Contributions in Merlin

We investigate price discovery over the 24-hour trading day for equities, currencies, bonds, and commodities. Sizable price discovery occurs around the clock for most assets. For a given asset, intraday risk and return distributions are fairly similar, indicating a broadly constant risk-return-relationship during the day. Although the amount of price discovery varies significantly during the day and differs across assets, price discovery is generally efficient around the clock. Most assets do not exhibit the U-shaped intraday volatility pattern that has been documented for US equities, even if only main trading hours are considered. Intraday spikes in volatility are driven by the open or close of the market for the respective asset or other assets and by macroeconomic announcements. Both diffusion and jump risk are important drivers of intraday volatility patterns, and US macroeconomic news account for a sizable fraction of jump-driven volatility. For some -- but not all -- assets, the relationship between volume and volatility that can generally be observed during the trading day does not hold at the time of jumps, suggesting that traders anticipate large price moves at the time of scheduled announcements and market depth falls accordingly.

In this paper we assess the suitability of different risk profiling measures when individuals are involved in a process of discovering their willingness to take risks over different decision modes. The latter involve decisions under ambiguity, decisions after gaining experience and receiving outcome information on previous decisions. We find that risk taking is associated with individuals’ risk preferences in all decision modes but not with their investment experience. Although simulated experience improves the risk awareness and supports a higher risk taking, it cannot substitute the assessment of risk preferences and in particular the assessment of individual’s loss aversion. In contrast, self-assessed risk tolerance measures are not suitable for predicting risk taking in any decision mode. If risk preferences cannot be assessed, only the gender can be used as a predictor of risk taking.

Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank's financing structure. In our model the bank's assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long--term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that their use adds to the cost of long--term debt financing, which limits the bank's appetite for unstable repo funding. This effect is, however, weakened under poor returns on assets, abundant deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank's financing choices and show that all these tools are able to curb the bank's reliance on repos.

The new training literature views regulated labour markets as critical for firms' willingness to participate in apprenticeship training. These regulations allow training firms to retain their apprenticeship graduates at the end of the training period and recoup training costs. Yet, in spite of an only loosely regulated labour market, many Swiss firms offer and pay for training. Using representative data from a large employer-employee survey, we investigate whether these firms use performance-related pay to retain their graduates. We find that both the magnitude and the likelihood of performance-related pay are significantly related to a firm's retention success.

This paper develops a method to measure and compare social performance of microfinance investments at the level of microfinance investment vehicles. Drawing from measurement theory, it develops formal quality criteria that individual social performance indicators, the selection, and the aggregation of such indicators into a single metric need to satisfy. Social performance indicators are selected for both microfinance investment vehicles, and their underlying portfolio. The method presented here uses data of the microfinance investment universe to determine a rating framework for the underlying of microfinance institutions, in addition to a unique set of variables captured at MIV level. The paper demonstrates the approach in a sample calculation and serves as a guideline for a future empirical application among microfinance investment vehicles.

The increasing complexity of the modern world creates both higher risks and new interdependencies in the socioeconomic environment. To cope with these challenges powerful new tools must be applied to find sustainable solutions. System dynamics is a field that offers potential assistance in dealing with complex issues. However, managers and politicians often lack the knowledge and necessary skills to apply quantitative methods in their decision-making process. In contrast, qualitative approaches are easily understood and handled but have limited capacities for analysis. To address this gap, we have developed a bundle of tools tailored for managers and politicians facing complex problems. These tools enable executives to recognize effective levers and assess potential consequences of specific interventions in a highly interconnected system. The approach detailed here equips decision makers with a powerful method to develop, test, and communicate strategies to find long-term sustainable solutions for complex issues in business and society.

Past trends in a broad range of fundamental variables predict currency returns. We document that a trading strategy that goes long currencies in countries with strong economic momentum and short currencies in countries with weak economic momen- tum exhibits an annualized Sharpe ratio of about one and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that cross-country di↵erences in carry are captured by di↵erences in past economic trends. Moreover, we study investors’ expectations of fundamental variables and find the expectations to be extrapolative but negatively related to the portfolio weights, which rank economic trends across countries.

Prior literature raises a “puzzle” of high rates of return on corporate political investment, but evidence for this puzzle is largely descriptive in nature. We exploit the setting of the American Jobs Creation Act’s passage in 2004 to provide more robust estimates of political returns based on instrumentation in a two-stage regression model. We find for the median sample firm that an increase of $1 million in lobbying spending is associated with about $32.35 million in taxes saved. These estimates, while consistent with a high-returns “puzzle,” are nearly an order of magnitude lower than those previously reported via descriptive methods.

Corporate lobbying activities are designed to influence legislators, regulators, and courts, presumably to encourage favorable policies and/or outcomes. In dollar terms, corporate lobbying expenditures are typically one or even two orders of magnitude larger than spending by Political Action Committees (PAC), and unlike PAC donations, lobbying amounts are direct corporate expenditures. We use data made available by the Lobbying Disclosure Act of 1995, to examine this more pervasive form of corporate political activity. We find that on average, lobbying is positively related to accounting and market measures of financial performance. These results are robust across a number of empirical specifications. We also report market performance evidence using a portfolio approach. We find that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks in the three years following portfolio formation.

We develop a simple integration of banks into the Solow model. The objective is to provide a tractable benchmark for analyzing the long-term impact of crises on economic activities and growth. A fraction of firms have to rely on banks for financing their investments while banks face themselves an endogenous leverage constraint. Informed lending by banks and uninformed lending through capital markets spur capital accumulation. The ensuing coupled accumulation rules for household wealth and bank equity yield a uniquely determined steady state. We highlight three properties when shocks to wealth, productivity or trust affect the economy. First, typically bond and loan financing react in opposite directions to such shocks. Second, negative temporary shocks to household wealth (financial crisis) or negative sectoral production shocks can surprisingly cause persistent booms of banking and even of the entire economy -- after an initial bust. Third, shocks to bank equity (banking crisis), however, lead to large and persistent downturns associated with high output losses.