Katrin Hummel, Ute Laun, Annette Krauss, Management of Environmental and Social Risks and Topics in the Banking Sector - an Empirical Investigation, In: SSRN, No. 3415580, 2019. (Working Paper)
This paper investigates how environmental and social (E&S) risks and topics are integrated in the banking sector. In the context of global financial stability, banks play a key role in steering financial flows towards sustainable development. Yet, little is currently known as to whether and how banks integrate E&S aspects into their management control systems and whether this integration translates into E&S performance. Building on prior studies in the environmental management control literature, we design a conceptual model in which we link contextual factors, a proactive strategy approach, E&S management controls, and E&S performance. Following common practice in the banking sector, we differentiate between two paths of E&S management controls: risk management (value protection) and topic management (value creation). Based on survey data of 50 European banks, we find evidence that contextual factors, reflected in the perceived power and legitimacy of clients, voluntary standard setters and NGOs, are positively related to a proactive strategy approach. This proactive strategy translates into both topic and risk management. Yet, in the next step, only topic management is positively related to the E&S performance of a bank, but not risk management. |
|
Raja Almarzoqi, Sami Ben Naceur, Alessandro Scopelliti, How Does Bank Competition Affect Solvency, Liquidity and Credit Risk? Evidence from the MENA Countries, In: IMF Working Paper Series, No. 15/210, . (Working Paper)
The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base—due to capital adjustments—is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender’s side overcomes the decrease in the credit risk from the borrower’s side. In both cases, country-specific policies for market entry conditions—and for bank regulation and supervision—may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision. |
|
Angela Maddaloni, Alessandro Scopelliti, Rules and Discretion(s) in Prudential Regulation and Supervision: Evidence from EU Banks in the Run-Up to the Crisis, In: ECB Working Paper Series, No. 2284, . (Working Paper)
|
|
Sascha Behnk, Adam E. Greenberg, Alexander Wagner, When and why do ripple effects of dishonesty occur?, In: Swiss Finance Institute Research Paper, No. 16-45, 2021. (Working Paper)
|
|
Regina Hammerschmid, Commodity Return Predictability, In: SSRN, No. 2909209, 2018. (Working Paper)
The futures curve of an aggregate commodity portfolio is time-varying and changes from upward (contango) to downward sloping (backwardation) which implies negative or positive expected returns. The basis arises as a natural fundamental to predict commodity returns. However, the empirical evidence at the aggregate portfolio level is very weak. I construct a factor based on different forward rates along the futures curve and find that commodity returns are predictable. Economic fundamentals, such as industrial production or global trade, positively predict aggregate commodity returns and used jointly with this forward rates factor significantly improve overall predictability in- and out-of-sample. I find evidence that expected aggregate commodity returns are procyclical. When economic activity is high, the commodity yield curve tends to be inverted and expected returns are high. |
|
Alan Roncoroni, Stefano Battiston, Serafin Martinez Jaramillo, Luis Onesimo Leonardo Escobar Farfan, Climate Risk and Financial Stability in the Network of Banks and Investment Funds, In: SSRN, No. 3356459, 2019. (Working Paper)
We develop a method to analyze the effects on financial stability of the interplay between climate policy shocks and market conditions. We combine the frameworks of the Climate Stress-test with the framework of the network valuation of financial assets, in which the valuation of interbank claims accounts for market volatility as well as for endogenous recovery rates consistent with the network of obligations. We also include the dynamics of common asset contagion involving not only banks but also investment funds, which are key players in the low carbon transition. We then apply the model to a unique supervisory data-set of banks and investment funds at the firm level in order to assess the impact for financial stability of shocks deriving from the disorderly alignment of energy and utility sectors in a range of climate policy scenarios. While under mild shock scenarios systemic losses are contained, we identify the climate policy scenarios and market conditions under which systemic losses can pose a threat to financial stability. |
|
Lena Hörnlein, Martin Stadelmann, Jessica Brown, Fast-start finance to address climate change: what we know at the mid-point, In: ODI working and discussion papers, No. 2011, 2011. (Working Paper)
The 2009 Copenhagen Accord includes a collective pledge by industrialised countries to provide ‘new and additional resources, including forestry and investments through international institutions, approaching $30 billion for the period 2010-2012. The allocation of these new resources is to be balanced between adaptation and mitigation’ (UNFCCC, 2009). These resources are commonly called ‘fast-start finance’ (FSF). As fast-start finance is seen as a testing ground for longer-term arrangements for climate finance, it is important to explore how this funding has been used to date and what lessons should be drawn for the future.
