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This paper studies the impact of financial sector size and leverage on business cycles and risk-free rates dynamics. We model a general equilibrium productive economy where financial intermediaries provide costly risk mitigation to households by pooling the idiosyncratic risks of their investment activities. We find that leverage amplifies variations of intermediaries’ relative size, but may also mitigate the business cycle. Moreover, it makes risk-free rates pro-cyclical. Households benefit the most when the financial sector is neither too small, thus avoiding high consumption fluctuations and costly mitigation, nor too big, so that fewer resources are lost after intermediation costs.
We show that High Frequency Traders (HFTs) are not beneficial to the stock market during flash crashes. They actually consume liquidity when it is most needed, even when they are rewarded by the exchange to provide immediacy. The behavior of HFTs exacerbate the transient price impact, unrelated to fundamentals, typically observed during a flash crash. Slow traders provide liquidity instead of HFTs, taking advantage of the discounted price. We thus uncover a trade-o↵ between the greater liquidity and efficiency provided by HFTs in normal times, and the disruptive consequences of their trading activity during distressed times.
Law is force of order. It reacts, usually with a necessary time delay, to technological pro-gress. Only twelve years after Samuel Morse presented the first workable telegraph sys-tem in New York in 1838 and six years after the first completed telegraph line from Wash-ington to Baltimore, central European states agreed on an international framework for tel-egraphs. It has been much more than twelve years since the technologies underlying the internet’s popularity today, such as the ‘World Wide Web’, were invented. No international framework has emerged, even though normative approaches abound. There are norms that are applied to the internet, but the recognition of the existence of an underlying, structuring order is missing. This motivates the present study.
This paper presents causal evidence of the effects of boardroom networks on firm value. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms that become more central in the network as a result of the shock experience positive abnormal returns around the announcement date. We find that information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. We also find that firms benefit more from boardroom centrality when they are more central in the input-output network, as this reinforces information complementarities, or when they are less central in the cross-ownership network, as well as when they suffer from low profitability and low growth opportunities. Network centrality also results in higher compensation for board directors.
Using an original dataset on professional networks of directors sitting on the boards of large US corporations, we examine how personal relationships are used by firms to improve job match quality in the high-skill segment of the labor market. Analyzing explicit social connection data between new hires and recruiters, we are able to test predictions of well established job referral models. We find that referred executive directors have a fifteen percent longer tenure than their non-referred counterparts. Referred executive directors also tend to be similar to their referrers on multiple dimensions, giving support to network homophily hypotheses.
We study whether and how time preferences change over the life cycle, exploiting representative long-term panel data. We estimate the age patterns of discount rates from age 25 to 80. In order to identify age effects, we have to disentangle them from cohort and period factors. We address this identification problem by estimating individual fixed effects models, where we substitute period effects with determinants of time preferences that depend on calendar years. We find that discount rates decrease with age and the decline is remarkably linear over the life cycle.
In many parts of the world, the centralized grid provides energy to the population only to a limited extent. The electrification for sub-Saharan Africa countries is the lowest in the world, representing half of the world's population withoutelectricity. However, during the last years there has been an increased attention to rural areas in the Global South beyond the centralised grid, especially with respect to improved possibilities of solar power systems. The transition from one dominant form of energy provision to various alternatives includes different dimensions and depends on specific socio-spatial contexts. Energy systems are framed within systems of spatial practices, performed by a variety of involved actors, like consumers, local suppliers, international for-profit companies, international development donors as well as national and regional authorities. As such power systems arealways cause and effect of socio-technical change This study takes the example of Rwanda to analyse the marketization of decentralised energy systems. Based on empirical field work with energy entrepreneurs it combines Post-Colonial Theory with Science and Technology-Studies to theorise the role of energy to the social production of space beyond the grid.
In this paper we argue that the own findings of the SSM THEMATIC REVIEW ON PROFITABILITY AND BUSINESS MODEL and the academic literature on bank profitability do not provide support for the business model approach of supervisory guidance. We discuss in the paper several reasons why the regulator should stay away from intervening in management practices. We conclude that by taking the role of a coach instead of a referee, the supervisor generates a hazard for financial stability.
