for exposures to the same firm compared to banks under the local supervisor. Local supervisors provide preferential treatment to larger institutes. The central supervisor removes such biases, which results in an overall standardized behavior. While the central supervisor treats banks more equally, we document a loss in information in banks’ risk models associated with central supervision. The tighter supervision of larger banks results in a shift of particularly risky lending activities to smaller banks. We document lower sales and employment for firms receiving most of their funding from banks that receive a tighter supervisory treatment. Overall, the central supervisor treats banks more equally but has less information about them than the local supervisor.
Industry concentration and markups in the US have been rising over the last 3-4 decades. However, the causes remain largely unknown. This paper uses machine learning on regulatory documents to construct a novel dataset on compliance costs to examine the effect of regulations on market power. The dataset is comprehensive and consists of all significant regulations at the 6-digit NAICS level from 1970-2018. We find that regulatory costs have increased by $1 trillion during this period. We document that an increase in regulatory costs results in lower (higher) sales, employment, markups, and profitability for small (large) firms. Regulation driven increase in concentration is associated with lower elasticity of entry with respect to Tobin's Q, lower productivity and investment after the late 1990s. We estimate that increased regulations can explain 31-37% of the rise in market power. Finally, we uncover the political economy of rulemaking. While large firms are opposed to regulations in general, they push for the passage of regulations that have an adverse impact on small firms.
Resolving financial distress where property rights are not clearly defined: the case of China
(2022)
We use data on financially distressed Chinese companies in order to study a debt market where property rights are crudely defined and poorly enforced. To help with identification we use an event where a business-friendly province published new guidelines regarding the administration and enforcement of assets pledged as collateral. Although by no means a comprehensive reform of bankruptcy law or property rights, by instructing courts to enforce existing, albeit rudimentary, contractual rights the new guidelines virtually eliminated creditors runs and produced a sharp increase in the survival rate of financially-distressed companies. These changes illustrate how piecemeal reforms of property rights and their enforcement may have a significant impact on economic outcomes. Our analysis and results challenge the view that a fully fledged system of private property is a precondition for economic development.