Johannes Meuer, Michèle Angstmann, Kerstin Pull, Uschi Backes-Gellner, Christian Tröster, Embeddedness and the repatriation intention of assigned and self-initiated expatriates, In: UZH Business Working Paper Series, No. 373, 2017. (Working Paper)
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Peter Höschler, Simone Balestra, Uschi Backes-Gellner, The Development of non-cognitive skills in adolescence, In: Swiss Leading House "Economics of Education" Working Paper, No. 138, 2017. (Working Paper)
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Harald Pfeifer, Uschi Backes-Gellner, Another piece of the puzzle: Firms' investment in training as optimization of skills inventory, In: Swiss Leading House "Economics of Education" Working Paper, No. 136, 2017. (Working Paper)
By applying the inventory theory to hiring skilled workers under uncertainty, the authors explain how firms decide on their optimum investment in an "inventory of skills." This paper investigates the conditions under which firms are willing to make investments in a skilled workforce themselves rather than relying on skills produced within the education system or by other companies. By applying inventory theory to investments into apprenticeship training, the authors explain how firms decide on producing an optimum "inventory of skills" today to meet future demand. The authors derive hypotheses on how much firms are willing to invest in having a larger inventory of skilled worker depending on different types of inventory costs (overage cost, underage costs, demand structure). The authors use data from the BIBB Cost-Benefit-Survey 2012/2013, which comprises detailed information on different costs and benefits of training investments from the firm's perspective. The study applies a negative binomial estimation model. Results are threefold: firms are willing to invest in a larger inventory of skilled workers, i.e., to train more apprentices, first, if the costs of producing and retaining an excessive number of skilled workers (overage costs) are lower, second, if the costs of being short of skilled workers (underage costs) are higher, and third, given an identical cost structure, if it is more likely that the demand for skilled worker may be high in the future. Even more important is the relationship of the three: the combination of a firm's critical ratio (underage costs in relation to overage costs) with its demand structure (industry volatility) is associated with a higher inventory of skills. The findings (particularly the relation of underage and overage costs, in combination with the demand structure) have important policy implications for firms' incentives to invest in apprenticeship training. |
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Erich Walter Farkas, Alexander Smirnow, Intrinsic Risk Measures, In: Swiss Finance Institute Research Paper, No. 16-65, 2016. (Working Paper)
Monetary risk measures are usually interpreted as the smallest amount of external capital that must be added to a financial position to make it acceptable. We propose a new concept: intrinsic risk measures and argue that this approach provides a direct path from unacceptable positions towards the acceptance set. Intrinsic risk measures use only internal resources and return the smallest percentage of the currently held financial position which has to be sold and reinvested into an eligible asset such that the resulting position becomes acceptable. While avoiding the problem of infinite values, intrinsic risk measures allow a free choice of the eligible asset and they preserve desired properties such as monotonicity and quasi-convexity. A dual representation on convex acceptance sets is derived and the link of intrinsic risk measures to their monetary counterparts on cones is detailed. |
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Ciprian Necula, An Approximation of an Equivalent European Payoff for the American Put Option, In: SSRN, No. 2892152, 2017. (Working Paper)
Is the American put option in the Black-Scholes model simply an incognito European one? In this paper, we develop a numerical procedure, in the context of the Black-Scholes model, to approximate the payoff of a European type option that generates prices that are equal to the prices of the American put option in the continuation region. The resulting equivalent European payoff is a sum of power payoffs and therefore the price and the hedging indicators can be computed in closed form. For a given set of model parameters (interest rate, dividend rate and volatility) the computation of the equivalent European payoff reduces to solving a linear optimization problem. We conduct a numerical experiment spanning a wide range of model parameters and contract characteristics and, overall, the method produces American option prices with a relative RMSE less than 0.01% compared to a benchmark. |
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Erich Walter Farkas, Ciprian Necula, The Dynamics of Heterogeneity and Asset Prices, In: SSRN, No. 2973276, 2017. (Working Paper)