Discussions about the banking union have restarted. Its success so far is limited: national banking sectors are still overwhelmingly exposed to their own countries’ economies, cross border banking has not increased and capital and liquidity remain locked within national boundaries. The policy letter highlights that the current debate, centered on sovereign exposures and deposit insurance, misses critical underlying problems in the supervision and resolution frameworks. The ECB supervisors’ efforts to facilitate cross-border banking have been hampered by national ringfencing. The resolution framework is not up to its task: limited powers of the SRB, prohibitive access conditions and limited size of the Single Resolution Fund limit its effectiveness. A lack of a coherent European framework for insolvency unlevels the regulatory field and creates incentives to bypass European rules. The new Commission and European Parliament, with the new ECB leadership, provide a unique opportunity to address these shortcomings and make the banking union work.
The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.
We design, field and exploit survey data from a representative sample of the French population to examine whether informative social interactions enter householdsístockholding decisions. Respondents report perceptions about their circle of peers with whom they interact about Önancial matters, their social circle and the population. We provide evidence for the presence of an information channel through which social interactions ináuence perceptions and expectations about stock returns, and financial behavior. We also find evidence of mindless imitation of peers in the outer social circle, but this does not permeate as many layers of financial behavior as informative social interactions do.
Abundant studies show that individuals often struggle and frequently fail to form a correct perception of how much they are worth in terms of income or net wealth, both in absolute terms and relative to others. The authors find that wealth misperception arises even in a frictionless environment. They show that this wealth misperception is related to low cognitive abilities and inattention, and that subjects who misperceive wealth have a greater tendency to borrow and spend out of gains. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix aligns the key experimental findings.
This paper provides an overview of how to use "big data" for economic research. We investigate the performance and ease of use of different Spark applications running on a distributed file system to enable the handling and analysis of data sets which were previously not usable due to their size. More specifically, we explain how to use Spark to (i) explore big data sets which exceed retail grade computers memory size and (ii) run typical econometric tasks including microeconometric, panel data and time series regression models which are prohibitively expensive to evaluate on stand-alone machines. By bridging the gap between the abstract concept of Spark and ready-to-use examples which can easily be altered to suite the researchers need, we provide economists and social scientists more generally with the theory and practice to handle the ever growing datasets available. The ease of reproducing the examples in this paper makes this guide a useful reference for researchers with a limited background in data handling and distributed computing.
We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average about seven percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that `late' stocks can only have higher expected returns than `early' stocks if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.
We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies—forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus—in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB’s New Area- Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.
Differential games of common resources that are governed by linear accumulation constraints have several applications. Examples include political rent-seeking groups expropriating public infrastructure, oligopolies expropriating common resources, industries using specific common infrastructure or equipment, capital-flight problems, pollution, etc. Most of the theoretical literature employs specific parametric examples of utility functions. For symmetric differential games with linear constraints and a general time-separable utility function depending only on the player’s control variable, we provide an exact formula for interior symmetric Markovian-strategies. This exact solution, (a) serves as a guide for obtaining some new closed-form solutions and for characterizing multiple equilibria, and (b) implies that, if the utility function is an analytic function, then the Markovian strategies are analytic functions, too. This analyticity property facilitates the numerical computation of interior solutions of such games using polynomial projection methods and gives potential to computing modified game versions with corner solutions by employing a homotopy approach.
This paper focuses on the life and work of three of the most important men who arrived in the Philippines during the 16th century: the Augustinian Martín de Rada (1533–1578) studied at the universities of Paris and Salamanca. He was one of the best European scientists of his time in East Asia. The Dominican Domingo de Salazar (1512–1594), first bishop of Manila, studied the legitimacy of the conquest of the Philippines and wrote against the Spanish plan to conquest China. The Dominican Juan Cobo (? –1592) was the first Spanish to master the Chinese language and, through his book Shilu, the first European who introduced Christianity to the Chinese from a rational point of view and the first one to introduce European science into Chinese context. All of them were very influenced by the School of Salamanca and, from Manila, they always had their eyes on China. These three men of the late 16th century are paradigmatic examples of the influence of the University of Salamanca in the production of global knowledge in the early modernity.
Differences in euro-area household finances and their relevance for monetary-policy transmission
(2019)
This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission in the euro area.
Is it true that speed bumps level the playing field, make financial markets more stable and reduce negative externalities of high-frequency trading (HFT) firms? We examine how the implementation of a particular speed bump – Midpoint Extended Life order (M-ELO) on Nasdaq impacted financial markets stability in terms of occurrences of mini-flash crashes in individual securities. We use high-frequency order book message data around the implementation date and apply difference-in-differences analysis to estimate the average treatment effect of the speed bump on market stability and liquidity provision. The results suggest that the introduction of the M-ELO decreases the average number of crashes on Nasdaq compared to other exchanges by 4.7%. Liquidity provision by HFT firms also improves. These findings imply that technology-based solutions by exchanges are feasible alternatives to regulatory intervention towards safer markets.
