Contributions in Merlin

The market infrastructure reform carried out in the aftermath of the 2008 financial crisis mandates the central clearing of standardized over-the-counter derivatives. We investigate how this reform can impact on the valuation of derivative contracts and how it can lead to unintended value redistribution effects among market participants. The transition to central clearing changes both the counterparty risk and the funding costs associated with a derivative position. By developing a theoretical model of derivative contract valuation, we clarify how these changes affect the expected value adjustments for a particular dealer and identify the three channels of value redistribution. Moreover, we find that, through these value adjustments, mutualization of risks and collateral in a central clearing counterparty can lead to externalities among the members.

I use spatial and temporal variation in temperature shocks to examine the effect of adverse weather conditions on the onset of social conflicts in seventeenth- and eighteenth-century France. The paper’s contribution is threefold. First, I document the effect of temperature shocks on standards of living using cross-section and panel prices data. Second, I link highresolution temperature data and a new database of 8,528 episodes of social conflicts in France between 1661 and 1789. I use a linear probability model with subregional and year fixed effects to establish a causal connection between temperature shocks and conflicts. One standard deviation increase in temperature increased the probability of social conflicts by about 5.3 per cent. To the best of my knowledge, these results are the first to quantify the effect of temperature shocks on intergroup conflict in pre-industrial Europe. Finally, I investigate the role of local leaders– the intendants– in the mitigation of temperature shocks. I show that leaders with higher level of local experience were better able to cope with adverse weather conditions. I argue that years of local experience were a key determinant in the intendant’s ability to administer efficiently his province. This interpretation is supported by historical evidence.

Covariance matrix forecasts for portfolio optimization have to balance sensitivity to new data points with stability in order to avoid excessive rebalancing. To achieve this, a new robust orthogonal GARCH model for a multivariate set of non-Gaussian asset returns is proposed. The conditional return distribution is multivariate generalized hyperbolic and the dispersion matrix dynamics are driven by the leading factors in a principle component decomposition. Each of these leading factors is endowed with a univariate GARCH structure, while the remaining eigenvalues are kept constant over time. Joint maximum likelihood estimation of all model parameters is performed via an expectation maximization algorithm, and is applicable in high dimensions. The new model generates realistic correlation forecasts even for large asset universes and captures rising pairwise correlations in periods of market distress better than numerous competing models. Moreover, it leads to improved forecasts of an eigenvalue-based financial systemic risk indicator. Crucially, it generates portfolios with much lower turnover and superior risk-adjusted returns net of transaction costs, outperforming the equally weighted strategy even under high transaction fees.

Countless test statistics can be written as quadratic forms in certain random vectors, or ratios thereof. Consequently, their distribution has received considerable attention in the literature. Except for a few special cases, no closed-form expression for the cdf exists, and one resorts to numerical methods. Traditionally the problem is analyzed under the assumption of joint Gaussianity; the algorithm that is usually employed is that of Imhof (1961). The present manuscript generalizes this result to the case of multivariate generalized hyperbolic (MGHyp) random vectors. The MGHyp is a very flexible distribution which nests, among others, the multivariate t, Laplace, and variance gamma distributions. An expression for the first partial moment is also obtained, which plays a vital role in financial risk management. The proof involves a generalization of the classic inversion formula due to Gil-Pelaez (1951). Two numerical applications are considered: first, the finite-sample distribution of the 2SLS estimator of a structural parameter. Second, the Value at Risk and Expected Shortfall of a quadratic portfolio with heavy-tailed risk factors. An empirical application is examined, where a portfolio of of Dow Jones Industrial Index (DJIA) stock options is optimised by minimising the expected shortfall. The empirical results show the benefits of the analytical expression.

Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.

We study how the CEO's power over the board of directors affects pay levels and the structure of optimal compensation contracts and derive unexpected results. First, a more powerful CEO generally receives more pay and a contract with a higher pay-performance sensitivity (PPS) if firm performance is low. In contrast, if firm performance is high, more CEO power translates into less pay and a lower PPS. Second, considering a special case of our general model, we show that more powerful CEOs receive higher salaries, more stocks but a nonincreasing number of options. Third, we find that the presence of a powerful CEO generally leaves the optimal use of relative performance evaluation unaffected. However, we identify conditions under which the sensitivity of CEO pay to peer performance can be increasing in the CEO's power over the board. Overall, our results suggest that frequently used indicators of poor (or sound) compensation practices should be interpreted with care.

In this paper, we investigate whether companies located in liberal market economies report more explicitly about specific CSR topics than firms located in coordinated market economies. For a sample of 3,384 CSR reports of European and US firms, we perform a textual analysis over the period 2008 – 2016. Our results confirm that companies located in LMEs report more explicitly about education and philanthropy; for parental leave and climate, we find a negative and significant association. We also find that CSR performance, size and report length are positively associated with the explicitness of our topic-specific CSR disclosure scores. Our results are robust to a variety of alternative measures.

This paper analyses stock market reactions after the occurrence of major negative corporate social responsibility (CSR) events and the possibility of mitigating these effects through the upfront provision of CSR information in firms’ annual reports. For this purpose, we follow a three-step procedure. First, we analyse the major concerns gathered from REPRisk® data via event study analysis. Herein, we cover a window of 5 to 20 days. Second, we analyse all annual reports of the firms mentioned in the covered period over the entire time horizon and conduct a textual analysis to examine firms’ disclosure of CSR information. Finally, we draw conclusions from the two approaches and show that firms with more upfront CSR information suffer from stronger negative market reactions after the occurrence of a negative CSR event. Herein, we show that if the occurrence of a negative CSR event conflicts with investors’ expectations, then it leads to an important update of investors’ beliefs about firms’ prospects. Our results also confirm that such an event leads to an adjustment of the subsequent year’s CSR disclosure in the annual reports.

In this paper, we test the realization effect, i.e., that risk-taking increases after a paper loss, whereas risk-taking decreases after a realized loss, using gambling data from a real casino. During a particular casino visit, losses are likely perceived as paper losses because the chance to offset prior losses remains effective until leaving the casino. However, when casino customers leave the casino, the final account balance is realized. Using individual-level slot machine gambling records, we find that risk-taking after paper losses increases during a visit and that this effect is more pronounced for larger losses. Conversely, risk-taking across multiple visits is not altered if the realized losses are comparatively small, whereas risk-taking is reduced if realized losses are comparatively large.

We analyze the impact of quantitative easing by the Federal Reserve, European Central Bank and Bank of England on cross‐border credit flows. Relying on comprehensive loan‐level data, we find that Fed QE strongly boosts cross‐border credit granted to Turkish banks by banks located in the US, Euro Area and UK, while ECB and BoE QEs work only moderately through banks in the EA and UK, respectively. In general QE works at short maturities across bank locations and loan currencies, more strongly for weaker lenders and borrowers, and may have resulted in maturity mismatches in Turkish banks searching for yield.