This paper reviews the problem of futures contracts and backtesting. If the contracts are spliced together, the resulting backtest is wrong. Such a dataset would include artificial and non-existing jumps that would appear in the analysis as profits or losses. This paper aims to examine some possible solutions to the spliced futures problem. Firstly, it is essential to choose the date when the successive contracts are rolled and secondly, which adjustments would be made to the raw contract prices. Since there are many options for both key elements, it creates a broad set of possibilities. Moreover, there is no one best approach. Each algorithm has it is own pluses and minuses. We examine in the practice the first-of-month roll method and backward ratio adjustment method. Such an approach is simple and probably the best if we want to provide information about the percentual performance of the strategies.
{"title":"Continuous Futures Contracts Methodology for Backtesting","authors":"Radovan Vojtko, Matúš Padyšák","doi":"10.2139/ssrn.3517736","DOIUrl":"https://doi.org/10.2139/ssrn.3517736","url":null,"abstract":"This paper reviews the problem of futures contracts and backtesting. If the contracts are spliced together, the resulting backtest is wrong. Such a dataset would include artificial and non-existing jumps that would appear in the analysis as profits or losses. This paper aims to examine some possible solutions to the spliced futures problem. Firstly, it is essential to choose the date when the successive contracts are rolled and secondly, which adjustments would be made to the raw contract prices. Since there are many options for both key elements, it creates a broad set of possibilities. Moreover, there is no one best approach. Each algorithm has it is own pluses and minuses. We examine in the practice the first-of-month roll method and backward ratio adjustment method. Such an approach is simple and probably the best if we want to provide information about the percentual performance of the strategies.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130884541","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}
A. Hosseini, Gergana Jostova, Alexander Philipov, R. Savickas
Using novel corporate Twitter data on all U.S. public firms, we show that firms with a Twitter account earn 50 basis points per month higher returns than similar firms without a Twitter account. This `Twitter premium' is higher among smaller firms and firms with higher fundamentals uncertainty, and is not explained by existing risk-factor models. Having a Twitter account presents opportunities for value creation but also raises social media risks. We show that a social media risk factor is priced in the cross-section of U.S. stock returns and carries a premium of 30 to 75 basis points per month controlling for other risk factors.
{"title":"The Social Media Risk Premium","authors":"A. Hosseini, Gergana Jostova, Alexander Philipov, R. Savickas","doi":"10.2139/ssrn.3514826","DOIUrl":"https://doi.org/10.2139/ssrn.3514826","url":null,"abstract":"Using novel corporate Twitter data on all U.S. public firms, we show that firms with a Twitter account earn 50 basis points per month higher returns than similar firms without a Twitter account. This `Twitter premium' is higher among smaller firms and firms with higher fundamentals uncertainty, and is not explained by existing risk-factor models. Having a Twitter account presents opportunities for value creation but also raises social media risks. We show that a social media risk factor is priced in the cross-section of U.S. stock returns and carries a premium of 30 to 75 basis points per month controlling for other risk factors.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"121 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130218923","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 impending departure of the UK from the EU makes progress on Capital Markets Union all the more urgent. Unless the EU-27 takes action soon, its capital market may leave the EU along with the UK as early as the end of next year, when the transition period in the UK-EU Withdrawal Agreement (assuming agreed) is (currently) scheduled to end.
The foundation of any capital market is its infrastructure, including its arrangements for the “collateral ecosystem” (the regulatory, institutional and operational arrangements for collateral, custody, client assets and client money). Capital market infrastructure should work in an integrated fashion across the market so that issuers, investors and intermediaries can transact seamlessly. If the collateral ecosystem is the plumbing of the financial markets then it needs to be laid out in a uniform manner as opposed to a patchwork.
That is not the case today in the EU. In particular, there is no uniform single EU-wide collateral ecosystem. Although various EU Directives and Regulations have improved the workings of individual aspects of the ecosystem, such legal instruments have neither been uniformly applied across the EU nor integrated with one another. As Member States transposed EU Directives into national law, they did so in national terms in the context of national institutions.
