Latest documents http://publikationen.stub.uni-frankfurt.de/index/index/ Fri, 19 Apr 2013 08:13:26 +0200 Fri, 19 Apr 2013 08:13:26 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29384 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. Dirk Bursian; Ester Faia workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29384 Fri, 19 Apr 2013 08:13:26 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29383 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. Laurent E. Calvet; Paolo Sodini workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29383 Fri, 19 Apr 2013 08:07:12 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29382 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. Marcel Bluhm; Ester Faia; Jan Pieter Krahnen workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29382 Fri, 19 Apr 2013 07:52:54 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29381 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. Nicole Branger; Holger Kraft; Christoph Meinerding workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29381 Fri, 19 Apr 2013 07:42:21 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29380 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. Tim Eisert; Christian Eufinger workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29380 Thu, 18 Apr 2013 08:58:50 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29379 This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea of the proposed regulation is to utilize the compensation scheme to drive a wedge between the interests of top management and shareholders to counteract shareholder risk-shifting incentives. The decisive advantage of this approach compared to existing regulation is that the regulator does not need to be able to properly measure the bank investment risk, which has been shown to be a difficult task during the 2008-2009 financial crisis. Christian Eufinger; Andrej Gill workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29379 Thu, 18 Apr 2013 08:49:05 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29378 We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel — monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output. Ignazio Angeloni; Ester Faia; Marco Lo Duca workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29378 Thu, 18 Apr 2013 08:27:58 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29377 Euro area data show a positive connection between sovereign and bank risk, which increases with banks’ and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks’ runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk. Matthieu Darracq-Pariès; Diego Rodríguez-Palenzuela; Ester Faia workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29377 Thu, 18 Apr 2013 08:05:05 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29376 This paper studies the relation between firm value and a firm's growth options. We find strong empirical evidence that (average) Tobin's Q increases with firm-level volatility. However, the significance mainly comes from R&D firms, which have more growth options than non-R&D firms. By decomposing firm-level volatility into its systematic and unsystematic part, we also document that only idiosyncratic volatility (ivol) has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Single sorting according to the size of idiosyncratic volatility, we only find a significant ivol anomaly for non-R&D portfolios, whereas in a four-factor model the portfolio alphas of R&D portfolios are all positive. Double sorting on idiosyncratic volatility and R&D expenses also reveals these differences between R&D and non-R&D firms. To simultaneously control for several explanatory variables, we also run panel regressions of portfolio alphas which confirm the relative importance of idiosyncratic volatility that is amplified by R&D expenses. Holger Kraft; Eduardo Schwartz; Farina Weiss workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29376 Thu, 18 Apr 2013 07:56:32 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29374 We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index. Grigory Vilkov; Yan Xiao workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29374 Thu, 18 Apr 2013 07:47:38 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29373 We test whether investor mood affects trading with data on all stock market transactions in Finland, utilizing variation in daylight and local weather. We find some evidence that environmental mood variables (local weather, length of day, daylight saving and lunar phase) affect investors’ direction of trade and volume. The effect magnitudes are roughly comparable to those of classical seasonals, such as the Monday effect. The statistical significance of the mood variables is weak in many cases, however. Only very little of the day-to-day variation in trading is collectively explained by all mood variables and calendar effects, but lower frequency variation seems connected to holiday seasons. Markku Kaustia; Elias Rantapuska workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29373 Wed, 17 Apr 2013 08:55:29 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29371 We use unique data from financial advisers’ professional exam scores and combine it with other variables to create an index of financial sophistication. Using this index to explain long-term stock return expectations, we find that more sophisticated financial advisers tend to have lower return expectations. A one standard deviation increase in the sophistication index reduces expected returns by 1.1 percentage points. The effect is stronger for emerging market stocks (2.3 percentage points). The sophistication effect contributes 60% to the model fit, while employer fixed effects combined contribute less than 30%. These results help understand the formation of potentially excessively optimistic expectations. Markku Kaustia; Antti Lehtoranta; Vesa Puttonen workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29371 Wed, 17 Apr 2013 08:42:50 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29370 A natural experiment in which customer-owned mutual companies converted to publicly listed firms created a plausibly exogenous shock to the stock market participation status of tens of thousands of people. We find the shock changed the way people vote in the affected areas, with a 10% increase in share-ownership rate being followed by a 1.3%–3.1% increase in right-of-center vote share. The institutional details and additional tests suggest that wealth, liquidity, and tax-related incentives cannot fully explain the results. A plausible explanation is that the associated increase in the salience of stock ownership causes a shift in voters’ attention. Markku Kaustia; Samuli Knüpfer; Sami Torstila workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29370 Tue, 16 Apr 2013 15:48:32 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29734 The European Commission recently put forward a proposal for a regulation to amend and strengthen the 2009 version of the EU's rules on the regulation of credit rating agencies ("CRA3"). Among other things, Art. 35a of the draft proposal introduces strict liability for rating agencies. This liability proposal is at odds with the aim to strengthen competition in the rating sector and could have a chilling effect on capital markets. The paper analyses existing rules on civil liability of rating agencies under different legal systems. Subsequently, the provision under Art. 35a of the Draft Proposal is examinded more closely. Suggestions