We examine the audit pricing consequences of auditor inspections under the public oversight regime in the EU. Employing a staggered difference-in-differences design, we document an inspections audit fee premium during the post-inspection period when companies’ auditors are inspected by the national Public Oversight Body (POB). However, this effect masks significant cross-sectional variation. Specifically, we find that the increase in audit fees attributable to inspections is concentrated among POBs with sufficient human resources, where inspections occur both at the auditor’s and the regulator’s premises. Also, the effect of inspections on audit fees is evident only when the POB prohibits inspectors from joining an audit firm immediately after their departure or when the oversight system is funded by multiple stakeholders. Overall, our findings suggest that audit costs increase for clients of inspected auditors but only when inspections are more laborious, independent, and rigorous.
{"title":"The Costs of Public Audit Oversight: Evidence from the EU","authors":"Annita Florou, Y. Shuai","doi":"10.2139/ssrn.3595454","DOIUrl":"https://doi.org/10.2139/ssrn.3595454","url":null,"abstract":"We examine the audit pricing consequences of auditor inspections under the public oversight regime in the EU. Employing a staggered difference-in-differences design, we document an inspections audit fee premium during the post-inspection period when companies’ auditors are inspected by the national Public Oversight Body (POB). However, this effect masks significant cross-sectional variation. Specifically, we find that the increase in audit fees attributable to inspections is concentrated among POBs with sufficient human resources, where inspections occur both at the auditor’s and the regulator’s premises. Also, the effect of inspections on audit fees is evident only when the POB prohibits inspectors from joining an audit firm immediately after their departure or when the oversight system is funded by multiple stakeholders. Overall, our findings suggest that audit costs increase for clients of inspected auditors but only when inspections are more laborious, independent, and rigorous.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"218 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132615241","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 Bitcoin, a new type of technology was born in 2008 when Satoshi Nakamoto released the white paper for a new cash payment system (Nakamoto 2008), which effectively invented blockchain technology. By 2015 the technology already gained a lot of interest among startups, financial institutions, and industrial enterprises. Besides Bitcoin, many other crypto assets emerged with various design approaches such as stablecoins, utility tokens, security tokens, decentralized finance (DeFi), and non-fungible tokens (NFTs). Many of these tokens have an identifiable issuer to whom existing regulatory frameworks could potentially apply. However, other types of assets that are based on fully decentralized protocols are governed entirely by technology and either do not have an issuer (like in the case of Bitcoin) or the initiators designed the technology in an ‘issuerless’ way - and have no relation to any ‘real-world asset’. It is the latter class of assets that are truly new and that have recently attracted increasing attention from regulatory authorities, international organizations, standard-setting bodies, and the like. On the part of regulators and policymakers, interest in and the activity surrounding cryptocurrencies, crypto assets, and stablecoins peaked in 2019 so far. Of the several key regulators and policymakers at the supra-national level, nearly all issued a report, warning, study, or recommendations on some aspect of blockchain technology in financial markets. This spike in interest is related to the increasing business activity in this area and growing interest of investors and consumers. The exponential rise in the price of Bitcoin also attracted the interest of a wider audience (Edwards et al. 2019). The increasing business activity always preceded the actions of regulators and policymakers, thus rendering the activities of the latter a ‘reaction’ to the market developments. According to the Financial Stability Board (FSB), crypto assets reached an estimated total market capitalization of $830 billion on January 8, 2018, before falling sharply in subsequent months (Financial Stability Board 2018). While the global value of the crypto assets market is still relatively small compared to the entire financial system, its absolute value and daily transaction volume are substantial, and its rapid development continues, gaining increasing market acceptance (Basel Committee on Banking Supervision 2019). This paper seeks to analyze regulators’ and policymakers’ efforts to understand and develop an adequate regulatory approach to crypto assets, tokens, and the distributed ledger technology (DLT) in general. After several years of innovation in the space of decentralized technologies, several principles became clear on how to treat both issuer-based tokens and issuerless tokens. However, when regulators and policymakers tried at first to understand these new decentralized technologies and the assets they enable, it was not clear to them from the begin