This creates gaps in protection for market participants, particularly where they document, transact and/or hold assets in different jurisdictions. That in turn increases risk as well as transaction costs. This lowers the attractiveness of the EU capital market and hampers growth.
Creating an integrated, uniform EU-27 regime for the collateral ecosystem should therefore have high priority. Although institutional-led operational-based and thus non-legal driven changes have provided "jurisdiction agnostic" solutions that work across multiple jurisdictions free from national influences this is not a panacea to plugging the (potential) problems in the plumbing. While the Eurosystem's work on the operational system known as TARGET2 Securities is very much a step in the right direction in terms of operational-led cross-border functionality, more is needed. Some hope that new technologies (such as distributed ledger technology) and/or new entrants (e.g. FinTech) will supply what is missing. They cannot. Legislative and regulatory changes will also be required.
The question is what form they should take. Economically, the most effective measure would be the harmonisation across the EU of the laws and regulations affecting the collateral ecosystem, ideally along the lines of the most commonly used regime. Politically, however, such an approach is likely to encounter severe challenges. The question is whether EU-27 policymakers, in light of the UK's changing relationship with the remaining bloc, will take the plunge and move the discussion on fixing the plumbing from "too big to reform" to "too important
{"title":"‘Too Big to Reform or Too Important to Miss?’ Why the EU Needs More Consistency on the Rules on Collateral and Custody of Client Assets and Client Money as Part of CMU 2.0","authors":"Michael Huertas","doi":"10.2139/ssrn.3508665","DOIUrl":"https://doi.org/10.2139/ssrn.3508665","url":null,"abstract":"The impending departure of the UK from the EU makes progress on Capital Markets Union all the more urgent. Unless the EU-27 takes action soon, its capital market may leave the EU along with the UK as early as the end of next year, when the transition period in the UK-EU Withdrawal Agreement (assuming agreed) is (currently) scheduled to end. <br><br>The foundation of any capital market is its infrastructure, including its arrangements for the “collateral ecosystem” (the regulatory, institutional and operational arrangements for collateral, custody, client assets and client money). Capital market infrastructure should work in an integrated fashion across the market so that issuers, investors and intermediaries can transact seamlessly. If the collateral ecosystem is the plumbing of the financial markets then it needs to be laid out in a uniform manner as opposed to a patchwork. <br><br>That is not the case today in the EU. In particular, there is no uniform single EU-wide collateral ecosystem. Although various EU Directives and Regulations have improved the workings of individual aspects of the ecosystem, such legal instruments have neither been uniformly applied across the EU nor integrated with one another. As Member States transposed EU Directives into national law, they did so in national terms in the context of national institutions. <br><br>This creates gaps in protection for market participants, particularly where they document, transact and/or hold assets in different jurisdictions. That in turn increases risk as well as transaction costs. This lowers the attractiveness of the EU capital market and hampers growth.<br><br>Creating an integrated, uniform EU-27 regime for the collateral ecosystem should therefore have high priority. Although institutional-led operational-based and thus non-legal driven changes have provided \"jurisdiction agnostic\" solutions that work across multiple jurisdictions free from national influences this is not a panacea to plugging the (potential) problems in the plumbing. While the Eurosystem's work on the operational system known as TARGET2 Securities is very much a step in the right direction in terms of operational-led cross-border functionality, more is needed. Some hope that new technologies (such as distributed ledger technology) and/or new entrants (e.g. FinTech) will supply what is missing. They cannot. Legislative and regulatory changes will also be required.<br><br>The question is what form they should take. Economically, the most effective measure would be the harmonisation across the EU of the laws and regulations affecting the collateral ecosystem, ideally along the lines of the most commonly used regime. Politically, however, such an approach is likely to encounter severe challenges. The question is whether EU-27 policymakers, in light of the UK's changing relationship with the remaining bloc, will take the plunge and move the discussion on fixing the plumbing from \"too big to reform\" to \"too important","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127957363","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 main focus of this paper is to show some principles that can be used to pick well-working periods for the evaluation of various indicators. This paper is focused on a momentum strategy based on a diversified ETFs, but the approaches are applicable in almost every strategy where the practitioners have to pick the period for the indicator. Firstly, there is an option to pick a larger set of periods to evade the risk of overfitting and the underperformance out-of-sample. Secondly, there is a possibility to make a decision based on the performance of each strategy that corresponds to the different evaluating periods. Each approach is examined concerning the momentum strategies based on 3- to 15-month momentum and results are compared also with a benchmark portfolio. Lastly, this study shows that periods that are almost fixed in the world of quantitative strategies, do not necessarily have to be the best.
