Direct and Indirect Risk-taking Incentives of Inside Debt
Stefano Colonnello, Giuliano Curatola, Ngoc Giang Hoang
Journal of Corporate Finance,
August
2017
Abstract
We develop a model of compensation structure and asset risk choice, where a risk-averse manager is compensated with salary, equity and inside debt. We seek to understand the joint implications of this compensation package for managerial risk-taking incentives and credit spreads. We show that the size and seniority of inside debt not only are crucial for the relation between inside debt and credit spreads but also play an important role in shaping the relation between equity compensation and credit spreads. Using a sample of U.S. public firms with traded credit default swap contracts, we provide evidence supportive of the model's predictions.
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Predicting the Rise of EU Right-Wing Populism in Response to Unbalanced Immigration
Marko Jusup, Dejan Kovač, Boris Podobnik, H. Eugene Stanley
Complexity,
August
2017
Abstract
Among the central tenets of globalization is the free migration of labor. Although much has been written about the benefits of globalization, little is known about its limitations and how antiglobalist sentiment can be strongly affected by high levels of immigration. Analyzing poll data from a group of EU countries affected by the recent migrant crisis, we find that over the last three years the percentage of right-wing (RW) populist voters in a given country depends on the prevalence of immigrants in this country’s population and the total immigration inflow into the entire EU. The latter is likely due to the perception that the EU functions as a supranational state in which a lack of inner borders means that “someone else’s problem” can easily become “my problem.” We find that the increase in the percentage of RW voters substantially surpasses the percentage of immigration inflow, implying that if this process continues, ongoing democratic processes will cause RW populism to prevail and globalization to rapidly decrease. We locate tipping points between the fraction of immigrants and the rise of RW populism, and we model our empirical findings using a complex network framework in which the success of globalization rests on a balance between immigration and immigrant integration.
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Central Bank Transparency and Cross-border Banking
Stefan Eichler, Helge Littke, Lena Tonzer
Journal of International Money and Finance,
2017
Abstract
We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent and operates in a stable economic environment. Central bank transparency and credibility are thus considered complements by banks investing abroad.
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Career Experience, Political Effects, and Voting Behavior in the Riksbank’s Monetary Policy Committee
Stefan Eichler, Tom Lähner
Economics Letters,
June
2017
Abstract
We find that career experience shapes the voting behavior of the Riksbank’s Monetary Policy Committee (MPC) members. Members with a career in the Riksbank and the government prefer higher rates. During a legislation with a center-right (center-left) party administration, MPC members with a career background in the government favor higher (lower) interest rates. Highlights: • The determinants of voting behavior in the Swedish Riksbank are considered. • Voting is analyzed with random effects ordered logit models for 1999–2013. • Interplay of career experience and political factors shapes voting behavior. • Government or Riksbank background leads to higher interest rate votes. • Partisan voting behavior is detected for members with government background.
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U.S. Monetary-Fiscal Regime Changes in the Presence of Endogenous Feedback in Policy Rules
Yoosoon Chang, Boreum Kwak
Abstract
We investigate U.S. monetary and fiscal policy regime interactions in a model, where regimes are determined by latent autoregressive policy factors with endogenous feedback. Policy regimes interact strongly: Shocks that switch one policy from active to passive tend to induce the other policy to switch from passive to active, consistently with existence of a unique equilibrium, though both policies are active and government debt grows rapidly in some periods. We observe relatively strong interactions between monetary and fiscal policy regimes after the recent financial crisis. Finally, latent policy regime factors exhibit patterns of correlation with macroeconomic time series, suggesting that policy regime change is endogenous.
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Transferability of Skills across Sectors and Heterogeneous Displacement Costs
Moises Yi, Steffen Müller, Jens Stegmaier
American Economic Review: Papers and Proceedings,
Nr. 5,
2017
Abstract
We use rich German administrative data to estimate new measures of skill transferability between manufacturing and other sectors. These measures capture the value of workers' human capital when applied in different sectors and are directly related to workers' displacement costs. We estimate these transferability measures using a selection correction model, which addresses workers' endogenous mobility, and a novel selection instrument based on the social network of workers. Our results indicate substantial heterogeneity in how workers can transfer their skills when they move across sectors, which implies heterogeneous displacement costs that depend on the sector to which workers reallocate.
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Do Conventional Monetary Policy Instruments Matter in Unconventional Times?
Manuel Buchholz, Kirsten Schmidt, Lena Tonzer
Abstract
This paper investigates how declines in the deposit facility rate set by the European Central Bank (ECB) affect bank behavior. The ECB aims to reduce banks’ incentives to hold reserves at the central bank and thus to encourage loan supply. However, given depressed margins in a low interest environment, banks might reallocate their liquidity toward more profitable liquid assets other than traditional loans. Our analysis is based on a sample of euro area banks for the period from 2009 to 2014. Three key findings arise. First, banks reduce their reserve holdings following declines in the deposit facility rate. Second, this effect is heterogeneous across banks depending on their business model. Banks with a more interest-sensitive business model are more responsive to changes in the deposit facility rate. Third, there is evidence of a reallocation of liquidity toward loans but not toward other liquid assets. This result is most pronounced for non-GIIPS countries of the euro area.
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Tail-risk Protection Trading Strategies
Natalie Packham, Jochen Papenbrock, Peter Schwendner, Fabian Wöbbeking
Quantitative Finance,
Nr. 5,
2017
Abstract
Starting from well-known empirical stylized facts of financial time series, we develop dynamic portfolio protection trading strategies based on econometric methods. As a criterion for riskiness, we consider the evolution of the value-at-risk spread from a GARCH model with normal innovations relative to a GARCH model with generalized innovations. These generalized innovations may for example follow a Student t, a generalized hyperbolic, an alpha-stable or a Generalized Pareto distribution (GPD). Our results indicate that the GPD distribution provides the strongest signals for avoiding tail risks. This is not surprising as the GPD distribution arises as a limit of tail behaviour in extreme value theory and therefore is especially suited to deal with tail risks. Out-of-sample backtests on 11 years of DAX futures data, indicate that the dynamic tail-risk protection strategy effectively reduces the tail risk while outperforming traditional portfolio protection strategies. The results are further validated by calculating the statistical significance of the results obtained using bootstrap methods. A number of robustness tests including application to other assets further underline the effectiveness of the strategy. Finally, by empirically testing for second-order stochastic dominance, we find that risk averse investors would be willing to pay a positive premium to move from a static buy-and-hold investment in the DAX future to the tail-risk protection strategy.
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Inflation Dynamics During the Financial Crisis in Europe: Cross-sectional Identification of Long-run Inflation Expectations
Geraldine Dany-Knedlik, Oliver Holtemöller
IWH Discussion Papers,
Nr. 10,
2017
Abstract
We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
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