2008年，中本聪发布了一种新的现金支付系统(Nakamoto 2008)白皮书，有效地发明了区块链技术，比特币诞生了一种新型技术。到2015年，这项技术已经引起了初创公司、金融机构和工业企业的极大兴趣。除了比特币之外，许多其他加密资产也以各种设计方法出现，如稳定币、实用代币、安全代币、去中心化金融(DeFi)和不可替代代币(nft)。其中许多代币都有一个可识别的发行人，现有的监管框架可能适用于该发行人。然而，基于完全去中心化协议的其他类型的资产完全由技术控制，要么没有发行人(如比特币)，要么发起者以“无发行人”的方式设计技术——与任何“现实世界的资产”都没有关系。后一类资产才是真正的新资产，最近吸引了监管机构、国际组织、标准制定机构等越来越多的关注。到目前为止，监管机构和政策制定者对加密货币、加密资产和稳定币的兴趣和活动在2019年达到顶峰。在超国家层面的几个关键监管机构和政策制定者中，几乎所有人都就区块链技术在金融市场的某些方面发布了报告、警告、研究或建议。这种兴趣的激增与该地区日益增加的商业活动以及投资者和消费者日益增长的兴趣有关。比特币价格的指数级上涨也吸引了更广泛受众的兴趣(Edwards et al. 2019)。不断增加的商业活动总是先于监管机构和政策制定者的行动，从而使后者的活动成为对市场发展的“反应”。根据金融稳定委员会(FSB)的数据，加密资产在2018年1月8日达到了估计的8300亿美元的总市值，然后在随后的几个月急剧下降(金融稳定委员会2018)。虽然加密资产市场的全球价值与整个金融体系相比仍然相对较小，但其绝对价值和每日交易量相当可观，并且其快速发展仍在继续，获得越来越多的市场接受度(巴塞尔银行监管委员会2019)。本文旨在分析监管机构和政策制定者在理解和制定加密资产、代币和分布式账本技术(DLT)的适当监管方法方面所做的努力。经过几年在去中心化技术领域的创新，关于如何对待基于发行者的代币和无发行者的代币，一些原则变得清晰起来。然而，当监管机构和政策制定者最初试图理解这些新的去中心化技术及其所支持的资产时，他们从一开始就不清楚如何对待基于这种新技术的资产。直到最近才有可能确定最佳监管实践，并将良好的监管方法从警告、建议或研究的“噪音”中分离出来。列支敦士登通过创建一套抽象定义和模型，并将其应用于定制的监管方法，对加密资产和代币采取了非凡的视角和愿景。因此，列支敦士登代币法案激励了其他政策制定者和随后的监管行动。本文的其余部分结构如下。首先，我们试图代表监管机构和政策制定者展示过去几年的“意见”历史。这些观点往往缺乏明确的定义、理解和模型，但也包括有价值的贡献。在下一节中，我们将介绍列支敦士登代币法案的关键定义和模型，并描述如何将这些定义和模型纳入列支敦士登的国家框架，为新兴的代币经济奠定坚实的基础。此后，我们描述了欧盟监管加密资产的方法-加密资产监管市场(MiCA) -如何处理加密资产和代币，以及它与列支敦士登代币法案的关系。在接下来的章节中，我们将回顾各种监管方法和策略。最后是结束语。
{"title":"Cryptocurrencies, DLT and Crypto Assets – the Road to Regulatory Recognition in Europe","authors":"Agata Ferreira, Philipp G. Sandner, Thomas Dünser","doi":"10.2139/ssrn.3891401","DOIUrl":"https://doi.org/10.2139/ssrn.3891401","url":null,"abstract":"With Bitcoin, a new type of technology was born in 2008 when Satoshi Nakamoto released the white paper for a new cash payment system (Nakamoto 2008), which effectively invented blockchain technology. By 2015 the technology already gained a lot of interest among startups, financial institutions, and industrial enterprises. Besides Bitcoin, many other crypto assets emerged with various design approaches such as stablecoins, utility tokens, security tokens, decentralized finance (DeFi), and non-fungible tokens (NFTs). Many of these tokens have an identifiable issuer to whom existing regulatory frameworks could potentially apply. However, other types of assets that are based on fully decentralized protocols are governed entirely by technology and either do not have an issuer (like in the case of Bitcoin) or the initiators designed the technology in an ‘issuerless’ way - and have no relation to any ‘real-world asset’. It is the latter class of assets that are truly new and that have recently attracted increasing attention from regulatory authorities, international organizations, standard-setting bodies, and the like. On the part of regulators and policymakers, interest in and the activity surrounding cryptocurrencies, crypto assets, and stablecoins peaked in 2019 so far. Of the several key regulators and policymakers at the supra-national level, nearly all issued a report, warning, study, or recommendations on some aspect of blockchain technology in financial markets. This spike in interest is related to the increasing business activity in this area and growing interest of investors and consumers. The exponential rise in the price of Bitcoin also attracted the interest of a wider audience (Edwards et al. 2019). The increasing business activity always preceded the actions of regulators and policymakers, thus rendering the activities of the latter a ‘reaction’ to the market developments. According to the Financial Stability Board (FSB), crypto assets reached an estimated total market capitalization of $830 billion on January 8, 2018, before falling sharply in subsequent months (Financial Stability Board 2018). While the global value of the crypto assets market is still relatively small compared to the entire financial system, its absolute value and daily transaction volume are substantial, and its rapid development continues, gaining increasing market acceptance (Basel Committee on Banking Supervision 2019). This paper seeks to analyze regulators’ and policymakers’ efforts to understand and develop an adequate regulatory approach to crypto assets, tokens, and the distributed ledger technology (DLT) in general. After several years of innovation in the space of decentralized technologies, several principles became clear on how to treat both issuer-based tokens and issuerless tokens. However, when regulators and policymakers tried at first to understand these new decentralized technologies and the assets they enable, it was not clear to them from the begin","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"100 3-4","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132983022","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 analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy. JEL Classification: E22, E52, G12