{"title":"How to Choose the Period for Indicators","authors":"Radovan Vojtko, Matúš Padyšák","doi":"10.2139/ssrn.3497900","DOIUrl":"https://doi.org/10.2139/ssrn.3497900","url":null,"abstract":"The main focus of this paper is to show some principles that can be used to pick well-working periods for the evaluation of various indicators. This paper is focused on a momentum strategy based on a diversified ETFs, but the approaches are applicable in almost every strategy where the practitioners have to pick the period for the indicator. Firstly, there is an option to pick a larger set of periods to evade the risk of overfitting and the underperformance out-of-sample. Secondly, there is a possibility to make a decision based on the performance of each strategy that corresponds to the different evaluating periods. Each approach is examined concerning the momentum strategies based on 3- to 15-month momentum and results are compared also with a benchmark portfolio. Lastly, this study shows that periods that are almost fixed in the world of quantitative strategies, do not necessarily have to be the best.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116035340","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}
Abstract We assess the influence of corporate news on costs of financing for a sample of large European and U.S. firms from 2006 to 2016. Focusing on environmental, social, and governance (ESG) news items, we take into account volume (number of news items), tonality (positive, neutral, negative), and source (financial or mass media). We find that (1) the volume of ESG-related news is significantly associated with credit default swap (CDS) spreads and therefore matters for companies' refinancing costs; (2) news with positive (negative) tonality is associated with lower (higher) CDS spreads by about 4% (6%); (3) tonality matters even more for ESG-related news. These results hold for different subsamples and alternate specifications, and are relatively insensitive to omitted variables.
{"title":"It is Not Only What You Say, But How You Say It: ESG, Corporate News, and the Impact on CDS Spreads","authors":"Hans-Jörg Naumer, B. Yurtoglu","doi":"10.2139/ssrn.3512923","DOIUrl":"https://doi.org/10.2139/ssrn.3512923","url":null,"abstract":"Abstract We assess the influence of corporate news on costs of financing for a sample of large European and U.S. firms from 2006 to 2016. Focusing on environmental, social, and governance (ESG) news items, we take into account volume (number of news items), tonality (positive, neutral, negative), and source (financial or mass media). We find that (1) the volume of ESG-related news is significantly associated with credit default swap (CDS) spreads and therefore matters for companies' refinancing costs; (2) news with positive (negative) tonality is associated with lower (higher) CDS spreads by about 4% (6%); (3) tonality matters even more for ESG-related news. These results hold for different subsamples and alternate specifications, and are relatively insensitive to omitted variables.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122724843","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}
As from January 2018, MiFIR and the PRIIPs Regulation explicitly provided national supervisors with competences to adopt measures restricting or limiting financial activities or practices or the marketing, distribution or sale of financial instruments, structured deposits and insurance-based investments. In a number of Member States, including Belgium, the national supervisor had already been granted this power by national regulation. MiFIR and the PRIIPs Regulation, however, uniformize the conditions for taking such measures. Moreover, those regulations give competences to ESMA, EBA and EIOPA to coordinate and facilitate such measures, in order to safeguard the level playing field. On top of those competences, these European Supervisory Authorities can now also temporarily prohibit or restrict the same products, activities or practices directly in the entire Union. In this contribution we first offer a discussion of the historical evolution of product intervention, including an overview of national measures taken by a number of Member States before the entry into force of the MiFIR and the PRIIPs Regulation. Next, the contents and application of the MiFIR and PRIIPs product intervention rules are scrutinised. Finally, we take a critical look at the scope of application of these provisions. We conclude that the MiFIR and PRIIPs product intervention measures are the keystone of the EU investor protection regime. The prevailing restrictive interpretation of the personal scope of application of the MiFIR product intervention measures could, however, partly undermine their efficiency. In this contribution we have argued that such interpretation is based on an incorrect reading of the scope of application of the MiFIR.