on possible improvemts of the proposal are made. Brigitte Haar workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29734 Mon, 15 Apr 2013 13:57:21 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29740 periodicalpart http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29740 Mon, 15 Apr 2013 12:56:30 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29653 Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We uncover an additional factor contributing to debt culture, namely social influences emanating from the perceived average income of peers. Using unique information from a representative household survey of the Dutch population that circumvents the need to define the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing – especially among those who consider themselves poorer than their peers – and on indebtedness, suggesting a link to financial distress. We check the robustness of our results using several approaches to rule out spurious associations and handle correlated effects. Dimitris Georgarakos; Michael Haliassos; Giacomo Pasini workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29653 Mon, 15 Apr 2013 11:22:21 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27866 bookpart http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27866 Mon, 04 Feb 2013 14:01:35 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28635 In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks. Otmar Issing; Volker Wieland workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28635 Mon, 04 Feb 2013 13:53:23 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28634 This paper investigates how an office-motivated incumbent can use transparency enhancement on public spending to signal his budgetary management ability and win re-election. We show that when the incumbent faces a popular challenger, transparency policy can be an effective signaling device. A more popular challenger can reduce the probability to enhance transparency, while voters can be better off due to a more informative signaling. It is also shown that a higher level of public interest in fiscal issues can increase the probability of enhancing transparency, while voters can be worse off by a less informative signaling. Laura Moretti; Toru Suzuki workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28634 Mon, 04 Feb 2013 13:45:37 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28633 This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation. Harold L. Cole; Soojin Kim; Dirk Krueger workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28633 Mon, 04 Feb 2013 13:36:03 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28632 This paper investigates the effect of anticipated/experienced regret and pride on individual investors’ decisions to hold or sell a winning or losing investment, in the form of the disposition effect. As expected the results suggest that in the loss domain, low anticipated regret predicts a greater probability of selling a losing investment. While in the gain domain, high anticipated pride indicates a greater probability of selling a winning investment. The effects of high experienced regret/pride on the selling probability are found as well. An unexpected finding is that regret (pride) seems to be not only relevant for the loss (gain) domain, but also for the gain (loss) domain. In addition, this paper presents evidence of interconnectedness between anticipated and experienced emotions. The authors discuss the implications of these findings and possible avenues for further research Carmen Lee; Roman Kräussl; Leo Paas workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28632 Mon, 04 Feb 2013 13:26:51 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28631 After nearly two decades of US leadership during the 1980s and 1990s, are Europe’s venture capital (VC) markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amid an overall VC performance slump with no encouraging news? We attempt to answer these questions by tracking over 40,000 VC-backed firms stemming from six industries in 13 European countries and the US between 1985 and 2009; determining the type of exit – if any – each particular firm’s investors choose for the venture. Roman Kräussl; Stefan Krause workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28631 Mon, 04 Feb 2013 13:19:33 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28630 Venture capital (VC) investment has long been conceptualized as a local business , in which the VC’s ability to source, syndicate, fund, monitor, and add value to portfolio firms critically depends on their access to knowledge obtained through their ties to the local (i.e., geographically proximate) network. Consistent with the view that local networks matter, existing research confirms that local and geographically distant portfolio firms are sourced, syndicated, funded, and monitored differently. Curiously, emerging research on VC investment practice within the United States finds that distant investments, as measured by “exits” (either initial public offering or merger & acquisition) out-perform local investments. These findings raise important questions about the assumed benefits of local network membership and proximity. To more deeply probe these questions, we contrast the deal structure of cross-border VC investment with domestic VC investment, and contrast the deal structure of cross-border VC investments that include a local partner with those that do not. Evidence from 139,892 rounds of venture capital financing in the period 1980-2009 suggests that cross-border investment practice, in terms of deal sourcing, syndication, and performance indeed change with proximity, but that monitoring practices do not. Further, we find that the inclusion of a local partner in the investment syndicate yields surprisingly few benefits. This evidence, we argue, raises important questions about VC investment practice as well as the ability of firms to capture and lever the presumed benefits of network membership. Robert Wuebker; William Schulze; Roman Kräussl workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/28630 Mon, 04 Feb 2013 13:09:23 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26877 From its early post-war catch-up phase, Germany’s formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses. Exports have powered the dynamic phases and helped emerge from stagnation. Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries’ standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany’s ability to act as global locomotive has been limited. With increasing competition in its traditional areas of manufacturing, a more domestically-driven growth dynamic, especially in the production and delivery of services, will be good for Germany and for the global economy. Absent such an effort, German growth will remain constrained, and Germany will play only a modest role in spurring growth elsewhere. Fabian Bornhorst; Ashoka Mody workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26877 Tue, 04 Dec 2012 17:09:03 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26658 In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes, with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated as a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy-related events along the different components of the contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus. Adrian Alter; Andreas Beyer workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26658 Fri, 09 Nov 2012 12:22:28 +0100