This Background Note looks at how FSF promises have been implemented in practice. We begin by providing an overview of the knowledge on FSF as of June 2011, roughly halfway through the 2010-2012 period. We analyse funding volumes, the mitigation-adaptation balance, the grant-loan share and the proportion of multilateral and bilateral channels. We then go on to focus on governance, transparency, and sources of finance. |
|
Lena Hörnlein, Utility divestitures in Germany. A case study of corporate financial strategies and energy transition risk, In: SSRN, No. 2019-04, 2019. (Working Paper)
Germany is in the midst of a radical transformation of its power sector, which in 2016 led two of its main electric utilities, EON and RWE, to undertake dramatic restructurings. EON spun off its fossil fuel and trading segments, while RWE carved out its renewable energy, retail and grid business.
The paper examines the drivers of these divestitures. Building on corporate finance literature, the paper uses a mix of comparative descriptive statistics, interviews and event studies to test four groups of hypotheses. The evidence rejects drivers related to operations and management, biased investment and investor preferences and instead points to financing-related drivers.
Among the financing-related drivers, debt overhang and risk contamination seemed to have played the main role. Utilities restructured to save their healthy assets (renewables and grid infrastructure) from losses at their conventional power generation business (fossil fuel and nuclear plants).
Already weakened from record losses in their fossil fuel powered generation fleet due to low electricity prices, after 2011 the nuclear exit emerged as an additional challenge to the utilities. Investors doubted the adequacy of utilities provisions for decommissioning nuclear power plants and storing toxic waste, and feared major cost increases for which the utilities would be unlimitedly liable.
The paper uses existing research on divestitures in an empirical case that has implications for the evolution of European power markets. The results suggest that exiting conventional technologies as part of the transition to a more renewable energy mix might cause substantial costs. If these are not clarified and allocated ex ante, policy makers might find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector. |
|
Steven Ongena, Michael R. King, Nikola Tarashev, Bank standalone credit ratings, In: BIS Working Paper, No. 542, 2020. (Working Paper)
We study a unique experiment to examine the importance of rating agencies' private information for bank shareholders. On July 20, 2011, Fitch Ratings refined their bank standalone ratings, which measure intrinsic financial strength, from a 9-point to a 21-point scale. This refinement did not affect their all-in ratings, which combine assessments of intrinsic strength and extraordinary sovereign support and provide an estimate of banks' creditworthiness. Thus, the impact of the standalone rating refinement was cleanly limited to bank shareholders. We find evidence suggesting that the refinement resulted in higher than expected standalone ratings, but we find only weak evidence of ratings catering. We also find a positive relationship between stock price reactions and rating surprises, revealing that the rating refinement delivered useful information about the importance of bank characteristics for assessing intrinsic financial strength. |
|
Vladimir Petrov, Anton Golub, Richard Olsen, Instantaneous Volatility Seasonality of High-Frequency Markets in Directional-Change Intrinsic Time, In: SSRN, No. 3243797, 2019. (Working Paper)
We propose a novel intraday instantaneous volatility measure which utilises sequences of drawdowns and drawups non-equidistantly spaced in physical time as indicators of high-frequency activity of financial markets. The sequences are re-expressed in terms of directional-change intrinsic time which ticks only when the price curve changes the direction of its trend by a given relative value. We employ the proposed measure to uncover market microstructure weekly volatility seasonality patterns of three Forex and one Bitcoin exchange rates as well as a stock market index. We demonstrate the long memory of instantaneous volatility computed in directional-change intrinsic time. The provided volatility estimation method can be adapted as a universal multiscale risk-management tool independent of the discreteness and the type of analysed large high-frequency data. |
|
Vladimir Petrov, Anton Golub, Richard B. Olsen, Agent-Based Model in Directional-Change Intrinsic Time, In: SSRN, No. 3240456, 2019. (Working Paper)