{"title":"Product Intervention: Keystone of the EU Investor Protection Regime","authors":"Veerle A. Colaert","doi":"10.2139/ssrn.3440557","DOIUrl":"https://doi.org/10.2139/ssrn.3440557","url":null,"abstract":"As from January 2018, MiFIR and the PRIIPs Regulation explicitly provided national supervisors with competences to adopt measures restricting or limiting financial activities or practices or the marketing, distribution or sale of financial instruments, structured deposits and insurance-based investments. In a number of Member States, including Belgium, the national supervisor had already been granted this power by national regulation. MiFIR and the PRIIPs Regulation, however, uniformize the conditions for taking such measures. Moreover, those regulations give competences to ESMA, EBA and EIOPA to coordinate and facilitate such measures, in order to safeguard the level playing field. On top of those competences, these European Supervisory Authorities can now also temporarily prohibit or restrict the same products, activities or practices directly in the entire Union. \u0000 \u0000In this contribution we first offer a discussion of the historical evolution of product intervention, including an overview of national measures taken by a number of Member States before the entry into force of the MiFIR and the PRIIPs Regulation. Next, the contents and application of the MiFIR and PRIIPs product intervention rules are scrutinised. Finally, we take a critical look at the scope of application of these provisions. \u0000 \u0000We conclude that the MiFIR and PRIIPs product intervention measures are the keystone of the EU investor protection regime. The prevailing restrictive interpretation of the personal scope of application of the MiFIR product intervention measures could, however, partly undermine their efficiency. In this contribution we have argued that such interpretation is based on an incorrect reading of the scope of application of the MiFIR.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125204232","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 global nature of derivatives markets, and the presence of large key financial institutions trading in several markets across the globe, call for taking a “macro” view on the interconnections arising in the clearing network. Based on the analysis of derivatives transactions data reported under the EMIR Regulation we reconstruct the network of relationships in the centrally-cleared derivatives market and analyse its topology providing insight into its structural features. The centrally-cleared derivatives network is modelled in the form of a multiplex network where each layer is represented by a derivatives asset class market. In turn, each node represents a single counterparty in that market. On the basis of different centrality measures applied to the collapsed aggregate and to the multiplex network, the critical participants of the euro area centrally-cleared derivatives market are identified and their level of interconnectedness analysed. This paper provides insight on how the collected data pursuant to the EMIR regulation can be used to shed light on the complex network of interrelations underlying the financial markets. It provides indications on structural features of the euro area centrally-cleared derivatives market and discusses policy relevant implications and future applications. JEL Classification: G01, G15, G23
{"title":"Interdependencies in the Euro Area Derivatives Clearing Network: A Multi-Layer Network Approach","authors":"Simonetta Rosati, F. Vacirca","doi":"10.2139/ssrn.3515396","DOIUrl":"https://doi.org/10.2139/ssrn.3515396","url":null,"abstract":"The global nature of derivatives markets, and the presence of large key financial institutions trading in several markets across the globe, call for taking a “macro” view on the interconnections arising in the clearing network. Based on the analysis of derivatives transactions data reported under the EMIR Regulation we reconstruct the network of relationships in the centrally-cleared derivatives market and analyse its topology providing insight into its structural features. The centrally-cleared derivatives network is modelled in the form of a multiplex network where each layer is represented by a derivatives asset class market. In turn, each node represents a single counterparty in that market. On the basis of different centrality measures applied to the collapsed aggregate and to the multiplex network, the critical participants of the euro area centrally-cleared derivatives market are identified and their level of interconnectedness analysed. This paper provides insight on how the collected data pursuant to the EMIR regulation can be used to shed light on the complex network of interrelations underlying the financial markets. It provides indications on structural features of the euro area centrally-cleared derivatives market and discusses policy relevant implications and future applications. JEL Classification: G01, G15, G23","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114300602","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}
In this paper, I compare two policy interventions used in Europe to increase gender equality on corporate boards: quota versus disclosure. While quota has a stronger enforcement effect, disclosure allows firms to decide on the optimal board gender ratio taking into consideration their own information. This information includes the friction that causes low female representation on boards. I show that it is important to separate supply and demand side frictions. In industries that have a low supply of female directors, quota leads firms to hire more foreign female directors, new female directors with no prior board experience, and more female directors with PhDs. In industries not constrained by female director supply, disclosure and quota can be equally effective in shattering the glass ceiling. Additionally, I find that effects are stronger in countries where there is a stronger social norm on gender equality. Last, I do not find this increase in board gender diversity leads to better financial performance.