In the context of a continuous-time pure-exchange economy model, the paper develops a novel methodology, based on measure-valued stochastic processes, for analyzing the evolution of heterogeneity in a tractable manner and studying its impact on asset prices. The agents in the economy differ with respect to impatience, risk aversion, beliefs about the growth rate of output, and to the rules for updating beliefs. The heterogeneity itself is described by a single object, a measure, and its dynamics by a measure-valued stochastic process. A key contribution of the paper consists in obtaining a closed form formula for the stock price in the case in which preferences are homogeneous with the risk aversion parameter given by a natural number. We also synthesize and generalize existing results about the equilibrium in heterogeneous pure-exchange complete markets economies and we highlight the importance of the endogenously determined risk tolerance weighted consumption distribution as a key ingredient in driving the equilibrium variables. |
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Delia Coculescu, Monique Jeanblanc, Some No-Arbitrage Rules for Converging Asset Prices under Short-Sales Constraints, In: HAL, No. 01589416, 2017. (Working Paper)
Under short sales prohibitions, no free lunch with vanishing risk (NFLVR-S) is known to be equivalent to the existence of an equivalent supermartingale measure for the price processes (Pulido, 2014). For two given price processes, we translate the property (NFLVR-S) in terms of so called structure conditions and we introduce the concept of fun- damental supermartingale measure. When a certain condition necessary to the construction of the fundamental martingale measure is not fulfilled, we provide the corresponding arbi- trage portfolios. The motivation of our study lies in understanding the particular case of converging prices, i.e., that are going to cross at a bounded random time.
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Alexander Wagner, Richard J Zeckhauser, Alexandre Ziegler, Paths to Convergence: Stock Price Behavior After Donald Trump's Election, In: Swiss Finance Institute Research Paper, No. 17-36, 2018. (Working Paper)
How do market prices adjust towards stability after a shock? Tracking individual stock prices following their dramatic shakeup after Donald Trump’s surprise election provides an answer. Prices moved overwhelmingly in the appropriate direction on the first post-election day, albeit much too little. Relative prices needed several daily iterations to converge. Three days of historically strong cross-sectional momentum were followed by a brief reversal. Prices then settled. Firm characteristics that explained first-day returns, such as corporate taxes and foreign revenues, accounted for most of the observed momentum. These findings support prominent theories of slow but predictable diffusion of information into prices. |
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Delia Coculescu, A default system with overspilling contagion, In: SSRN, No. 3004484, 2017. (Working Paper)
In classical contagion models, default systems are Markovian conditionally on the observation of their stochastic environment, with interacting intensities. This necessitates that the environment evolves autonomously and is not influenced by the history of the default events. We extend the classical literature and allow a default system to have a contagious impact on its environment. In our framework, contagion can either be contained within the default system (i.e., direct contagion from a counterparty to another) or spill from the default system over its environment (indirect contagion).
This type of model is of interest whenever one wants to capture within a model possible impacts of the defaults of a class of debtors on the more global economy and vice versa. |
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Daniel Grosshans, Stefan Zeisberger, Ferdinand Langnickel, How Investment Performance Affects the Formation and Use of Beliefs, In: SSRN, No. 2972112, 2017. (Working Paper)
This study provides new insights on how investors form beliefs about future asset prices and how they use these beliefs for their trading decisions. Compared to the objective Bayesian benchmark, investors become overly optimistic when they face a paper loss. In addition, selling decisions are less sensitive to beliefs than purchase decisions. This difference is driven by selling behavior in the presence of paper losses. Our insights stem from a laboratory experiment in which participants are price-takers and trade a stock governed by a persistent two-state Markov chain. At each point in time, we elicit incentivized beliefs about the probability that the stock price will increase in the next period. |
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Delia Coculescu, From the decompositions of a stopping time to risk premium decompositions, In: ArXiv.org, No. arXiv:0912, 2010. (Working Paper)