We describe an agent-based model where trades happen in event-based time called directional-change intrinsic time. Events are defined as the reversal price moves of a directional-change threshold from a local extreme. The price impact of traded volumes is modelled according to the empirically observed squared root impact function. The time series generated by the agents is characterised by statistical properties typical for foreign exchange rates: low auto-correlation of returns, fat-tailed distribution of returns, aggregated normality, and the price jump scaling law. Furthermore, we introduce and use as a benchmark, the overshoot scaling law, which is an omnipresent feature of liquid markets and relates the expected length of price overshoots to the length of the corresponding directional-change threshold. |
|
Markus Leippold, Hanlin Yang, Mixed-Frequency Predictive Regressions, In: SSRN, No. 3157988, 2019. (Working Paper)
This paper explores the performance of mixed-frequency predictive regressions for stock returns from the perspective of a Bayesian investor. We develop a parameter learning approach for sequential estimation, allowing for belief revisions. Empirically, we find that mixed-frequency models improve predictability, not only because of the combination of predictors with different frequencies but also due to the preservation of the time-variation in the volatility of predictors. Mixed-frequency models produce higher volatility timing benefits, compared to temporally aggregate models. Therefore, our results highlight the importance of consistently incorporating predictors of mixed frequencies and correctly specifying the volatility dynamics in predictive regressions. |
|
Simon Hediger, Loris Michel, Jeffrey Näf, On the Use of Random Forest for Two-Sample Testing, In: ArXiv.org, No. 190306287, 2019. (Working Paper)
We follow the line of using classifiers for two-sample testing and propose several tests based on the Random Forest classifier. The developed tests are easy to use, require no tuning and are applicable for any distribution on Rp, even in high-dimensions. We provide a comprehensive treatment for the use of classification for two-sample testing, derive the distribution of our tests under the Null and provide a power analysis, both in theory and with simulations. To simplify the use of the method, we also provide the R-package "hypoRF". |
|
Adriano Tosi, International Volatility Arbitrage, In: SSRN, No. 3203445, 2018. (Working Paper)
Are options on exchange-traded products (ETPs) and indexes consistently priced internationally? The cross-section of international option returns exhibits a mispricing by sorting on ex-ante volatility returns. In addition, selling international ETP options and buying their corresponding index options commands a positive risk premium. Both empirical findings are economically large and pervasive internationally, whereas they are comparably small domestically. While volatility hedge funds are exposed towards domestic option products, they neglect the possibility of engaging in foreign volatility arbitrage. These findings entail that alpha seekers may expand their horizon towards international derivatives which at first glance are similar, but institutionally are not. |
|
Adriano Tosi, Alexandre Ziegler, The Timing of Option Returns, In: SSRN, No. 2909163, 2018. (Working Paper)
We document empirically that the returns from shorting out-of-the-money S&P 500 put options are concentrated in the few days preceding their expiration. Back-month options generate almost no returns, and front-month options do so only towards the end of the option cycle. The concentration of the option premium at the end of the cycle reflects changes in options’ risk characteristics. Specifically, options’ convexity risk increases sharply close to maturity, making them more sensitive to jumps in the underlying price. By contrast, volatility risk plays a smaller role close to maturity. Our results imply that speculators wishing to harvest the put option premium should short front-month options only during the last days of the cycle, while investors wishing to protect against downside risk should use back-month options to reduce hedging costs. |
|
Regina Hammerschmid, Harald Lohre, Regime Shifts and Stock Return Predictability, In: SSRN, No. 2445086, 2017. (Working Paper)
Identifying economic regimes is useful in a world of time-varying risk premia. We apply regime switching models to common factors proxying for the macroeconomic regime and show that the ensuing regime factor is relevant in forecasting the equity risk premium. Moreover, the relevance of this regime factor is preserved in the presence of fundamental variables and technical indicators which are known to predict equity risk premia. Based on multiple predictive regressions and pooled forecasts, the macroeconomic regime factor is deemed complementary relative to the fundamental and technical information sets. Finally, these forecasts exhibit significant out-of-sample predictability that ultimately translates into considerable utility gains in a mean-variance portfolio strategy. |
