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/29736 The Center of Excellence SAFE – “Sustainable Architecture for Finance in Europe” – is a cooperation of the Center for Financial Studies and Goethe University Frankfurt. It is funded by the LOEWE initiative of the State of Hessen (Landes-Offensive zur Entwicklung wissenschaftlich-ökonomischer Exzellenz). SAFE brings together more than 40 professors and just as many junior researchers who are all dedicated to conducting research in support of a sustainable financial architecture. The Center has two main pillars: excellent research on all important topics related to finance; and policy advice, including the dissemination of relevant research findings to European decision makers from the realms of politics, regulation and administration. In order to promote a fruitful exchange with interested parties from politics, academia, business and the media, SAFE issues a newsletter on a quarterly basis. This aims to provide an overview of the Center‘s ongoing research and policy activities. The SAFE Newsletter succeeds the House of Finance Newsletter, which was published between 2009 and 2012. SAFE is based at Goethe University’s House of Finance however extends beyond by drawing on scholars from other parts of Goethe University as well as from fellow research institutions. The Center builds on the reputation of the House of Finance institutions, serving as an interdisciplinary think tank on the issue of finance. periodical http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/29736 Mon, 15 Apr 2013 12:48:38 +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/27875 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/27875 Tue, 05 Feb 2013 10:49:24 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27872 In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy using a new database of models designed for such investigations. We focus on three representative models due to Christiano, Eichenbaum, Evans (2005), Smets and Wouters (2007) and Taylor (1993a). Although these models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, optimized monetary policy rules differ across models and lack robustness. Model averaging offers an effective strategy for improving the robustness of policy rules. John B. Taylor; Volker Wieland workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27872 Tue, 05 Feb 2013 10:41:16 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27871 Zusammenfassung und Ergebnisse 1. Es gibt gute Argumente für ein generelles Verbot (freiwilliger) Unterstützungsleistungen an Euro-Mitgliedstaaten. 2. Die Vereinbarkeit der Leistungen der EU im Rahmen des EFSM mit Art. 122 Abs. 2 AEUV ist fraglich. Die Beurteilung der Kausalitätsfrage ist maßgebend. 3. Die Vereinbarkeit der Leistungen der Mitgliedstaaten im Rahmen der speziellen Griechenlandhilfe und im Rahmen der EFSF mit dem AEUV in der damals geltenden Fassung ist nicht sicher. 4. Die Einführung von Art. 136 Abs. 3 AEUV modifiziert das Vertragsrecht und ist wohl noch in Einklang mit Art. 48 Abs. 6 EUV erfolgt. 5. ESM und Fiskalpakt verstoßen nach der Änderung des Primärrechts wohl nicht gegen den AEUV. 6. Unabdingbar für die Schaffung des ESM sind aber das Inkrafttreten von Art. 136 Abs. 3 AEUV und 7. Der Erwerb von Forderungen gegen Mitgliedstaaten über einen längeren Zeitraum und zur Erleichterung von Zinslasten überschreitet die Befugnisse und Zuständigkeiten des ESZB. 8. Der Erwerb von Forderungen gegen Mitgliedstaaten über einen längeren Zeitraum und zur Erleichterung von Zinslasten ist nicht mit dem Verbot der Kreditgewährung durch Zentralbanken an Hoheitsträger nach Art. 123 AEUV zu vereinbaren 9. Die Gewährung von langfristigen Krediten an Banken verstößt ebenfalls gegen die Zuständigkeitsordnung des AEUV und ist bei einer Weiterleitung der Mittel an Hoheitsträger nicht mit Art. 123 AEUV zu vereinbaren. 10. Die Akzeptierung von ausfallgefährdeten Forderungen als Sicherheit für die Gewährung von Krediten durch das ESZB verstößt gegen Art. 18.1., zweiter Spiegelstrich, Satzung ESZB/EZB. Helmut Siekmann workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27871 Tue, 05 Feb 2013 10:27:10 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27870 Helmut Siekmann workingpaper http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27870 Tue, 05 Feb 2013 10:19:29 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27690 1 Editorial ; 2 Increased Disclosure Requirements for the Supervisory Boards of Stock Corporations ; 3 Can Facebook Predict Stock Market Activity? ; 4 Combining Structured and Unstructured Data :Sources for Support in Financial Decision Making ; 5 Liikanen Commission makes proposals for an efficient and sustainable financial system ; 6 INTERVIEW: What Economists Can Learn from Neuroscientists ; 7 News ; 8 Selected Research and Policy Publications periodicalpart http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/27690 Thu, 29 Nov 2012 09:34:56 +0100 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26643 Wirtschaftliche Umbrüche, wie sie mit der deutschen Wiedervereinigung verbunden waren, sind in industrialisierten Ländern selten. Sie bieten deshalb aus wissenschaftlicher Sicht eine wertvolle Gelegenheit, um Erkenntnisse über das ökonomische Verhalten von Menschen zu gewinnen. Das Sparverhalten der Ostdeutschen nach der deutschen Wiedervereinigung bestätigt, dass Menschen ihre Ersparnis rational planen. Nicola Fuchs-Schündeln; Damir Stijepic article http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26643 Fri, 05 Oct 2012 09:24:12 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26642 Vielfältige Einschnitte im Rentensystem haben die Bedeutung der privaten Altersvorsorge in den vergangenen Jahren massiv erhöht. Neben Immobilienbesitz, Lebensversicherungen und staatlich geförderten Programmen zur privaten Vorsorge hat sich inzwischen auch die eigenverantwortliche Altersvorsorge mit Wertpapierdepots etabliert, so dass die Anzahl privater Depots in den letzten 25 Jahren von 8,0 auf 27,9 Millionen gestiegen ist. Vor diesem Hintergrund ist die Frage von zentraler Bedeutung, wie gut Anleger ihr Geld investieren. Steffen Meyer; Maximilian Köstner; Andreas Hackethal article http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26642 Fri, 05 Oct 2012 09:19:29 +0200 http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26634 Muriel Büsser article http://publikationen.stub.uni-frankfurt.de/frontdoor/index/index/docId/26634 Fri, 05 Oct 2012 08:26:12 +0200