Abstract Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank’s ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.
{"title":"Securitization and Optimal Foreclosure","authors":"J. Kuong, Jing Zeng","doi":"10.2139/ssrn.3668209","DOIUrl":"https://doi.org/10.2139/ssrn.3668209","url":null,"abstract":"Abstract Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank’s ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78871213","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Purpose - To describe the broad categories and characteristics of information contained in COVID-19 pandemic-related corporate communications made as regulatory news by UK firms during the first half year of 2020, to describe the regulatory environment in which they took place, and to develop research questions that arise from these descriptions.
Design/Methodology/Approach - Uses an empirical, descriptive, approach to develop underlying characterisations of financial communications. Uses inductive reasoning to move from the characterisations to potentially interesting research questions.
Findings - We identify patterns of corporate communications concerning financial position (including) corporate debt negotiations, and corporate actions (including furloughing employees, cutting costs in general, corporate social responsibility (CSR) activities and initiatives, cutting executive compensation, corporate distributions, and forecasting future performance). Issues raised by these communications suggest possible future research on the impact of these communications on stock prices and stock market participants in general, corporate social responsibility behaviour, statements and initiatives and their underlying rationale, and contracting between firms and lenders.
Originality/Value - We provide a novel description of UK corporate communications during the early stages of the COVID-19 pandemic period and propose a related research agenda in the area of regulatory news disclosures.
{"title":"The Content of COVID-19 Pandemic-Related Regulatory News Communications by UK Main Market Listed Firms","authors":"Cristiana Bernardi, G. Livne, A. Stark","doi":"10.2139/ssrn.3711709","DOIUrl":"https://doi.org/10.2139/ssrn.3711709","url":null,"abstract":"Purpose - To describe the broad categories and characteristics of information contained in COVID-19 pandemic-related corporate communications made as regulatory news by UK firms during the first half year of 2020, to describe the regulatory environment in which they took place, and to develop research questions that arise from these descriptions.<br><br>Design/Methodology/Approach - Uses an empirical, descriptive, approach to develop underlying characterisations of financial communications. Uses inductive reasoning to move from the characterisations to potentially interesting research questions.<br><br>Findings - We identify patterns of corporate communications concerning financial position (including) corporate debt negotiations, and corporate actions (including furloughing employees, cutting costs in general, corporate social responsibility (CSR) activities and initiatives, cutting executive compensation, corporate distributions, and forecasting future performance). Issues raised by these communications suggest possible future research on the impact of these communications on stock prices and stock market participants in general, corporate social responsibility behaviour, statements and initiatives and their underlying rationale, and contracting between firms and lenders.<br><br>Originality/Value - We provide a novel description of UK corporate communications during the early stages of the COVID-19 pandemic period and propose a related research agenda in the area of regulatory news disclosures.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75130185","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
S. Jena, A. Tiwari, S. Hammoudeh, Muhammad Shahbaz
We apply the wavelet coherency and phase difference methodology to explore the nature of the relationship and the direction of causality between foreign institutional investment (FII) flows and stock market returns across time and frequency domain for the fast‐growing Indian economy. Since both variables are affected by economic uncertainty, we have estimated the partial wavelet coherency and the phase difference to discern the impact of economic uncertainty on the dynamic relationship and causality between those variables. Both the FII flows and the stock market return move together during the periods of the global financial crisis and the European sovereign debt crisis without any causality in the short run, but the stock market leads the FII inflows in the long run. However, in the bull market the stock market Granger causes the FII inflows both in the short run and in the long run. Nonetheless, economic uncertainty drives the co‐movement and also masks the causality effect between those two variables. Thus, the results require policymakers to set out a transparent economic environment to reap the benefits of FII flows. As far as the FII outflows are concerned, profit booking and economic uncertainty drive the relationship and the causality in the short run. Hence, policymakers and portfolio managers should be concerned about FII outflows in the long run, while in the short run, it is a normal trading activity.
