Contributions published at Department of Banking and Finance (Pablo Koch Medina)

Decentralized finance (DeFi) promises a revolution in financial accessibility, transparency, and automation. Yet, its very novelty exposes participants to a number of additional risks and challenges. This study aims to address the risks associated with DeFi, while also conducting a comparative analysis to those of classical/traditional finance (TradFi). After introducing DeFi and its defining characteristics, such as the use of smart contracts, blockchain technology, and decentralized governance, the paper outlines the principal risks associated with DeFi. Drawing insights from an extensive literature review of 200 recent articles, of which 50 were thoroughly analyzed, the study compares risks of DeFi and TradFi, categorizing these into systematic and unsystematic risks. Furthermore, we introduce the ‘risk wheel’, an innovative tool tailored to understand and navigate the subtleties of DeFi risks, finding potential applications in risk assessment, management, and even education. This paper’s primary objective is to provide a detailed and impartial examination of the risks associated with DeFi and their comparison to traditional finance in order to assist stakeholders in making informed decisions and mitigating possible losses.

The flows-to-equity method is commonly used in leveraged buyouts and other highly leveraged transactions. These flows are hybrid flows, mixing expected operating cash flows with promised debt payments under a planned debt schedule. Because of this, it is difficult to accurately estimate the appropriate discount rate, a difficulty that is compounded by the typically changing leverage over time under the planned debt schedule. We show how the flows-to-equity approach works and discuss its benefits and drawbacks as compared with other, “more standard” methods.

Can local government spending spur entrepreneurial activity? To answer this question, we study a setting where, around multiple pre‐determined and non‐manipulable thresholds, municipalities with lower tax revenues receive direct and different monetary grants from the national budget. Employing a fuzzy regression discontinuity design, we find a positive impact of fiscal transfers on the number of firms, especially sole proprietorships and small firms. The impact is stronger in municipalities where the opposition is more involved in the legislative process or more parties are represented in the municipal council.

Although sustainable finance (SF) has become a leading trend in the financial industry, little is known about how attention to news on SF, trust in the industry, and recent accusations of greenwashing affect the likelihood to invest in SF products. Based on a survey of a representative sample of Swiss citizens, we find that more attention to news about SF and trust in SF are positively related to the likelihood of investing in SF, whereas greenwashing perceptions are negatively related. Furthermore, attention to SF and economic news are positive predictors of sustainable finance literacy (SFL), whereas attention to SF news is negatively associated with greenwashing perception of SF. Collectively, these findings imply that engaging citizens with SF investments, particularly information seeking on SF news and trust in SF rather than SFL, need to be fostered. The Implications of the communication practices of the SF industry and policy implications are discussed.

This thesis examines the risk-return attributes of portfolios screened for ESG factors against those of unscreened portfolios. Key performance indicators are utilized in conjunction with multi-factor models, including the CAPM, Fama-French, and the Carhart models. An ESG factor is then introduced to quantify the ESG premium. The empirical results offer a nuanced perspective: ESG screening neither conclusively reduces portfolio risk nor unambiguously affects diversification. However, the study detects a statistically significant ESG premium, particularly during crises such as the COVID-19 pandemic or the Ukraine conflict. Furthermore, it suggests that ESG-screened portfolios display comparable resilience to their unscreened counterparts during global crises.

What is the long-term impact of negative interest rates on bank lending? To answer this question, we construct a unique summary measure of negative rate exposure by individual banks based on exclusive survey data and banks’ balance sheets and couple it with the credit register of Spain and firms’ balance sheets to identify this impact on the supply of credit to firms. We find that only when deposit rates reached the zero lower bound did affected banks (relative to non-affected banks) decrease their supply, especially when undercapitalized and lending to risky firms. The adverse effects of the negative rates on banks’ intermediation capacity only took place after a protracted period of time.

We identify the effects of negative rates on bank behavior using difference-in-differences identification. First, we find that going negative can interrupt not only the pass-through from policy to deposit but also to mortgage rates. To preserve their deposit franchise, banks finance negative deposit with increased mortgage spreads, the more the bigger their market power. Second, negative rates on reserves induce banks to cut some reserves without replacement and replace others with riskier assets. Together with increased mortgage spreads, balance sheet restructuring preserves profits but risk-taking increases. Third, pass-through interruption and risk-taking can be reduced through tiered remuneration.