We study the accuracy and usefulness of automated (i.e., machine-generated) valuations for illiquid and heterogeneous real assets. We assemble a database of 1.1 million paintings auctioned between 2008 and 2015. We use a popular machine-learning technique—neural networks—to develop a pricing algorithm based on both non-visual and visual artwork characteristics. Our out-of-sample valuations predict auction prices dramatically better than valuations based on a standard hedonic pricing model. Moreover, they help explaining price levels and sale probabilities even after conditioning on auctioneers’ pre-sale estimates. Machine learning is particularly helpful for assets that are associated with high price uncertainty. It can also correct human experts’ systematic biases in expectations formation—and identify ex ante situations in which such biases are likely to arise.
In this study, we investigate the wealth decumulation decision from the perspective of a retiree who is averse to the prospect of fully annuitizing her accumulated savings. We field a large online survey of hypothetical product choices for phased drawdown offerings and annuities. While the demand for annuities remains low in our sample, we find significant demand for phased withdrawal products with equity-based asset allocations and flexible payout structures. Consistent with the product choice, the most important self-reported considerations for the wealth decumulation decision are low default risk in the products they purchase, the size of the withdrawal rates, and flexibility in the timing of their withdrawal. As determinants of the decision of how much wealth individuals are willing to draw down, we identify consumers’ attitudes towards future economic conditions, the extent to which they are protected against longevity risk, and their desire to leave bequests. Policy implications are discussed.
Libra – a global virtual currency project initiated by Facebook – has been the subject of many controversial discussions since its announcement in June 2019. This paper provides a differentiated view on Libra, recognising that different development scenarios of Libra are conceivable.
Libra could serve purely as an alternative payment system in combination with a dedicated payment token, the Libra coin. Alternatively, the Libra project could develop into a broader financial infrastructure for advanced financial services such as savings and loan products operating on the Libra blockchain. Based on a comparison of the Libra architecture with other cryptocurrencies, the opportunities and challenges for the development of the respective Libra ecosystems are investigated form a commercial, regulatory and monetary policy perspective.
Local crowding out in China
(2019)
In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints, while leaving state-owned firms’ investment unaffected. We establish this result using a purpose-built dataset for Chinese local public debt. Private firms invest less in cities with more public debt, the reduction in investment being larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms’ investment is more sensitive to internal cash flow, also when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained.
We analyze debt and debt management of Americans nearing retirement age. We show that older people have numerous financial obligations that can lead to financial distress. Using data from the 2015 National Financial Capability Study and an extensive literature review, we show that lack of financial literacy, lack of information, and behavioral biases help explain the prevalence of debt later in life. Our evidence indicates that debt at older ages can negatively influence retirement well-being.
Over the life-cycle, wealth holdings tend to be highest in the early part of retirement. The quality of financial decisions among older adults is therefore an important determinant of their financial security during the asset drawdown phase. This paper assesses how financial literacy shapes financial decision-making at older ages. We devised a special module in the Singapore Life Panel survey to measure financial literacy to study its relationship with three aspects of household financial and investment behaviors: credit card debt repayment, stock market participation, and adherence to age-based investment glide paths. We found that the majority of respondents age 50+ has some grasp of concepts such as interest compounding and inflation, but fewer know about risk diversification. We provide evidence of a statistically significant positive association between financial literacy and each of the three aspects of suboptimal financial decision-making, controlling for many other factors, including education. A one-unit increase in the financial literacy score was associated with an 8.3 percentage point greater propensity to hold stocks, and a 1.7 percentage point higher likelihood of following an age-appropriate investment glide path. The financial literacy score is only weakly positively linked with timely credit card balance repayment, both in terms of statistical significance and estimate size.
Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.
We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms' real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.
A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. As a result, theory implies a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints provides insurance against aggregate shocks and commands a lower risk compensation compared with non-collateralizable assets. We show that a longshort portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.
Implications of money-back guarantees for individual retirement accounts: protection then and now
(2019)
In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.
We investigate the default probability, recovery rates and loss distribution of a portfolio of securitised loans granted to Italian small and medium enterprises (SMEs). To this end, we use loan level data information provided by the European DataWarehouse platform and employ a logistic regression to estimate the company default probability. We include loan-level default probabilities and recovery rates to estimate the loss distribution of the underlying assets. We find that bank securitised loans are less risky, compared to the average bank lending to small and medium enterprises.