{"title":"Dynamics of FII Flows and Stock Market Returns in a Major Developing Country: How Does Economic Uncertainty Matter?","authors":"S. Jena, A. Tiwari, S. Hammoudeh, Muhammad Shahbaz","doi":"10.1111/twec.12830","DOIUrl":"https://doi.org/10.1111/twec.12830","url":null,"abstract":"We apply the wavelet coherency and phase difference methodology to explore the nature of the relationship and the direction of causality between foreign institutional investment (FII) flows and stock market returns across time and frequency domain for the fast‐growing Indian economy. Since both variables are affected by economic uncertainty, we have estimated the partial wavelet coherency and the phase difference to discern the impact of economic uncertainty on the dynamic relationship and causality between those variables. Both the FII flows and the stock market return move together during the periods of the global financial crisis and the European sovereign debt crisis without any causality in the short run, but the stock market leads the FII inflows in the long run. However, in the bull market the stock market Granger causes the FII inflows both in the short run and in the long run. Nonetheless, economic uncertainty drives the co‐movement and also masks the causality effect between those two variables. Thus, the results require policymakers to set out a transparent economic environment to reap the benefits of FII flows. As far as the FII outflows are concerned, profit booking and economic uncertainty drive the relationship and the causality in the short run. Hence, policymakers and portfolio managers should be concerned about FII outflows in the long run, while in the short run, it is a normal trading activity.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83391887","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Individuals’ stock market participation depends on the risk–return trade-off they expect to achieve from investing. We argue that the expected economic benefits from investing are highly heterogeneous. To capture these benefits, we define the personal equity risk premium (PERP) as the difference between an individual’s expected stock return and personal opportunity cost of capital. We find that the PERP is a significant determinant of stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion. The results are stronger when we analyze the level of stock investment. Disentangling the PERP into its two components shows that both contribute to explain both stock market participation and the level of participation.
{"title":"Does It Pay to Invest? The Personal Equity Risk Premium and Stock Market Participation","authors":"Yulia Merkoulova, C. Veld","doi":"10.2139/ssrn.3661024","DOIUrl":"https://doi.org/10.2139/ssrn.3661024","url":null,"abstract":"Individuals’ stock market participation depends on the risk–return trade-off they expect to achieve from investing. We argue that the expected economic benefits from investing are highly heterogeneous. To capture these benefits, we define the personal equity risk premium (PERP) as the difference between an individual’s expected stock return and personal opportunity cost of capital. We find that the PERP is a significant determinant of stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion. The results are stronger when we analyze the level of stock investment. Disentangling the PERP into its two components shows that both contribute to explain both stock market participation and the level of participation.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84325561","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The emphasis of this paper is on understanding the proliferation of financial institutions beyond movements of the entire market, namely, systemic risk net of systematic risk. I present economic foundation for this new notion of risk I term “net systemic risk” and propose two metrics: Net Systemic Risk (NSR) and Reverse Net Systemic Risk (RevNSR). I also provide a theoretical link between net systemic risk and other risk classes including total, systemic, systematic, and idiosyncratic risk. The empirical analysis for NSR and RevNSR demonstrates that these measures would be able to predict systemic pressure during the financial crisis of 2007-2009.
{"title":"Net Systemic Risk","authors":"Woongki Lee","doi":"10.2139/ssrn.3657428","DOIUrl":"https://doi.org/10.2139/ssrn.3657428","url":null,"abstract":"The emphasis of this paper is on understanding the proliferation of financial institutions beyond movements of the entire market, namely, systemic risk net of systematic risk. I present economic foundation for this new notion of risk I term “net systemic risk” and propose two metrics: Net Systemic Risk (NSR) and Reverse Net Systemic Risk (RevNSR). I also provide a theoretical link between net systemic risk and other risk classes including total, systemic, systematic, and idiosyncratic risk. The empirical analysis for NSR and RevNSR demonstrates that these measures would be able to predict systemic pressure during the financial crisis of 2007-2009.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82044907","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
With their transparent and rules-based index review policy and surging popularity, Stoxx Europe indices provide an excellent opportunity to study the index inclusion effect in a pan-European setting. Using a dataset spanning the period from 1999 to 2019, we find sizable positive abnormal returns for additions to Euro Stoxx 50. CARs averaged 7% from thirty days before the announcement to the effective inclusion date. No such effects have been observed for Stoxx Europe 600. We find evidence for both downward-sloping demand curves and investor awareness hypotheses.