We build a general model for pricing defaultable claims. In addition to the usual absence of arbitrage assumption, we assume that one defaultable asset (at least) looses value when the default occurs. We prove that under this assumption, in some standard market filtrations, default times are totally inaccessible stopping times; we therefore proceed to a systematic construction of default times with particular emphasis on totally inaccessible stopping times. Surprisingly, this abstract mathematical construction, reveals a very specific and useful way in which default models can be built, using both market factors and idiosyncratic factors. We then provide all the relevant characteristics of a default time (i.e. the Az\'ema supermartingale and its Doob-Meyer decomposition) given the information about these factors. We also provide explicit formulas for the prices of defaultable claims and analyze the risk premiums that form in the market in anticipation of losses which occur at the default event. The usual reduced-form framework is extended in order to include possible economic shocks, in particular jumps of the recovery process at the default time. This formulas are not classic and we point out that the knowledge of the default compensator or the intensity process is not anymore a sufficient quantity for finding explicit prices, but we need indeed the Az\'ema supermartingale and its Doob-Meyer decomposition. |
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Michal Dzielinski, Alexander Wagner, Richard J Zeckhauser, CEO Clarity, In: Swiss Finance Institute Research Paper, No. 17-13, 2021. (Working Paper)
A key task for CEOs is to communicate with analysts and investors about their companies' past performance and prospects in quarterly earnings conference calls. Some CEOs speak fuzzily, frequently using words such as "approximately", "probably", and "maybe." Others rarely use such tentative words. That is, they speak clearly. We show that CEO clarity is a matter of personal style; it is not driven by fundamental uncertainty in the companies' business activity. Analysts and the stock market respond more strongly to earnings news conveyed by clear CEOs. Past performance does not explain the style of a newly appointed CEO. However, when a firm does appoint a more clear-talking CEO, Tobin's Q increases and analyst recommendations become more favorable. Overall, investors and analysts appear to value clear talk. |
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Johannes Brumm, Felix Kübler, Michael Grill, Karl Schmedders, Re-use of collateral: Leverage, volatility, and welfare, In: Swiss Finance Institute Research Paper, No. 17-04, 2017. (Working Paper)
We assess the quantitative implications of the re-use of collateral on financial market leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to re-use frees up collateral that can be used to back more transactions. Re-use thus contributes to the build-up of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing reuse beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets. |
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Santiago Moreno-Bromberg, Guillaume Roger, Scale Effects in Dynamic Contracting, In: Swiss Finance Institute Research Paper, No. 15-49 , 2016. (Working Paper)
We study a continuous-time contracting problem in which size plays a role. The agent may take on excessive risk to enhance short-term gains; doing so exposes the principal to large, infrequent losses. The optimal contract includes size as an instrument: downsizing along the equilibrium path may be necessary so as to preserve incentive compatibility. We characterize the principal's value function and the downsizing process, both of which depend on the nature of the liquidation value. When the latter has fixed and size-dependent components, there is an optimal (endogenous) liquidation size. In the special case where the liquidation value is linear in size, one may describe the solution in size-adjusted terms, which allows for the study of re-investment. The optimal contract is implemented using the full array of financial securities plus debt covenants; holding equity is essential to curb risk taking. Conflicts emerge between classes of security holders and explain phenomena like seniority of claims. Firms for which risk taking is less attractive can afford a higher leverage. |
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Jorge Abad, Marco D'Errico, Neill Killeen, Vera Luz, Tuomas Peltonen, Richard Portes, Teresa Urbano, Mapping the interconnectedness between EU banks and shadow banking entities, In: NBER Working Paper Series, No. 23280, 2017. (Working Paper)
This paper provides a unique snapshot of the exposures of EU banks to shadow banking entities within the global financial system. Drawing on a rich and novel dataset, the paper documents the cross-sector and cross-border linkages and considers which are the most relevant for systemic risk monitoring. From a macroprudential perspective, the identification of potential feedback and contagion channels arising from the linkages of banks and shadow banking entities is particularly challenging when shadow banking entities are domiciled in different jurisdictions. The analysis shows that many of the EU banks’ exposures are towards non-EU entities, particularly US-domiciled shadow banking entities. At the individual level, banks’ exposures are diversified although this diversification leads to high overlap across different types of shadow banking entities. |