In this paper, we investigate the relation between buildings' energy efficiency and the probability of mortgage default. To this end, we construct a novel panel dataset by combining Dutch loan-level mortgage information with provisional building energy ratings that are calculated by the Netherlands Enterprise Agency. By employing the Logistic regression and the extended Cox model, we find that buildings' energy efficiency is associated with lower likelihood of mortgage default. The results hold for a battery of robustness checks. Additional findings indicate that credit risk varies with the degree of energy efficiency.
The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as ‘shadow banking’, evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.
Our recently developed LRSX Tool implements a technique to automatically prove the correctness of program transformations in higher-order program calculi which may permit recursive let-bindings as they occur in functional programming languages. A program transformation is correct if it preserves the observational semantics of programs- In our tool the so-called diagram method is automated by combining unification, matching, and reasoning on alpha-renamings on the higher-order metalanguage, and automating induction proofs via an encoding into termination problems of term rewrite systems. We explain the techniques, we illustrate the usage of the tool, and we report on experiments.
The focus of this paper are space-improvements of programs, which are transformations that do not worsen the space requirement during evaluations. A realistic theoretical treatment must take garbage collection method into account. We investigate space improvements under the assumption of an optimal garbage collector. Such a garbage collector is not implementable, but there is an advantage: The investigations are independent of potential changes in an implementable garbage collector and our results show that the evaluation and other similar transformations are space-improvements.
Facebook’s proposal to create a global digital currency, Libra, has generated a wide discussion about its potential benefits and drawbacks. This note contributes to this discussion and, first, characterizes similarities and dissimilarities of Libra’s building blocks with existing institutions. Second, the note discusses open questions about Libra which arise from this characterization and, third, potential future developments and their policy implications. A central issue is that Libra raises considerable questions about its role in and impact on the international monetary and financial system that should be addressed before policymakers and regulators give Libra the green light.
Completing banking union
(2019)
To complete banking union, there should be a single European deposit insurance scheme (EDIS) alongside the single supervisor and the single resolution authority. This would ensure uniformity across the Eurozone and facilitate the removal of barriers to the mobility of liquidity and capital within the single market. That in turn would promote efficiency in the banking sector and in the economy at large — just at the time that the EU needs to boost growth in order to remain competitive with the US and China.
The EDIS promise to promptly reimburse insured deposits at a failed bank in the Eurozone should be unconditional. But who will stand behind that commitment? Who is the “E” in EDIS? Is its promise credible, even in a crisis? If a deposit guarantee scheme fails to deliver what people expect, panic would very likely erupt. Instead of strengthening financial stability, deposit insurance could destroy it.
Yet this is the risk that current proposals pose. They create the impression that there will be a single deposit guarantee scheme. There will not. Instead, there will be a complex set of liquidity and reinsurance arrangements among Member State schemes.
These defects need to be remedied. To do so, we propose creating a European Deposit Insurance Corporation (EDIC) alongside national schemes. For banks that meet EDIC’s strict entry criteria and decide to become members, EDIC will promise to reimburse promptly — in the event the member bank fails — 100 cents on the euro in euro for each euro of insured deposits, regardless of the Eurozone Member State in which the bank is headquartered.
In effect, the single deposit guarantee scheme would be created via migration to EDIC rather than mutualisation of existing schemes. This would increase the mobility of capital and liquidity and lead to a convergence of interest rates across the Eurozone. That in turn will improve the effectiveness of monetary policy, foster integration and promote growth.
This publication aims to provide an overview on how digitalisation of communication results in societal trends such as an “always-on” culture, “shitstorms”, “fake news” and their effects on schools, media, non-governmental organisations, work and sports.
Table of Contents
Christian Reuter, Tanjev Schultz, Christian Stegbauer: Digitalisation and Communication: Societal Trends and the Change in Organisations — Preface
Daniel Lambach: Digital World and Real World – Opposites no more
Leonard Reinecke: Brave New Smartphone World? Psychological Wellbeing between Digital Autonomy and Constant Connectedness
Christian Reuter: Fake News and the Manipulation of Public Opinion
Christian Stegbauer: Tantrums on a Massive Scale, or: Could Anybody be a Victim of Social Media Outrage?
Volker Schaeffer: “We Have Always Been Living in Bubbles” The Opportunities and Risks in the Digitalisation of Media
Angela Menig, Verena Zimmermann, Joachim Vogt: Digital Transformation of the Workplace – Risk or Opportunity?