{"title":"Stoxx Europe Indices and Index Premium","authors":"Derin Yilmazatilla","doi":"10.2139/ssrn.3657320","DOIUrl":"https://doi.org/10.2139/ssrn.3657320","url":null,"abstract":"With their transparent and rules-based index review policy and surging popularity, Stoxx Europe indices provide an excellent opportunity to study the index inclusion effect in a pan-European setting. Using a dataset spanning the period from 1999 to 2019, we find sizable positive abnormal returns for additions to Euro Stoxx 50. CARs averaged 7% from thirty days before the announcement to the effective inclusion date. No such effects have been observed for Stoxx Europe 600. We find evidence for both downward-sloping demand curves and investor awareness hypotheses.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77842676","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study assesses the Japanese government's response to the novel coronavirus disease (COVID-19). As of July 10, 2020, the number of new cases in Japan was over twenty thousand. COVID-19 has significantly affected both lifestyle and economy in Japan. In recent domestic economy, the interdependence between municipal governments and companies is required to cope with this new threat. This study develops a composite stock index by sector and prefecture from the standpoint of what effects the increase in infections have had on industries and companies in the core municipalities. Finally, it can contribute to a strategy for coexistence with COVID-19.
{"title":"Can Composite Stock Index by Sector and Region Explain the Impact of Novel Coronavirus Disease (COVID-19) on the Economies of Major Cities?","authors":"Masayasu Kanno","doi":"10.2139/ssrn.3651591","DOIUrl":"https://doi.org/10.2139/ssrn.3651591","url":null,"abstract":"This study assesses the Japanese government's response to the novel coronavirus disease (COVID-19). As of July 10, 2020, the number of new cases in Japan was over twenty thousand. COVID-19 has significantly affected both lifestyle and economy in Japan. In recent domestic economy, the interdependence between municipal governments and companies is required to cope with this new threat. This study develops a composite stock index by sector and prefecture from the standpoint of what effects the increase in infections have had on industries and companies in the core municipalities. Finally, it can contribute to a strategy for coexistence with COVID-19.<br>","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89580073","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Christian Hilpert, Stefan Hirth, Alexander Szimayer
We propose a novel framework for investigating learning dynamics on the debt market. Observing a firm’s survival of apparently distressed periods, the market eliminates asset value estimates that are too low to be consistent with the observed survival. Therefore, the firm’s cost of debt becomes lower for given financials. Relative to a perfect information setting, the firm strategically delays default to benefit from a subsequently lower cost of debt. Default comes as a surprise, as it reveals the currently worst possible asset value as correct. The surprise effect is mitigated for debt with higher performance sensitivity and for lower ex ante information asymmetry. This paper was accepted by Gustavo Manso, finance. Funding: This work was supported by Danmarks Frie Forskningsfond [Grant 0133-00087B], Australian Research Council [Grant DP160104737], the Deutsche Forschungsgemeinschaft [Grant 282079427], Fundamental Research Funds for the Central Universities of China [Grant 18wkpy36], and the Danish Finance Institute (DFI). Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4632 .
