Christoph Basten, Ragnar Juelsrud, Cross-Selling in Bank Household Relationships: Implications for Deposit Pricing, Loan Pricing, and Monetary Policy, In: Swiss Finance Institute Research Paper, No. 22-65, 2023. (Working Paper)
Using administrative data on deposits and loans of every Norwegian resident with any Norwegian bank, we show that an existing deposit account makes a household more likely to hold deposits at the same bank later despite better alternatives and more likely to borrow there. Cross-selling potential varies by household and banks pay higher deposit rates to those more likely to become borrowers. Then they charge depositors higher risk-adjusted loan rates than new clients, suggesting that cross-selling is driven by demand rather than supply. Discounting future cross selling profits motivates lower deposit spreads in times of lower policy rates, transmitting monetary policy. |
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Gianluca De Nard, Simon Hediger, Markus Leippold, Per Nils Anders Östberg, Michele Pelli, et al., Non-Standard Errors, In: Swiss Finance Institute Research Paper, No. 22-09, 2022. (Working Paper)
In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants. |
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Daniel Fasnacht, Digital ecosystems and super apps, In: SSRN, No. 3924260, 2021. (Working Paper)
Businesses are characterised by digital innovations, fusing the physical, artificial, and biological worlds, affecting societies, industries, and companies with ever-higher speed and intensity. There is no room for traditional strategic thinking in the process of a new world order with new competitive forces and increased uncertainty, where goals are continually changing, and resources must be flexibly reorganised. Established firms will be the losers with old management concepts, linear value chains, and rigid and closed organisational structures. This article explains why the banking industry is ripe for disruption. It introduces a conceptual framework based on a case study research of Chinese juggernauts with highly scalable data and value monetization based on platform business models and super-apps. Our journey from the industrial economy to the digital era opens up new vistas for creating and capturing value for businesses and clients of the next generation. We describe why modern leaders must embrace change, learn from Asia, and develop strategies through the lens of the ecosystem theory. Digital ecosystems focus on clients and data and consolidate goods and services from diverse sectors. We coined the holistic capability to bring together e-commerce, logistics, social media, and financial services as “The Golden Triangle of Digital Ecosystems” To achieve sustainable financial growth, we suggest an agile management approach that takes the digital transformation as a chance and builds upon partnerships to connect with diverse actors—technologically, socially, and culturally. |
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Julian Kölbel, Adrien-Paul Lambillon, Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds, In: Swiss Finance Institute Research Paper, No. 23-07, 2023. (Working Paper)
We examine the novel phenomenon of sustainability-linked bonds (SLBs). These bonds’ coupon is linked to the issuer achieving a predetermined sustainability performance target. We estimate the yield differential between SLBs and non-sustainable counterfactuals by matching bonds from the same issuer. Our results show that in most cases investors pay for the improvement in sustainability, while issuers benefit from a sustainability premium. Our analysis suggests that the sustainability premium is larger for bonds with a higher coupon step-up and for callable bonds. We also show that there is a ‘free lunch’ for some SLB issuers, as their financial savings are higher than the potential penalty, and they have a call option to reduce this penalty. While our findings suggest that most SLBs incentivize sustainability improvements by offering a lower cost of capital, some companies that do not benefit from a sustainability premium seem to issue SLBs to signal their commitment to sustainability targets. The ‘free lunch’ however suggests that SLBs can also be a form of greenwashing, when they are issued purely for financial optimization without a real commitment to carry out sustainability improvements. |
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Hui Chen, Robert Göx, Voluntary Disclosure in Leader-Follower Games, In: SSRN, No. 4268220, 2022. (Working Paper)
We study voluntary disclosure strategies in leader-follower games where firms choose real actions sequentially after simultaneously disclosing information. We show that the leader incurs an endogenous consistency cost when withholding information because it must choose a suboptimal real action to avoid that its private information is revealed to the follower. This consistency cost induces the leader to disclose more information in equilibrium than an equally informed follower. We establish this result in the context of a voluntary disclosure model with uncertain information endowment and show that it is robust under alternative modeling choices regarding the disclosure friction, the number of followers, and the impact of firms' private information on their rivals' profit. |