Stefan Aufenanger, Jasmin Bastian: Digital Technology in Schools
Angelika Böhling: Development Assistance Goes Digital - The Opportunities and Challenges Non-Governmental Organisations Face in Digital Communication
Josef Wiemeyer: Digital Interaction and Communication in Sports
We uncover a new channel for spillovers of funding dry-ups. The 2016 US money market fund (MMF) reform exogenously reduced unsecured MMF funding for some banks. We use novel data to trace those banks to a platform for corporate deposit funding. We show that intensified competition for corporate deposits spilled the funding squeeze over to other banks with no MMF exposure. These banks paid more for deposits, and their pool of funding providers deteriorated. Moreover, their lending volumes and margins declined, and their stocks underperformed. Our results suggest that banks' competitiveness in funding markets affect their competitiveness in lending markets.
We study nominal wage rigidity in the Netherlands using administrative data, which has three key features: (1) high-frequency (monthly), (2) high-quality (administrative records), and (3) high coverage (the universe of workers and the universe of firms). We find wage rigidity patterns in the data that are similar to wage behavior documented for other European countries. In particular we find that the hazard function has two spikes, one at 12 months and another one at 24 months and wage changes have time and state dependency components. As a novel and important piece of evidence we also uncover substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract. In particular, contracts featuring flexible hours, such as on-call contracts, exhibit a higher probability of a change in the contract wage compared to fixed hour contracts. Once we split the sample based on contract characteristics, we also find that the response of wage changes to the time and state component is heterogeneous across different type of contracts - with relatively more downward adjustments in flexible-hour contract wages in response to aggregate unemployment.
Since the financial crisis financial literacy has attracted growing interest among researchers and policy makers, as there is international empirical evidence that financial literacy is poor among both adults and students. In Germany we have almost no empirical evidence on financial literacy, especially in the case of students attending secondary schools, as financial education has not featured on German school curricula to date. Besides, Germany has not yet participated in the optional financial literacy module of PISA, which was offered for the first time in 2012. However, a lack of private pension provisioning, in spite of demographic change, and low stock ownership among German households indicate a deficit in financial knowledge and skills in this country as well.
In this paper we investigate financial literacy among students aged 14 to 16 attending a secondary school in the state of Hesse. The foundation is a test designed according to international standards. The statistical analysis of the test reveals substantial deficits in key areas of financial literacy. Particular deficits could be identified in the fields of basic knowledge of financial matters and, to an even greater degree, in more advanced concepts such as risk diversification. Applying interest calculations to financial matters turned out to be problematic for many students.
Furthermore, the paper analyses the impact of gender and type of school on the overall test score as well as test performance in specific tasks. The findings suggest that financial matters should be covered in some form at secondary schools. In light of the potentially far-reaching consequences of financial illiteracy for financial wellbeing, German participation in future PISA financial literacy tests seems highly advisable to gain a deeper understanding of the preliminary findings presented in this paper.
Revisiting the stealth trading hypothesis: does time-varying liquidity explain the size-effect?
(2019)
Large trades have a smaller price impact per share than medium-sized trades. So far, the literature has attributed this effect to the informational content of trades. In this paper, we show that this effect can arise from strategic order placement. We introduce the concept of a liquidity elasticity, measuring the responsiveness of liquidity demand with respect to changes in liquidity supply, as a major driver for a declining price impact per share. Empirical evidence based on Nasdaq stocks strongly supports theoretical predictions and shows that the aspect of liquidity coordination is an important complement to rationales based on asymmetric information.
The paper analyses the linkages from financial developments to public finances. It maps and discusses the transmission channels to fiscal variables. These channels include asset prices, financing conditions, balance sheets of banks, non-banks and central banks and international linkages. The study argues that the fiscal effects via each and all these channels can be very serious in magnitude and can put the sustainability of public finances at risk. However, there is an only limited in-depth analysis of these channels and risks.
Depressed demand and supply
(2019)
We investigate the implications of experienced-based learning on consumption-saving and labor supply, two fundamental decisions in business cycle models. Using the Dutch Household Survey, we find that individuals who have experienced higher national unemployment rates over their lifetime save more, borrow less, and work less, after controlling for aggregate shocks, income, wealth, and demographics. Possibly explaining these behavioral responses, these individuals find it more important to save for retirement and to cover unexpected expenses, are more worried about losing their job, and dislike their job more. These results have implications for business cycle models and stabilization policies.