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Quan Zhang, Recovery is Never Easy - Dynamics and Multiple Equilibria with Financial Arbitrage, Production and Collateral Constraints, In: Swiss Finance Institute Research Paper, No. 17-02, 2017. (Working Paper)
We develop a simple general equilibrium model to study the interactions between financial arbitrage and the real economy under collateral constraints. In good times, arbitrage activities help boost the production sectors by providing external funds to capital investment. However, when exposed to adverse shocks and panic market reactions, arbitrage also amplifies the financial distress and makes it easier for the economy to fall into self-fulfilling crises. Moreover, the possibility of regime switches triggered by exogenous shocks also complicates the path to recovery. The combination of financial distress and pessimistic market anticipation not only slows down the recovery process, but also can trap the economy in a less healthy steady state. |
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Mathias Beck, Cindy Lopes Bento, Innovation outcomes and partner-type selection in R&D Alliances: The role of simultaneous diversification and sequential adaptation, In: UZH Business Working Paper Series, No. 363, 2016. (Working Paper)
This study focuses on how firms form and sequentially adapt their inter organizational knowledge sourcing structures within research and development (R&D) alliances and how this process impacts their innovation performance. In contrast to the previous literature that mainly ignores the dynamic aspects of how firms adapt their search strategies, our approach accounts for sequential adaptation. Our proposed framework explores the role of simultaneous diversification and sequential adaptation of collaboration partners within R&D alliances according to specific innovation outcomes. The results emphasize that firms should not remain within the same search activities indefinitely, as non-adapting interorganizational knowledge transfer structures lead to inferior performance. Notably, this study highlights important partner-type selectivity and identifies appropriate simultaneous diversification and sequential adaptation strategies in relation to specific innovation outcomes and firm sizes. |
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Marco D'Errico, Tarik Roukny, Compressing over-the-counter markets, In: European Systemic Risk Board Working Paper Series (ESRB), No. 44, 2017. (Working Paper)
In this paper, we show both theoretically and empirically that the size of over-the-counter (OTC) markets can be reduced without affecting individual net positions. First, we find that the networked nature of these markets generates an excess of notional obligations between the aggregate gross amount and the minimum amount required to satisfy each individual net position. Second, we show conditions under which such excess can be removed. We refer to this netting operation as compression and identify feasibility and effciency criteria, highlighting intermediation as the key element for excess levels. We show that a trade-off exists between the amount of notional that can be eliminated from the system and the conservation of original trading relationships. Third, we apply our framework to a unique and comprehensive transaction-level dataset on OTC derivatives including all firms based in the European Union. On average, we find that around 75% of market gross notional relates to excess. While around 50% can in general be removed via bilateral compression, more sophisticated multilateral compression approaches are substantially more effcient. In particular, we find that even the most conservative multilateral approach which satisfies relationship constraints can eliminate up to 98% of excess in the markets. |
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Marco D'Errico, Stefano Battiston, Tuomas Peltonen, Martin Scheicher, How does risk flow in the credit default swap market?, In: European Systemic Risk Board Working Paper Series (ESRB), No. 33, 2016. (Working Paper)
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Nataliya Klimenko, Jean-Charles Rochet, Gianni De Nicolo, Sebastian Pfeil, Aggregate Bank Capital and Credit Dynamics, In: Swiss Finance Instiute Research Paper, No. 16-42, 2016. (Working Paper)
We develop a novel dynamic model of banking showing that aggregate bank capital is an important determinant of bank lending. In our model commercial banks finance their loans with deposits and equity, while facing equity issuance costs. Because of this financial friction, banks build equity buffers to absorb negative shocks. Aggregate bank capital determines the dynamics of lending. Notably, the equilibrium loan rate is a decreasing function of aggregate capitalization. The competitive equilibrium is constrained inefficient, because banks do not internalize the consequences of individual lending decisions for the future loss-absorbing capacity of the banking sector. In particular, we find that unregulated banks lend too much. Imposing a minimum capital ratio helps tame excessive lending, which enhances stability of the banking system. |
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