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(JEL: F30, F31, N20) I estimate the transmission of large global volatility shocks in international equity markets from the earlier (pre-1914) to the modern era of globalisation. To that end, I identify 43 such shocks over the period 1885-2011, defined as significant increases in unanticipated volatility in US equity markets, which I relate to well-known historical events. My estimates suggest that the response of global equity markets to these shocks in a panel of 16 countries is both statistically significant and large economically. On average, global equity market valuations correct by about 20% in the month when a shock occurs. There is substantial heterogeneity in responses both across countries and time, however, which can be partly explained by differences in global trade integration. I find no evidence that other potential theoretical determinants, such as output composition, country fundamentals or global policy responses matter, by contrast. These results shed light on a neglected aspect of globalisation, which creates opportunities but also heightens the exposure of economies to acute surges in global uncertainty and risk aversion.
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(JEL: G10, G20, L11) T2S is the single and harmonised IT platform for securities settlement in central bank money developed by the Eurosystem to promote integration in the European post-trading industry, and will go live in 2015. CSDs joining T2S are thus faced with the decision problem of determining to which degree they should reshape, that is, adapt their own IT infrastructure, human resources and business strategy to T2S. A more complete reshaping entails higher immediate fixed costs, but allows to benefit the most from the cost-reduction allowed by T2S. In this article we use a game theoretic approach to model the strategic choice of the CSDs. We then derive several results from this model. In particular, we give closed-form solutions for the degree of optimal reshaping and the optimal prices set in the unique equilibrium if the time-horizon is finite. In case of an infinite horizon we give a sufficient and necessary condition for the existence of another subgame perfect Nash equilibrium in which CSDs continually delay the decision to reshape. We argue this equilibrium is not robust and provide a condition under which a given CSD will always reshape, whatever the other CSDs’ strategy. We note that by adjusting the cost function and the interpretation of the reshaping parameter, the same game theoretic framework can be used to model the decision to join or not to join T2S.
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(JEL: C5, E44, G2) We explore the practical relevance from a supervisor’s perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis.
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(JEL: F32, F41) This paper studies current account reversals in industrial countries across different exchange rate regimes. There are two major findings which have important implications for industrial economies with external imbalances: first, triggers of current account reversals differ between exchange rate regimes. While the current account deficit and the output gap are significant predictors of reversals across all regimes, reserve coverage, credit booms, openness to trade and the US short term interest rate determine the likelihood of reversals only under more rigid regimes. Conversely, the real exchange rate affects the probability of experiencing a reversal only under flexible arrangements. Second, current account reversals in advanced economies do not have an independent effect on growth. This result holds not only for industrial economies in general but also for countries with fixed exchange rate regimes in particular.
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(JEL: G21, L26) How does home ownership affect new business creation? We develop a model of career choice in the presence of liquidity constraints in which shocks to the value of real estate affect the propensity of potential entrepreneurs to borrow against the value of their property. Using a large US individual-level survey dataset over the 1996-2006 period, we show that a 10% increase in home equity raises the probability of transition into entrepreneurship by up to 14%. Our results persist when we use the topological elasticity of housing supply to generate variation in home equity that is orthogonal to entrepreneurial choice.
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(JEL: D82, G0, G12, G14.) Market participants often invest in order to acquire information that pertains to the market itself (e.g. order flow) rather than to fundamentals. This enables them to infer more information from past trades. I show that agents trading on such information, typically high-frequency traders, decrease the likelihood of short-lived mispricings by trading against price pressure. In the long-run however, such countervailing speculation amounts to signal-jamming, slowing down price discovery. These traders insure the market against short-run crashes by “catching falling knives”. Higher adverse selection and slower convergence form the “premium” paid by other market participants.
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Procurement: Contract Notice: ECB – Provision of Childcare Mediation Services (2013/S 086-144675).
Issue date: 03/05/2013.
Closing date: 14/06/2013.
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(JEL: E58, G32) After the Lehman default, but also during the euro area sovereign debt crisis, central banks have tended to extend the ability of banks to take recourse to central bank credit operations through changes of the collateral framework (e.g. CGFS, 2008 – in consistence with previous narratives, such as Bagehot, 1873). We provide a simple four sector model of the economy in which we illustrate the relevant trade-offs, derive optimal central bank collateral policies, and show why in a financial crisis, in which liquidity shocks become more erratic and the total costs of defaults increase, central banks may want to allow for greater potential recourse of banks to central bank credit. The model also illustrates that the credit riskiness of counterparties and issuers is endogenous to the central bank’s credit policies and related risk control framework. Finally, the model allows identifying the circumstances under which the counterintuitive case arises in which a relaxation of the central bank collateral policy may reduce its expected losses.
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(JEL: E6) This paper uses Eurobarometer survey data from 26 EU countries to evaluate whether the general public cares about financial stability and imbalances over and above their effects on key macroeconomic variables such as unemployment and inflation. I confirm previous results in the literature that life satisfaction – a widely used measure of household welfare – negatively depends on the unemployment rate. In addition to previous results in the literature, I establish a strong empirical link between life satisfaction and consumer confidence as measured by the European Commission consumer survey. The main result of the paper is that life satisfaction generally does not systematically depend on a number of measures of financial imbalance based on credit and asset prices once the other macroeconomic controls are included.
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