Financial Markets
Research in this department centres on institutional changes in Europe’s financial markets. The department analyses the causes and consequences of banks’ international expansions, the link between market structures in banking and aggregate (financial) stability, contagion effects on international financial markets and the role of the financial system for the real economy.
The interdependence of the financial services sector with innovation and productivity in the real economy are of particular interest. Methodologically, research focuses on empirical methods that support analyses of feedback from the micro to the macro level and that allow for causal evaluations of regulatory interventions into financial systems.
IWH Research Seminar in Economics
FYI – Insights for Young Researchers in Finance
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Refereed Publications
Aggregate Dynamics with Sectoral Price Stickiness Heterogeneity and Aggregate Real Shocks
in: Journal of Money, Credit and Banking, forthcoming
Abstract
<p>This paper investigates the relationship between heterogeneity in sectoral price stickiness and the response of the economy to aggregate real shocks. We show that sectoral heterogeneity reduces inflation persistence for a constant average duration of price spells, and that inflation persistence can fall despite duration increases associated with increases in heterogeneity. We also find that sectoral heterogeneity reduces the persistence and volatility of interest rate and output gap for a constant price spells duration, while the qualitative impact on inflation volatility tends to be positive. A relevant policy implication is that neglecting price stickiness heterogeneity can impair the economic dynamics assessment.</p>
Church Membership and Economic Recovery: Evidence from the 2005 Hurricane Season
in: Economic Journal, forthcoming
Abstract
<p>This paper investigates the critical role of church membership in the process of economic recovery after high-impact natural disasters. We document a significant adverse treatment effect of the 2005 hurricane season in the Southeastern United States on establishment-level productivity. However, we find that establishments in counties with higher rates of church membership saw a significantly stronger recovery in terms of productivity for 2005–10. We also show that church membership is correlated with post-disaster entrepreneurship activities and population growth.</p>
Social Connections and Information Leakage: Evidence from Target Stock Price Run-up in Takeovers
in: Journal of Financial Research, forthcoming
Abstract
<p>Does information leakage in a target's social networks increase its stock price prior to a merger announcement? Evidence reveals that a target with more social connections indeed experiences a higher pre-announcement price run-up. This effect does not exist during or after the merger announcement, or in windows ending two months before the announcement. It is more pronounced among targets with severe asymmetric information, and weaker when the information about the upcoming merger is publicly available prior to the announcement. It is also weaker in expedited deals such as tender offers.</p>
Deposit Competition and Mortgage Securitization
in: Journal of Money, Credit and Banking, forthcoming
Abstract
<p>We study how deposit competition affects a bank's decision to securitize mortgages. Exploiting the state-specific removal of deposit market caps across the U.S. as a source of competition, we find a 7.1 percentage point increase in the probability that banks securitize mortgage loans. This result is driven by an 11 basis point increase in deposit costs and corresponding reductions in banks' deposit holdings. Our results are strongest among banks that rely more on deposit funding. These findings highlight a hitherto undocumented and unintended regulatory cause that motivates banks to adopt the originate-to-distribute model.</p>
The Corporate Investment Benefits of Mutual Fund Dual Holdings
in: Journal of Financial and Quantitative Analysis, forthcoming
Abstract
Mutual fund families increasingly hold bonds and stocks from the same firm. We present evidence that dual ownership allows firms to increase valuable investments and refinance by issuing bonds with lower yields and fewer restrictive covenants, especially when firms face financial distress. Dual holders also prevent overinvestment by firms with entrenched managers. Overall, our results suggest that mutual fund families internalize the agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.
Working Papers
From Shares to Machines: How Common Ownership Drives Automation
in: IWH Discussion Papers, No. 23, 2024
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Environmental Incidents and Sustainability Pricing
in: IWH Discussion Papers, No. 17, 2024
Abstract
<p>We investigate whether lenders employ sustainability pricing provisions to manage borrowers’ environmental risk. Using unexpected negative environmental incidents of borrowers as exogenous shocks that reveal information on environmental risk, we find that lenders manage borrowers’ environmental risk by conventional tools such as imposing higher interest rates, utilizing financial and net worth covenants, showing reluctance to refinance, and demanding increased collateral. In contrast, the inclusion of sustainability pricing provisions in loan agreements for high environmental risk borrowers is reduced by 11 percentage points. Our study suggests that sustainability pricing provisions may not primarily serve as risk management tools but rather as instruments to attract demand from institutional investors and facilitate secondary market transactions.</p>
Regulating Zombie Mortgages
in: IWH Discussion Papers, No. 16, 2024
Abstract
Using the adoption of Zombie Property Law (ZL) across several US states, we show that increased lender accountability in the foreclosure process affects mortgage lending decisions and standards. Difference-in-differences estimations using a state border design show that ZL incentivizes lenders to screen mortgage applications more carefully: they deny more applications and impose higher interest rates on originated loans, especially risky loans. In turn, these loans exhibit higher ex-post performance. ZL also affects lender behavior after borrowers become distressed, causing them to strategically keep delinquent mortgages alive. Our findings inform the debate on policy responses to foreclosure crises.
How Do EU Banks’ Funding Costs Respond to the CRD IV? An Assessment Based on the Banking Union Directives Database
in: IWH Discussion Papers, No. 12, 2024
Abstract
The establishment of the European Banking Union constitutes a major change in the regulatory framework of the banking system. Main parts are implemented via directives that show staggered transposition timing across EU member states. Based on the newly compiled Banking Union Directives Database, we assess how banks’ funding costs responded to the Capital Requirements Directive IV (CRD IV). Our findings show an upward trend in funding costs which is driven by an increase in cost of equity and partially offset by a decline in cost of debt. The diverging trends are most present in countries with an ex-ante lower regulatory capital stringency, which is in line with banks’ short-run adjustment needs but longer-run benefits from increased financial stability.
Climate Stress Tests, Bank Lending, and the Transition to the Carbon-neutral Economy
in: IWH Discussion Papers, No. 9, 2024
Abstract
We ask if bank supervisors’ efforts to combat climate change affect banks’ lending and their borrowers’ transition to the carbon-neutral economy. Combining information from the French supervisory agency’s climate pilot exercise with borrowers’ emission data, we first show that banks that participate in the exercise increase lending to high-carbon emitters but simultaneously charge higher interest rates. Second, participating banks collect new information about climate risks, and boost lending for green purposes. Third, receiving credit from a participating bank facilitates borrowers’ efforts to improve environmental performance. Our findings establish a hitherto undocumented link between banking supervision and the transition to net-zero.