{"title":"The Information Value of Distress","authors":"Christian Hilpert, Stefan Hirth, Alexander Szimayer","doi":"10.2139/ssrn.2986850","DOIUrl":"https://doi.org/10.2139/ssrn.2986850","url":null,"abstract":"We propose a novel framework for investigating learning dynamics on the debt market. Observing a firm’s survival of apparently distressed periods, the market eliminates asset value estimates that are too low to be consistent with the observed survival. Therefore, the firm’s cost of debt becomes lower for given financials. Relative to a perfect information setting, the firm strategically delays default to benefit from a subsequently lower cost of debt. Default comes as a surprise, as it reveals the currently worst possible asset value as correct. The surprise effect is mitigated for debt with higher performance sensitivity and for lower ex ante information asymmetry. This paper was accepted by Gustavo Manso, finance. Funding: This work was supported by Danmarks Frie Forskningsfond [Grant 0133-00087B], Australian Research Council [Grant DP160104737], the Deutsche Forschungsgemeinschaft [Grant 282079427], Fundamental Research Funds for the Central Universities of China [Grant 18wkpy36], and the Danish Finance Institute (DFI). Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4632 .","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77330011","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use an international sample of 20 developed countries to test theories predicting an association between operating leverage with stock returns and the value premium. Results suggest that operating leverage is related to stock returns and the value premium across the sampled countries. These results are robust to multiple definitions of operating and financial leverage, and the endogeneity of operating and financial leverage. Results on the association between financial leverage and the value premium are sensitive to variable definitions. Consistent with recent theories, we also find that a country’s labor share is positively associated with the value premium. Overall, we find support for the notion that the value premium reflects compensation for exposure to systematic operating risk.
{"title":"Operating Leverage and Stock Returns: International Evidence","authors":"Benjamin A. Jansen, Luis García‐Feijóo","doi":"10.2139/ssrn.3646542","DOIUrl":"https://doi.org/10.2139/ssrn.3646542","url":null,"abstract":"We use an international sample of 20 developed countries to test theories predicting an association between operating leverage with stock returns and the value premium. Results suggest that operating leverage is related to stock returns and the value premium across the sampled countries. These results are robust to multiple definitions of operating and financial leverage, and the endogeneity of operating and financial leverage. Results on the association between financial leverage and the value premium are sensitive to variable definitions. Consistent with recent theories, we also find that a country’s labor share is positively associated with the value premium. Overall, we find support for the notion that the value premium reflects compensation for exposure to systematic operating risk.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87103615","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Juan Arismendi-Zambrano, V. Belitsky, Vinicius Amorim Sobreiro, H. Kimura
This paper investigates the counterparty credit risk of interest rate swaps positions using the credit valuation adjustment (CVA) measure, and examines the potential dependency relationships between the probability of default (PD) and exposure at default (EAD). We empirically tested, using interest rate swaption implied market volatilities, three tail dependency models: a Basel III Committee independent model, a Gaussian copula dependent model, and a Wrong Way Risk (WWR) with copula dependency approach. The results show that the CVA underestimation when using a Gaussian copula for modelling the dependence of PD and EAD is about 51%–362% compared to using WWR, and the underestimation between using the standardised Basel independent model and using the Gaussian copula is about 527%–1609%, including the period of the 2007/2008 crisis. This has important implications for regulators, financial institutions, and credit risk managers when calculating counterparty risk.
{"title":"The Implications of Tail Dependency Measures for Counterparty Credit Risk Pricing","authors":"Juan Arismendi-Zambrano, V. Belitsky, Vinicius Amorim Sobreiro, H. Kimura","doi":"10.2139/ssrn.3931840","DOIUrl":"https://doi.org/10.2139/ssrn.3931840","url":null,"abstract":"This paper investigates the counterparty credit risk of interest rate swaps positions using the credit valuation adjustment (CVA) measure, and examines the potential dependency relationships between the probability of default (PD) and exposure at default (EAD). We empirically tested, using interest rate swaption implied market volatilities, three tail dependency models: a Basel III Committee independent model, a Gaussian copula dependent model, and a Wrong Way Risk (WWR) with copula dependency approach. The results show that the CVA underestimation when using a Gaussian copula for modelling the dependence of PD and EAD is about 51%–362% compared to using WWR, and the underestimation between using the standardised Basel independent model and using the Gaussian copula is about 527%–1609%, including the period of the 2007/2008 crisis. This has important implications for regulators, financial institutions, and credit risk managers when calculating counterparty risk.","PeriodicalId":11410,"journal":{"name":"Econometric Modeling: Capital Markets - Risk eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81249188","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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