{"title":"Euro Area Equity Risk Premia and Monetary Policy: A Longer-Term Perspective","authors":"Daniela Kapp, K. Kristiansen","doi":"10.2139/ssrn.3824860","DOIUrl":"https://doi.org/10.2139/ssrn.3824860","url":null,"abstract":"This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy. JEL Classification: E22, E52, G12","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127799424","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}
Pub Date : 2021-03-31DOI: 10.21303/2613-5647.2021.001770
N. Bondar, V. Fursova
Since the global financial crisis had impacted on all aspects of insurance companies' activities, it became necessary to focus on the activities of insurers and further improve the integrated risk and capital management of global and regional insurers. The purpose of the research is to analyze differences between national and European standards for risk identification in Ukrainian insurance companies, and to provide suggestions for improving the mechanism of risk insurance management. Using the method of comparative analysis and the method of content analysis of national and international solvency standards for insurance companies, the national characteristics of the types of insurance risks and the organization of the implementation of European legislation in domestic practice were determined. By the method of generalization and deduction, the key challenges for improving the effectiveness of insurance risk management in Ukrainian practice were identified. The results of the study shows the necessity to implement a unified system of insurance risk management in Ukrainian practice, which contents national and global characteristics of the functioning of insurance markets. The results of the research have significant practical implications for insurance companies and state government insurance market and can serve as a basis for improvement of theoretical principles concerning the identification of insurance risks and implementing European experience of insurance companies in national practice.
{"title":"Features of Insurance Risks’ Classification as the Basis of Risk Management of Insurance Companies in the Financial Crisis","authors":"N. Bondar, V. Fursova","doi":"10.21303/2613-5647.2021.001770","DOIUrl":"https://doi.org/10.21303/2613-5647.2021.001770","url":null,"abstract":"Since the global financial crisis had impacted on all aspects of insurance companies' activities, it became necessary to focus on the activities of insurers and further improve the integrated risk and capital management of global and regional insurers. The purpose of the research is to analyze differences between national and European standards for risk identification in Ukrainian insurance companies, and to provide suggestions for improving the mechanism of risk insurance management. Using the method of comparative analysis and the method of content analysis of national and international solvency standards for insurance companies, the national characteristics of the types of insurance risks and the organization of the implementation of European legislation in domestic practice were determined. By the method of generalization and deduction, the key challenges for improving the effectiveness of insurance risk management in Ukrainian practice were identified. The results of the study shows the necessity to implement a unified system of insurance risk management in Ukrainian practice, which contents national and global characteristics of the functioning of insurance markets. The results of the research have significant practical implications for insurance companies and state government insurance market and can serve as a basis for improvement of theoretical principles concerning the identification of insurance risks and implementing European experience of insurance companies in national practice.<br><br>","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125842746","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 Equity risk-premium and volatility puzzle - is it possible to have a high equity premium and a low risk-free rate with a plausible risk aversion- have received a great deal of attention but beyond this question, the fundamental issues of that puzzle are the followings: what are the economic representations that can provide such results? What are the relevant links between finance and economics? And what should be the consequences for economic decisions makers?
The classic ways to model the financial economy with a representative agent placed in a Lucas tree model, i.e. maximizing consumption-based utility, where fruit is equivalent to dividend and consumption, failed to explain a high equity premium and a low risk free rate. Even more, simple changes in reasoning failed to provide a consistent macroeconomic and finance representation that sticks to reality.