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Elliot Beck, Gianluca De Nard, Michael Wolf, Improved Inference in Financial Factor Models, In: SSRN, No. 4107472, 2022. (Working Paper)
Conditional heteroskedasticity of the error terms is a common occurrence in financial factor models, such as the CAPM and Fama-French factor models, This feature necessitates the use of heteroskedasticity consistent (HC) standard errors to make valid inference for regression coefficients. In this paper, we show that using weighted least squares (WLS) or adaptive least squares (ALS) to estimate model parameters generally leads to smaller HC standard errors compared to ordinary least squares (OLS), which translates into improved inference in the form of shorter confidence intervals and more powerful hypothesis tests. In an extensive empirical analysis based on historical stock returns and commonly used factors, we find that conditional heteroskedasticity is pronounced and that WLS and ALS can dramatically shorten confidence intervals compared to OLS, especially during times of financial turmoil. |
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Gianluca De Nard, Zhao Zhao, Using, Taming or Avoiding the Factor Zoo? A Double-Shrinkage Estimator for Covariance Matrices, In: SSRN, No. 3914867, 2023. (Working Paper)
Existing factor models struggle to model the covariance matrix for a large number of stocks and factors. Therefore, we introduce a new covariance matrix estimator that first shrinks the factor model coefficients and then applies nonlinear shrinkage to the residuals and factors. The estimator blends a regularized factor structure with conditional heteroskedasticity of residuals and factors and displays superior all-around performance against various competitors. We show that for the proposed double- shrinkage estimator, it is enough to use only the market factor or the most important latent factor(s). Thus there is no need for laboriously taking into account the factor zoo. Supplementary material for this article is available online. |
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Simon Hediger, Jeffrey Näf, Michael Wolf, R-NL: covariance matrix estimation for elliptical distributions based on nonlinear shrinkage, In: ArXiv.org, No. 2210.14854, 2023. (Working Paper)
We combine Tyler's robust estimator of the dispersion matrix with nonlinear shrinkage. This approach delivers a simple and fast estimator of the dispersion matrix in elliptical models that is robust against both heavy tails and high dimensions. We prove convergence of the iterative part of our algorithm and demonstrate the favorable performance of the estimator in a wide range of simulation scenarios. Finally, an empirical application demonstrates its state-of-the-art performance on real data. |
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Mrinal Mishra, Vasso Ioannidou, Jonathan Fu, Don’t Stay Put: Ride the (Credit) Wave, In: Centre for Banking Research Working Paper Series, Bayes Business School, No. WP 02/22, 2022. (Working Paper)
Information asymmetries and enforcement problems often limit commercial lenders’ entry into low-income markets. Using detailed credit registry data with more than 32 million bank-borrower loan observations, we study the “failed” entry of commercial lenders into Bolivia’s microfinance market in the mid-1990s, which led to an over-indebtedness crisis. Tracing borrowers’ credit outcomes for nearly 10 years, we find that despite the commercial lenders’ poorly adapted lending technologies, stronger adverse selection, and moral hazard problems, the increase in competition carried significant short-term and long-term credit benefits to borrowers by forcing microfinance institutions to improve their loan terms and reduce rents. |
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Emanuela Benincasa, Jonathan Fu, Mrinal Mishra, Adityavardhan Paranjape, Different Shades of Green: Estimating the Green Bond Premium using Natural Language Processing, In: SSRN, No. 22-64,2022, 2022. (Working Paper)
We document the existence of a premium in the green bond market based on the greenness of green bonds. Using BERT, a natural language processing method for textual analysis, we develop a novel measure for bonds’ greenness and document that a 10 percent increase in the bond’s greenness corresponds to a decrease in annualized yield by between 4.86 to 8.71 basis points. In addition to greener bonds enjoying higher premiums, we find evidence that issuing a green bond has positive spillover effects on the pricing of subsequent conventional bonds’ issuance. Overall, our findings are consistent with firms relying on 'green' debt instruments to lower capital costs and raise cheaper financing.