|
Gazi Kabas, Yavuz Arslan, Ahmet Degerli, Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks, In: SSRN, No. 3280437, 2018. (Working Paper)
Unemployment insurance (UI) policies are implemented by many countries to lower individual income risk and to automatically stabilize macroeconomic fluctuations. To the extent that these policies are successful, they should be reducing precautionary savings and hence bank deposits - households' major saving instrument. In this paper, we use this lower incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that when state UI benefits become more generous bank deposits decrease. Since deposits are the main and uniquely stable funding source for banks, the decrease in deposits squeezes bank commercial lending, which in turn reduces firm investment. These results imply that UI policies have the potential to destabilize the economy through banking sector by impairing banks' deposit funding - banks' major and stable funding source, which makes banks more exposed to negative shocks during bad times. |
|
Felix Kübler, Runjie Geng, Existence of Equilibrium in Stochastic Overlapping Generations Economies with Nonconvexities, In: -, No. -, 2018. (Working Paper)
Non-convexities and discrete choices have become important modeling tools in modern macro-economics. Unfortunately, existence of competitive equilibria in the presence of such non-convexities is not always ensured and most results on the existence of equilibrium that can be found in the literature consider a very general model and are not directly applicable to the macro-models used in the literature. In this paper we explain the three main problems one needs to face when proving existence
and give simple sufficient conditions for the existence of competitive equilibria in stochastic OLG models with discrete choices and non-convex preferences. We also consider a version of the model without aggregate uncertainty but with bankruptcy and default and prove existenceof a steady state equilibrium. |
|
Regina Hammerschmid, Alexandra Janssen, Crash-o-phobia in Currency Carry Trade Returns, In: Swiss Finance Institute Research Paper, No. 18-64, 2018. (Working Paper)
Currency carry trade returns are on average large and non-normally distributed. While the literature has found different explanations for the existence of carry trade returns, the higher order moments of their return distribution still pose a puzzle. We propose a new model to explain these non-normal properties of currency carry trade returns, by assuming that agents are loss averse and overweight states with low probabilities. This combination of loss aversion and probability weighting is called crash-o-phobia. Using non-linear least squares and risk-neutral state prices implied by currency options, we estimate this crash-o-phobia model to price developed and emerging market currencies. The parameter estimates reveal crash-o-phobic beliefs and preferences with significant differences across currencies. Compared to a model with rational beliefs and CRRA utility, our crash-o-phobia model performs significantly better at explaining the whole distribution of currency carry trade returns. |
|
Philipp Müller, Gregor Philipp Reich, Structural Estimation Using Parametric Mathematical Programming with Equilibrium Constraints and Homotopy Path Continuation, In: Econometrics: Econometric & Statistical Methods - General eJournal - CMBO, No. 12, 2019. (Working Paper)
In this paper, we formulate the likelihood function of structural models as a parametric optimization problem, where the model equations enter as constraints, forming a mathematical program with equilibrium constraints (Su and Judd, 2012). We trace the solution to its first-order conditions in dependence on a controlled parameter using homotopy continuation, delivering a relation from the controlled parameter to the corresponding maximum likelihood estimates and their confidence intervals. This enables us to estimate models with identification issues, multiplicity of equilibria, etc. As applications, we first trace the parameter estimates of the bus engine replacement model of Rust (1987), a dynamic discrete choice model, in dependence of the discount factor β. Using relative value iteration, we find that β is well identified and statistically significantly larger than 1. Second, for a simple static binary choice model, we demonstrate how the effects of multiplicity of equilibria and a lack of identification can be mitigated by the tracing method. |
|