This paper presents a new eco-financial approach based on three major changes: the definition of Wealth and wealth increment and their utility for any agent instead of consumption, a permanent change of equilibrium theory, a more realistic model in which the agents fear much more crises than ordinary fluctuations.
This model borrows two key principles from the model developed in Modigliani and Miller’s seminal papers: firstly an economy with investment opportunities in the market of goods and services and secondly an economy where rational agents always prefer more wealth to less and are indifferent as to whether a given increment to their wealth takes the form of dividend or growth in value .Main changes come from, we generalized this wealth approach to any agent, in a changing of equilibrium world, where crises are much more dreaded than ordinary negative events.
We will show that it is a way to solve the equity premium and to make consistent: macro, micro, finance and reality.
{"title":"Solving the Equity Premium Puzzle by Unifying Economics and Finance","authors":"Didier Vanoverberghe","doi":"10.2139/ssrn.3809302","DOIUrl":"https://doi.org/10.2139/ssrn.3809302","url":null,"abstract":"The Equity risk-premium and volatility puzzle - is it possible to have a high equity premium and a low risk-free rate with a plausible risk aversion- have received a great deal of attention but beyond this question, the fundamental issues of that puzzle are the followings: what are the economic representations that can provide such results? What are the relevant links between finance and economics? And what should be the consequences for economic decisions makers?<br><br>The classic ways to model the financial economy with a representative agent placed in a Lucas tree model, i.e. maximizing consumption-based utility, where fruit is equivalent to dividend and consumption, failed to explain a high equity premium and a low risk free rate. Even more, simple changes in reasoning failed to provide a consistent macroeconomic and finance representation that sticks to reality. <br><br>This paper presents a new eco-financial approach based on three major changes: the definition of Wealth and wealth increment and their utility for any agent instead of consumption, a permanent change of equilibrium theory, a more realistic model in which the agents fear much more crises than ordinary fluctuations. <br><br>This model borrows two key principles from the model developed in Modigliani and Miller’s seminal papers: firstly an economy with investment opportunities in the market of goods and services and secondly an economy where rational agents always prefer more wealth to less and are indifferent as to whether a given increment to their wealth takes the form of dividend or growth in value .Main changes come from, we generalized this wealth approach to any agent, in a changing of equilibrium world, where crises are much more dreaded than ordinary negative events.<br><br>We will show that it is a way to solve the equity premium and to make consistent: macro, micro, finance and reality.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131222902","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}
Spanish Abstract: Este documento contiene 210 errores cometidos en distintas valoraciones de empresas.
La mayor parte de las valoraciones proceden de arbitrajes, procesos judiciales, compras y ventas de empresas a los que el autor ha tenido acceso. Casi todos los nombres de personas, empresas y ciudades se han modificado.
Los errores se clasifican en 7 categorías: 1) Errores acerca de la tasa de descuento y del riesgo de la empresa; 2) Errores al calcular o prever los flujos esperados; 3) Errores al calcular el valor terminal; 4) Inconsistencias y errores conceptuales; 5) Errores al interpretar la valoración; 6) Errores al interpretar la contabilidad; y 7) Errores de organización.
English Abstract: This paper contains a collection and classification of 210 errors seen in company valuations performed by financial analysts, investment banks and financial consultants.
The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes.
We classify the errors in seven main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; 6) Errors when interpreting financial reports; and 7) Organizational errors.
{"title":"210 errores en valoraciones de empresas (210 Errors in Valuations of Companies)","authors":"Pablo Fernández","doi":"10.2139/ssrn.3803995","DOIUrl":"https://doi.org/10.2139/ssrn.3803995","url":null,"abstract":"<b>Spanish Abstract:</b> Este documento contiene 210 errores cometidos en distintas valoraciones de empresas.<br><br>La mayor parte de las valoraciones proceden de arbitrajes, procesos judiciales, compras y ventas de empresas a los que el autor ha tenido acceso. Casi todos los nombres de personas, empresas y ciudades se han modificado.<br><br>Los errores se clasifican en 7 categorías: 1) Errores acerca de la tasa de descuento y del riesgo de la empresa; 2) Errores al calcular o prever los flujos esperados; 3) Errores al calcular el valor terminal; 4) Inconsistencias y errores conceptuales; 5) Errores al interpretar la valoración; 6) Errores al interpretar la contabilidad; y 7) Errores de organización.<br><br><b>English Abstract:</b> This paper contains a collection and classification of 210 errors seen in company valuations performed by financial analysts, investment banks and financial consultants.<br><br>The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes.<br><br>We classify the errors in seven main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; 6) Errors when interpreting financial reports; and 7) Organizational errors.<br>","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"89 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132423372","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 a random controlled trial among Dutch households to analyze whether communication about monetary policy instruments impacts inflation expectations and trust in the ECB. All participants in the survey receive information about the ECB’s goal, but only a subset also receives information about how the ECB tries to achieve this. Our results suggest that individuals who are informed about policy instruments have inflation expectations closer to the ECB’s target inflation than individuals who only receive information about the ECB’s objective. Our evidence also indicates that communication about the ECB’s instruments does not impact average trust in the ECB.