In early July 2019, Christian Sewing, the CEO of Deutsche Bank, proclaimed a fundamental shift of the bank’s strategy after finally obtaining the approval of the Supervisory Board, which the management seems to have requested for quite some time. The essential point of the reorientation is a deep cut into the bank’s investment banking activities. At the same time, those parts of the bank’s activity portfolio that had been the mainstay of Deutsche Bank’s business 20 to 25 years ago, in particular lending to large and mid-sized German and European corporate clients, shall be strengthened in spite of a simultaneous reduction of the bank’s staff by 18,000 FTEs over the next three years.
The bank’s CEO, who has only been in office since about one year, was reported to have called this shift of strategy a “return to the roots of Deutsche Bank” at the press conference at which it was announced, without, however, making it clear to which roots he was referring: those of some 40 years ago, when Deutsche Bank was essentially a Germany-focused commercial bank, or even those from the late 19th century, when the bank had been founded with the mission to become an international bank with a strong capital market-orientation. In any event, the press was impressed and keeps repeating these words, that deserve to be taken seriously and irrespective of their vagueness may be justified. If it were successfully implemented, this change of strategy would indeed be fundamental and imply undoing what Deutsche Bank’s former management teams had aspired to do in the last 20 or 25 years.
The newly announced strategy shift raises two questions. Can it be successful, and what does it mean for the bank itself and its shareholders, for its staff and for its clients? And what does it imply for the German financial system? This note focuses on the latter question. What makes it interesting is the fact that the last fundamental change of Deutsche Bank’s strategy of two decades ago, which aimed at transforming Deutsche Bank from a Germany-centered commercial bank into a leading international investment bank, had a profound – and in my view clearly negative - effect on the entire German financial system.
The financial crisis of 2007-08 has stressed the importance of a sound financial system. Unlike other studies weighing the pros and cons of market versus bank-based systems, this paper investigates whether the main elements of the German financial system can be regarded as complementary and consistent. This assessment refers to the idea that there is a potential for positive interaction between different elements in the system that is actually used to make it more valuable to economy and society and more robust to crises. It is shown that the old German bank-based system, where the risk of long-term lending by large private commercial banks was limited by the membership in supervisory boards and strong personal ties between all stakeholders, was a consistent system of well-adjusted complementary elements. After reunification, a hybrid system has emerged where, on the one hand, public savings banks and cooperative banks maintain their role as lenders, but on the other, large private banks have withdrawn from their former dominant role in financing and corporate governance. It is argued that this transition to stronger capital-market and, accordingly, shareholder value orientations has occurred at the expense of consistency.
This paper aspires to provide an overview of the issue of diversity of banking and financial systems and its development over time from a positive and a normative perspective. In other word: how different are banks within a given country and how much do banking systems and entire financial systems differ between countries and regions, and do in-country diversity and between-country diversity change over time, as one would be inclined to expect as a consequence of globalization and increasingly global standards of regulation?
As the first part of this paper shows, the general answer to these questions is that there is still today a surprisingly high level of diversity in finance. This raises the two questions addressed in the second part of the paper: How can the persistence of diversity be explained, and how can it be assessed? In contrast to prevailing views, the author argues that persistent diversity should be regarded as valuable in a context in which there is no clear answer to the question of which structures of banking and financial systems are optimal from an economic perspective
It has been documented that vertical customer-supplier links between industries are the basis for strong cross-sectional stock return predictability (Menzly and Ozbas (2010)). We show that robust predictability also arises from horizontal links between industries, i.e., from the fact that industries are competitors or offer products, which are substitutes for each other. These horizontally linked industries exhibit positively correlated fundamentals. The signal derived from this type of connectedness is the basis for significant alpha in sorted portfolio strategies, and informed investors take the related information into account when they form their portfolios. We thus provide evidence of return predictability based on a new type of economic links between industries not captured in previous studies.
In the course of the crisis, the European System of Central Banks (ESCB) has acted several times to support the EU Member States and banking systems in financial distress by purchasing debt instruments: Covered Bonds Programmes (CBP), Securities Market Programmes (SMP), Long Term Refinancing Operations (LTRO), and Targeted Long Term Refinancing Operations (TLTRO), followed by the Outright Monetary Transactions (OMT) and then the Extended Asset Purchase Programmes (EAPP) – colloquially labelled as Quantitative Easing (QE).
Initially, the support measures of the ESCB might have to be judged as monetary policy but the selectivity of OMT and – even more – SMP in conjunction with the transfer of risks to the ESCB speak against it.
Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows:
1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core “intermediaries"(and major CCPs).
2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised.
3) When using relative net exposures as a proxy for the “flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core.
4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity.