What Drives the Commodity-Sovereign Risk Dependence in Emerging Market Economies?
Hannes Böhm, Stefan Eichler, Stefan Gießler
Journal of International Money and Finance,
March
2021
Abstract
Using daily data for 34 emerging markets in the period 1994–2016, we find robust evidence that higher export commodity prices are associated with lower sovereign default risk, as measured by lower EMBI spreads. The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find that, first, commodity dependence is higher for countries that export large volumes of commodities, whereas other portfolio characteristics like volatility or concentration are less important. Second, commodity-sovereign risk dependence increases in times of recessions and expansionary U.S. monetary policy. Third, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Fourth, the country’s government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity dependence.
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Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area
Stefan Eichler, Hannes Böhm
Journal of Financial Stability,
December
2020
Abstract
While the sovereign-bank loop literature has demonstrated the amplification between sovereign and bank risks in the Euro Area, its econometric identification is vulnerable to reverse causality and omitted variable biases. We address the loop's endogenous nature and isolate the direct bank-to-sovereign distress channel by exploiting the global, non-Eurozone related variation in banks’ stock prices. We instrument banking sector stock returns in the Eurozone with exposure-weighted stock market returns from non-Eurozone countries and take further precautions to remove Eurozone-related variation. We find that the transmission of instrumented bank distress to sovereign distress is around 50% smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on endogeneity. Despite the smaller relative magnitude, increasing instrumented bank distress is found to be an economically and statistically significant cause for rising sovereign fragility in the Eurozone.
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Why Life Insurers are Key to Economic Dynamism in Germany
Reint E. Gropp, William McShane
IWH Online,
No. 6,
2020
Abstract
Young entrepreneurial firms are of critical importance for innovation. But to bring their new ideas to the market, these startups depend on investors who understand and are willing to accept the risk associated with a new firm. Perhaps the key reason as to why the US has succeeded in producing nearly all the most successful new firms of the 21st century is the economy’s ability to supply vast sums of capital to promising startups. The volume of venture capital (VC) invested in the US is more than 60 times that of Germany. In this policy note, we argue that differences in the regulatory and structural context of institutional investors, in particular life insurance companies, is a central driver of the relative lack of VC - and thereby successful startups - in Germany.
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On the International Dissemination of Technology News Shocks
João Carlos Claudio, Gregor von Schweinitz
IWH Discussion Papers,
No. 25,
2020
Abstract
This paper investigates the propagation of technology news shocks within and across industrialised economies. We construct quarterly utilisation-adjusted total factor productivity (TFP) for thirteen OECD countries. Based on country-specific structural vector autoregressions (VARs), we document that (i) the identified technology news shocks induce a quite homogeneous response pattern of key macroeconomic variables in each country; and (ii) the identified technology news shock processes display a significant degree of correlation across several countries. Contrary to conventional wisdom, we find that the US are only one of many different sources of technological innovations diffusing across advanced economies. Technology news propagate through the endogenous reaction of monetary policy and via trade-related variables. That is, our results imply that financial markets and trade are key channels for the dissemination of technology.
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The Economic Record of the Government and Sovereign Bond and Stock Returns Around National Elections
Stefan Eichler, Timo Plaga
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates the role of the fiscal and economic record of the incumbent government in shaping the price response of sovereign bonds and stocks to the election outcome in emerging markets and developed countries. For sovereign bonds in emerging markets, we find robust evidence for higher cumulative abnormal returns (CARs) if a government associated with a relatively low primary fiscal balance is voted out of office compared to elections where the fiscal balance was relatively high. This effect of the incumbent government's fiscal record is significantly more pronounced in the presence of high sovereign default risk and strong political veto players, whereas the quality of institutions does not explain differences in effects for different events. We do not find robust effects of the government's fiscal record for developed countries and stocks.
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The Effects of German Regional Policy – Evidence at the Establishment Level
Matthias Brachert, Hans-Ulrich Brautzsch, Eva Dettmann, Alexander Giebler, Lutz Schneider, Mirko Titze
IWH Online,
No. 5,
2020
Abstract
Die „Gemeinschaftaufgabe ‚Verbesserung der regionalen Wirtschaftsstruktur‘ (GRW)“ repräsentiert das wichtigste Instrument der Regionalpolitik in Deutschland. Das Förderprogramm gewährt nicht-rückzahlbare Zuschüsse als Anteilsfinanzierung für Investitionsprojekte von Betriebsstätten (und Kommunen) im GRW-Fördergebiet. Die Festlegung des Fördergebiets erfolgt anhand eines aus verschiedenen Teilindikatoren zusammengesetzten Strukturschwächeindikators und eines von der Europäischen Union festgelegten Anteils der in Fördergebieten lebenden Bevölkerung. Verantwortlich für die Auswahl der geförderten Projekte ist das jeweilige Land, in dem das GRW-Projekt beantragt wird.
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Why are some Chinese Firms Failing in the US Capital Markets? A Machine Learning Approach
Gonul Colak, Mengchuan Fu, Iftekhar Hasan
Pacific-Basin Finance Journal,
June
2020
Abstract
We study the market performance of Chinese companies listed in the U.S. stock exchanges using machine learning methods. Predicting the market performance of U.S. listed Chinese firms is a challenging task due to the scarcity of data and the large set of unknown predictors involved in the process. We examine the market performance from three different angles: the underpricing (or short-term market phenomena), the post-issuance stock underperformance (or long-term market phenomena), and the regulatory delistings (IPO failure risk). Using machine learning techniques that can better handle various data problems, we improve on the predictive power of traditional estimations, such as OLS and logit. Our predictive model highlights some novel findings: failed Chinese companies have chosen unreliable U.S. intermediaries when going public, and they tend to suffer from more severe owners-related agency problems.
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 2,
2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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The Creation and Evolution of Entrepreneurial Public Markets
Shai B. Bernstein, Abhishek Dev, Josh Lerner
Journal of Financial Economics,
No. 2,
2020
Abstract
This paper explores the creation and evolution of new stock exchanges around the world geared toward entrepreneurial companies, known as second-tier exchanges. Using hand-collected novel data, we show the proliferation of these exchanges in many countries, their significant volume of Initial Public Offerings (IPOs), and lower listing requirements. Shareholder protection strongly predicted exchange success, even in countries with high levels of venture capital activity, patenting, and financial market development. Better shareholder protection allowed younger, less-profitable, but faster-growing, companies to raise more capital. These results highlight the importance of institutions in enabling the provision of entrepreneurial capital to young companies.
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How to Talk Down Your Stock Performance
Andreas Barth, Sasan Mansouri, Fabian Wöbbeking, Severin Zörgiebel
SSRN Discussion Papers,
2020
Abstract
We process the natural language of verbal firm disclosures in order to study the use of context specific language or jargon and its impact on financial performance. We observe that, within the Q&A of earnings conference calls, managers use less jargon in responses to tougher questions, and after a quarter of bad economic success. Moreover, markets interpret the lack of precise information as a bad signal: we find lower cumulative abnormal returns and a higher implied volatility following earnings calls where managers use less jargon. These results support the argument that context specific language or jargon helps to efficiently and precisely transfer information.
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