{"title":"The Impact of Providing Information about the ECB's Instruments on Infation Expectations and Trust in the ECB: Experimental Evidence","authors":"Nils Brouwer, J. de Haan","doi":"10.2139/ssrn.3805708","DOIUrl":"https://doi.org/10.2139/ssrn.3805708","url":null,"abstract":"We use a random controlled trial among Dutch households to analyze whether communication about monetary policy instruments impacts inflation expectations and trust in the ECB. All participants in the survey receive information about the ECB’s goal, but only a subset also receives information about how the ECB tries to achieve this. Our results suggest that individuals who are informed about policy instruments have inflation expectations closer to the ECB’s target inflation than individuals who only receive information about the ECB’s objective. Our evidence also indicates that communication about the ECB’s instruments does not impact average trust in the ECB.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116259892","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 paper estimates the dynamic effects of the ECB's asset purchase programme (APP) using a proxy structural vector autoregression. We construct a novel proxy for structural APP shocks as unexpected changes in the size of additional purchases announced by the ECB. Unexpected changes are inferred from public expectations released in quantitative surveys just before monetary policy announcements. The results consistently show that innovations to APP have expansionary effects on both output and prices: an immediate increase in asset purchases of one percent of GDP leads to a maximum impact in industrial production and consumer prices by 0.15 percent and 0.06 percent, respectively. Overall, APP shocks account for less than a fifth of the long-run macroeconomic variability. Finally, our counterfactual analyses indicate that APP and its successive recalibrations were central in supporting inflation. For example, we find inflation would have fallen into negative territory without December 2015 and March 2016 APP recalibrations.
{"title":"The Dynamic Effects of the ECB’s Asset Purchases: A Survey-Based Identification","authors":"Stéphane Lhuissier, Benoît Nguyen","doi":"10.2139/ssrn.3802359","DOIUrl":"https://doi.org/10.2139/ssrn.3802359","url":null,"abstract":"This paper estimates the dynamic effects of the ECB's asset purchase programme (APP) using a proxy structural vector autoregression. We construct a novel proxy for structural APP shocks as unexpected changes in the size of additional purchases announced by the ECB. Unexpected changes are inferred from public expectations released in quantitative surveys just before monetary policy announcements. The results consistently show that innovations to APP have expansionary effects on both output and prices: an immediate increase in asset purchases of one percent of GDP leads to a maximum impact in industrial production and consumer prices by 0.15 percent and 0.06 percent, respectively. Overall, APP shocks account for less than a fifth of the long-run macroeconomic variability. Finally, our counterfactual analyses indicate that APP and its successive recalibrations were central in supporting inflation. For example, we find inflation would have fallen into negative territory without December 2015 and March 2016 APP recalibrations.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"317 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115834457","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 paper assesses the effects of monetary policy shocks on the macroeconomy and the euro area banking sector after the global financial crisis. Financial risk-return indicators of the banking sector based on a compound option-based structural credit risk model are embedded in a large macro-financial quarterly database covering the period 2008Q4-2019Q4. A SFAVAR identifies and estimates the shocks’ responses relating them to the endogenous build-up of banks’ vulnerabilities. The study finds that unconventional monetary policy, in particular the Asset Purchase Program of the European Central Bank, seems to have been more successful than conventional monetary policy in raising output and inflation. The desired boost to bank lending has been muted and loan cyclicality has varied across countries and loan types. The performance of the banking sector following monetary policy shocks can be characterized by a drop in expected ROE and ROA, a relaxation of lending conditions and increased correlation between banks’ assets return and the market return, a mechanism pointing to enhanced risk-taking. While banks’ probabilities of default fall following monetary policy shocks, financial leverage and the price of risk increase. Banks’ net worth rises via higher market capitalization and implied assets value together with lower volatility, albeit often incurring more debt. Risk-taking in the banking sector, such as the one observed in the run-up to the global financial crisis, may pose a risk to financial stability, especially if its effects on banks’ vulnerability spread to systemic risk. The endogenous build-up of macro-financial vulnerabilities may need to become part of monetary policymaking.