Keywords: Green bonds, BERT model, Sustainable Finance, Bond premium |
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Thomas Puschmann, Marine Huang-Sui, A taxonomy for Decentralized Finance, In: SSRN, No. 4360067, 2023. (Working Paper)
Decentralized Finance (‘DeFi’) has gained tremendous momentum over the past three years by using novel approaches to disintermediating financial institutions in the provision of financial services. However, empirical research in this field is still rare and a more comprehensive understanding of the domain is a missing component in academic research. This paper develops a taxonomy based on a comprehensive literature analysis to structure this emerging field systematically. The application of the taxonomy to 278 DeFi start-ups reveals that most of the DeFi start-ups focus on Ethereum (36.3%) and have a focus on analytics and automation (52%), while only a few incorporate decentralized governance approaches (3.3%), provide decentralized exchanges (14%) or integrate off-chain data. |
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Alin Ake-Kob, Aurelija Blazeviciene, Liane Colonna, Anto Čartolovni, Sara Colantonio, Carina Dantas, Anton Fedosov, Francisco Florez-Revuelta, Eduard Fosch-Villaronga, Zhicheng He, Andrzej Klimczuk, Maksymilian Kuźmicz, Adrienn Lukács, Christoph Lutz, Renata Mekovec, Cristina Miguel, Emilio Mordini, Zada Pajalic, Barbara Krystyna Pierscionek, Maria Jose Santofimia Romero, Albert Ali Salah, Andrzej Sobecki, Agusti Solanas, Aurelia Tamò-Larrieux, State of the art on ethical, legal, and social issues linked to audio- and video-based AAL solutions - Uploaded on December 29, 2021, In: CA19121 GoodBrother COST Action, No. WG1, 2021. (Working Paper)
Ambient assisted living (AAL) technologies are increasingly presented and sold as essential smart additions to daily life and home environments that will radically transform the healthcare and wellness markets of the future. An ethical approach and a thorough understanding of all ethics in surveillance/monitoring architectures are therefore pressing. AAL poses many ethical challenges raising questions that will affect immediate acceptance and long-term usage. Furthermore, ethical issues emerge from social inequalities and their potential exacerbation by AAL, accentuating the existing access gap between high-income countries (HIC) and low and middle-income countries (LMIC). Legal aspects mainly refer to the adherence to existing legal frameworks and cover issues related to product safety, data protection, cybersecurity, intellectual property, and access to data by public, private, and government bodies. Successful privacy-friendly AAL applications are needed, as the pressure to bring Internet of Things (IoT) devices and ones equipped with artificial intelligence (AI) quickly to market cannot overlook the fact that the environments in which AAL will operate are mostly private (e.g., the home). The social issues focus on the impact of AAL technologies before and after their adoption. Future AAL technologies need to consider all aspects of equality such as gender, race, age and social disadvantages and avoid increasing loneliness and isolation among, e.g. older and frail people. Finally, the current power asymmetries between the target and general populations should not be underestimated nor should the discrepant needs and motivations of the target group and those developing and deploying AAL systems. Whilst AAL technologies provide promising solutions for the health and social care challenges, they are not exempt from ethical, legal and social issues (ELSI). A set of ELSI guidelines is needed to integrate these factors at the research and development stage. |
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Slavisa Aleksic, Liane Colonna, Carina Dantas, Anton Fedosov, Francisco Florez-Revuelta, Eduard Fosch-Villaronga, Alexandar Jevremovic, Hajer Gahbiche Msakniç, Siddharth Ravi, Blerim Rexha, Aurelia Tamò-Larrieux, State of the art in privacy preservation in video data, In: Zenodo, No. 6806207, 2022. (Working Paper)
Aleksic, Slavisa, Colonna, Liane, Dantas, Carina, Fedosov, Anton, Florez-Revuelta, Francisco, Fosch-Villaronga, Eduard, Jevremovic, Aleksandar, Msakniç, Hajer Gahbiche, Ravi, Siddharth, Rexha, Blerim, & Tamò-Larrieux, Aurelia. (2022). |
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Per Nils Anders Östberg, Thomas Richter, The Sovereign Debt Crisis: Flights or Freezes?, In: SSRN, No. 3060504, 2022. (Working Paper)
Multiple asset pricing theories predict that large price changes should be associated with abnormal trading volume, inducing investor rebalancing and possibly leading to flights. In contrast, consistent with market microstructure theories, this paper documents freezes, a reduction in trading volume (approximately 30% relative to the previous trading week) during market stress episodes in the European sovereign bond market. We trace the market freezes to increasing transaction costs driven by reduced risk bearing capacity of market makers. |
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Jiri Woschitz, Long-term Central Bank Repos and Bank Rollover Risk, In: n/a, No. n/a, 2017. (Working Paper)