What is the impact of policy interventions on the systemic risk of banks? To answer this question, we analyze a comprehensive sample that combines an original set of bank-specific bailout events with the balance sheets of key affected and nonaffected European banks between 2005 and 2014. We find a positive and significant association of guarantees with systemic risk that is somewhat weaker in the long run when the regulator appoints members to the supervisory board. The short run association between recapitalizations and systemic risk is also positive for large and less capitalized banks, while in the long run, recapitalizations are linked with reduced systemic importance, especially for less profitable banks and in cases when the regulator limits management pay. Liquidity injections are positively linked with systemic risk, but the long-run effect is mitigated for small or better capitalized banks. In the short run, injecting liquidity is associated with reduced systemic risk when the regulator imposes restrictions on supervisory board composition or on management pay or capital payouts.

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The recent surge in inflation represents the first time many individuals experience inflation considerably above central banks’ targets. Despite limited inflation experience, inflation expectations of many households have been upward biased relative to ex-post realisations and inflation rates targeted by central banks. This column proposes inflation shocks in the more distant past as an explanation for elevated inflation expectations. Consistent with this conjecture, German households living in areas with higher local inflation during the hyperinflation of the 1920s expect higher inflation today. Long-lasting effects of inflation shocks on attitudes toward inflation have important implications for monetary and fiscal policy as managing inflation expectations becomes more difficult.

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What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios. Laxer lending standards lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit inflows due to seniors’ propensity to save in deposits; and depressed local investment opportunities due to seniors’ lower credit demand. Banks thus look for riskier clients, especially in counties where they operate no branches.

Predicting equity returns is a complex task in finance. This paper examines the volume profile as a predictive tool using machine learning techniques. We process and summarize the volume profile into features, using an XGBoost classifier to forecast stock return direction. Our approach is validated across two equity sets, demonstrating its capability to identify high-return periods. Based on the probability estimates, trading strategies are created and shown to be able to outperform the benchmark on a risk-adjusted and total return basis. Overall, the results indicate the predictive potential of the volume profile leveraged by the model.

The relationship between economic indicators and financial development has long been a topic of particular interest for researchers and policymakers alike. Despite extensive research in the past, the true nature of the relationship remained unknown. The goal of this thesis is to analyze this research question for multiple advanced Asian countries with various economic and financial indicators. The analysis is conducted by means of ordinary least squares regression. The results reveal that many indicators have a rather negative impact but not consistently across all countries, making it difficult to draw a general conclusion about the observed relationship.

Diese Arbeit untersuchte, ob sich über die letzten 20 Jahre eine Beimischung der Emerging Markets in ein Aktienportfolio fortgeschrittener Volkswirtschaften gelohnt hat. Ausserdem sollten relevante Treiber der Emerging Markets Rendite identifiziert werden und deren Einfluss gemessen werden. Aus der Untersuchung resultierte, dass sich eine Beimischung über 5,10 und 15 Jahre nicht gelohnt hat, über 20 Jahre schon. Es resultierte ein signifikant positiver Einfluss der Rohstoffentwicklung und ein signifikant negativer Einfluss der Dollar Stärke. Die GDP Wachstums- differenz zwischen Emerging Markets und Developed Markets hatte keinen signifikanten Einfluss. Das GDP-Wachstum der Emerging Markets lieferte in einem drei Variablen Modell einen signifikant positiven Einfluss.

Mit dieser quantitativen empirischen Studie mit 207 Probanden wird gezeigt, dass die Big-Five- Persönlichkeitsdimensionen einen Einfluss auf ausgewählte Kauf- und Finanzierungspräferenzen bei Wohneigentum in Deutschland ausüben, wohingegen die Persönlichkeitsdimension ‹Eigenschaftsangst› diese Präferenzen nicht beeinflusst. Die Auswertung erfolgte mittels ‹Ordinary Least Squares›-Regressionsanalyse. Des Weiteren besteht kein Zusammenhang zwischen den Big Five und der Preisbereitschaft bei nachhaltigen Gebäudeattributen. Ausserdem wurde festgestellt, dass sich die Kauf- und Finanzierungspräferenzen im Mittelwert länderüber- greifend zwischen Israel und Deutschland signifikant voneinander unterscheiden. Diese Ergebnisse unter- streichen einerseits die Bedeutung von Persönlich- keitsdimensionen in Entscheidungsprozessen und andererseits die Notwendigkeit, auch kulturelle Faktoren in zukünftige Forschungen einzubeziehen, um Abweichungen besser zu verstehen.

Cyber-Angriffe beschäftigen die Schweizer Wirtschaft mehr denn je. Jedes zweite Grossunternehmen wurde bereits Opfer eines Cyber-Angriffs. In vielen Fällen ist die Folge ein Betriebsunterbruch. Die 14. Ausgabe des swissVR Monitors zeigt: Obwohl das Bewusstsein für die Risiken zunimmt, fehlt vielen Firmen eine klar formulierte Cyber-Strategie. Der Ernstfall wird nur selten geprobt und auch das Reporting der Geschäftsleitung an den Verwaltungsrat muss sich verbessern.