{"title":"Euro Area Banking and Monetary Policy Shocks in the QE Era: A Structural Credit Risk and Vector-autoregression Approach","authors":"A. Kabundi, Francisco Nadal De Simone","doi":"10.2139/ssrn.3780502","DOIUrl":"https://doi.org/10.2139/ssrn.3780502","url":null,"abstract":"This paper assesses the effects of monetary policy shocks on the macroeconomy and the euro area banking sector after the global financial crisis. Financial risk-return indicators of the banking sector based on a compound option-based structural credit risk model are embedded in a large macro-financial quarterly database covering the period 2008Q4-2019Q4. A SFAVAR identifies and estimates the shocks’ responses relating them to the endogenous build-up of banks’ vulnerabilities. The study finds that unconventional monetary policy, in particular the Asset Purchase Program of the European Central Bank, seems to have been more successful than conventional monetary policy in raising output and inflation. The desired boost to bank lending has been muted and loan cyclicality has varied across countries and loan types. The performance of the banking sector following monetary policy shocks can be characterized by a drop in expected ROE and ROA, a relaxation of lending conditions and increased correlation between banks’ assets return and the market return, a mechanism pointing to enhanced risk-taking. While banks’ probabilities of default fall following monetary policy shocks, financial leverage and the price of risk increase. Banks’ net worth rises via higher market capitalization and implied assets value together with lower volatility, albeit often incurring more debt. Risk-taking in the banking sector, such as the one observed in the run-up to the global financial crisis, may pose a risk to financial stability, especially if its effects on banks’ vulnerability spread to systemic risk. The endogenous build-up of macro-financial vulnerabilities may need to become part of monetary policymaking.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129863436","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}
Carla Giglio, Frances Shaw, Nicolas Syrichas, Giuseppe Cappelletti
Net trading income is an important but volatile source of income for many euro area banks, highly sensitive to changes in financial market conditions. Using a representative sample of European banks, we study the distribution of net trading income (normalized by total assets) conditional to changes in key macro-financial risk factors. To map the linkages of net trading income with financial risk factors and capture non-linear effects, we implement a dynamic fixed effects quantile model using the method of moments approach. We use the model to empirically estimate and forecast the conditional net trading income distribution from which we quantify tail risk measures and expected losses across banks. We find a heterogeneous and asymmetric impact of the risk factors on the distribution of net trading income. Credit and interest rate spreads affect lower quantiles of the net trading income distribution while stock returns are an important determinant of the upper quantiles. We also find that the onset of the Covid-19 pandemic resulted in a significant increase in the 5th and 10th percentile expected capital shortfall. Moreover, adverse scenario forecasts show a wide dispersion of losses and a long-left tail is evident especially in the most severe scenarios. Our findings highlight strong inter-linkages between financial risk factors and trading income and suggest that this tractable methodology is ideal for use as an additional tool in stress test exercises.
{"title":"Stress-Testing Net Trading Income: The Case of European Banks","authors":"Carla Giglio, Frances Shaw, Nicolas Syrichas, Giuseppe Cappelletti","doi":"10.2139/ssrn.3717707","DOIUrl":"https://doi.org/10.2139/ssrn.3717707","url":null,"abstract":"Net trading income is an important but volatile source of income for many euro area banks, highly sensitive to changes in financial market conditions. Using a representative sample of European banks, we study the distribution of net trading income (normalized by total assets) conditional to changes in key macro-financial risk factors. To map the linkages of net trading income with financial risk factors and capture non-linear effects, we implement a dynamic fixed effects quantile model using the method of moments approach. We use the model to empirically estimate and forecast the conditional net trading income distribution from which we quantify tail risk measures and expected losses across banks. We find a heterogeneous and asymmetric impact of the risk factors on the distribution of net trading income. Credit and interest rate spreads affect lower quantiles of the net trading income distribution while stock returns are an important determinant of the upper quantiles. We also find that the onset of the Covid-19 pandemic resulted in a significant increase in the 5th and 10th percentile expected capital shortfall. Moreover, adverse scenario forecasts show a wide dispersion of losses and a long-left tail is evident especially in the most severe scenarios. Our findings highlight strong inter-linkages between financial risk factors and trading income and suggest that this tractable methodology is ideal for use as an additional tool in stress test exercises.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127859297","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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