Over a period of more than four years the ECB has repeatedly and in addition to its standard monetary refinancing operations offered repos with extraordinarily long durations. This paper argues that such operations serve the function of reducing rollover risks for Eurozone banks. The data shows that high rollover (and borrowing) costs of banks in struggling countries correlate with the ECB's offering periods of these additional longer-dated repos. Banks with high rollover costs take disproportionately more Eurosystem liquidity and profit, expost, exceptionally from market borrowing cost reductions. As discussed, sheltering banks from rollover risks prevents some banks' equity holders (possibly erroneously) from deciding to let the bank default on its obligations. Moreover, such measures neither solve bank debt overhang (Myers, 1977) nor do they bail out banks efficiently (Bhattacharya and Nyborg, 2013). The inefficiency feature may have implications for the observed increase in fragmentation in the Euro area, the bank-sovereign nexus, and the risk composition of the ECB's balance sheet. |
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Jiri Woschitz, Central bank liquidity policy and the cross-section of bank equity returns, In: n/a, No. n/a, 2022. (Working Paper)
This paper examines abnormal bank equity returns around the announcement and implementations of the largest central bank liquidity operations to date. Those were conducted by the European Central Bank (ECB) at the height of the sovereign debt crisis in 2011 and 2012. I find that banks in countries perceived as being relatively riskier at the time experienced larger positive abnormal equity returns. Relating country-level abnormal returns to country-level liquidity uptake shows that banks with higher liquidity uptake profit disproportionately more from larger returns over this period. This provides evidence that the ECB alleviates stress in the euro area through the provisioning of relatively more liquidity to banks in riskier countries. |
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Qing He, Jiyuan Huang, Dongxu Li, Liping Lu, Bank lending and CEO turnover: Evidence from China, In: n/a, No. n/a, 2022. (Working Paper)
To maintain bank relationship, borrowers have motives to discipline themselves by forcing out underperforming CEOs. In this paper, we show that the state ownership in emerging markets renders this disciplinary mechanism ineffective. Using the contract information of bank loans for Chinese listed firms, we find that higher bank loan intensity overall does not affect the probability of forcing out an underperforming CEO. The absence of disciplinary effect is driven by the bank-firm pairs in which either the borrower or the lender is state-owned. However, the disciplinary effect is significant if a firm’s bank loans mostly consist of secured and short-term bank loans. Bank loans increase the likelihood of a forced CEO turnover, especially when joint-equity banks serve as the main lender. Overall, we propose that state ownership is an important factor driving the inefficiency of credit market in emerging countries. |
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Thorsten Hens, Mei Ding-Hirschfeld, Personality Traits and Investment Styles, In: Swiss Finance Institute Research Paper, No. 22-16, 2023. (Working Paper)
We collected detailed personality traits data and preferred investment styles of participants from the German population. We find a significant relationship between personality traits and styles. Then we established a personality-based style profiler based on a least-distance algorithm. We tested its out-of-sample performance. The results of AB testing show that the style profiler provides significantly better fitting style recommendations than a random recommendation. Moreover, including socio-economic characteristics increases the fit.
Our results suggest that further research on wealth management could benefit from including the personality of individual investors as a crucial factor, contributing to more satisfying recommendations helping people to invest consistently over time. |
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Felix Von Meyerinck, Alexandra Niessen-Ruenzi, Markus Schmid, Steven Davidoff Solomon, As California Goes, So Goes the Nation? Board Gender Quotas and Shareholders' Distaste of Government Interventions, In: European Corporate Governance Institute – Finance Working Paper Series, No. 785/2021, 2021. (Working Paper)
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Felix Von Meyerinck, Vesa Pursiainen, Markus Schmid, Competition and the Reputational Costs of Litigation, In: University of St.Gallen - School of Finance Research Paper, No. 2020/07, 2022. (Working Paper)
We study the role of competition in customers' reactions to litigation against firms, using anonymized mobile phone location data. A class action lawsuit filing results in a 4% average reduction in customer visits to target firms' outlets in the following months. The effect strongly depends on competition. Outlets facing more competition experience significantly larger negative effects. Closer competition matters more, both in terms of geographic and industry proximity. Announcement returns and quarterly accounting revenues around lawsuit filings also strongly depend on competition. Our results suggest that competition is an important component in customers' ability to discipline firms for misbehavior. |
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