{"title":"Quota or Disclosure? Evidence from Corporate Board Gender Diversity Policies","authors":"Shirley Lu","doi":"10.2139/ssrn.3493375","DOIUrl":"https://doi.org/10.2139/ssrn.3493375","url":null,"abstract":"In this paper, I compare two policy interventions used in Europe to increase gender equality on corporate boards: quota versus disclosure. While quota has a stronger enforcement effect, disclosure allows firms to decide on the optimal board gender ratio taking into consideration their own information. This information includes the friction that causes low female representation on boards. I show that it is important to separate supply and demand side frictions. In industries that have a low supply of female directors, quota leads firms to hire more foreign female directors, new female directors with no prior board experience, and more female directors with PhDs. In industries not constrained by female director supply, disclosure and quota can be equally effective in shattering the glass ceiling. Additionally, I find that effects are stronger in countries where there is a stronger social norm on gender equality. Last, I do not find this increase in board gender diversity leads to better financial performance.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117118894","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}
Using microdata from the second wave of the Household Finance and Consumption Survey, we investigate the accuracy of property values estimated by homeowners - so called “self-assessed” house prices - and explore the drivers of possible deviations of these prices from official hedonic house price indices. We find evidence that euro area homeowners overestimate the value of their properties by around 9%. Across the largest euro area countries, the overestimation lies in a range between 3.2% in Germany and 22% in Italy. Household characteristics, including the level of indebtedness, appear to explain significant discrepancies between hedonic and self-assessed house price indices, while the limited available data related to property characteristics are generally not affecting this gap. For the euro area, we find that higher self-assessed house prices are associated with a mild increase in consumption expenditures. JEL Classification: E31, C21, O18
{"title":"Accuracy and Determinants of Self-Assessed Euro Area House Prices","authors":"Julien Le Roux, M. Roma","doi":"10.2139/ssrn.3486801","DOIUrl":"https://doi.org/10.2139/ssrn.3486801","url":null,"abstract":"Using microdata from the second wave of the Household Finance and Consumption Survey, we investigate the accuracy of property values estimated by homeowners - so called “self-assessed” house prices - and explore the drivers of possible deviations of these prices from official hedonic house price indices. We find evidence that euro area homeowners overestimate the value of their properties by around 9%. Across the largest euro area countries, the overestimation lies in a range between 3.2% in Germany and 22% in Italy. Household characteristics, including the level of indebtedness, appear to explain significant discrepancies between hedonic and self-assessed house price indices, while the limited available data related to property characteristics are generally not affecting this gap. For the euro area, we find that higher self-assessed house prices are associated with a mild increase in consumption expenditures. JEL Classification: E31, C21, O18","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114916891","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}
L. Cathcart, Alfonso Dufour, Ludovico Rossi, Simone Varotto
Abstract We analyse a sample of 6 million firm-year observations of large corporations and small and medium sized enterprises (SMEs) spanning 6 European countries from 2005 to 2015, to determine the impact of leverage and different sources of funding on default risk. We find that financial leverage has a greater impact on the probability of default of SMEs than of large corporations. The difference in default probability between the top and bottom leverage quartiles is 1.24% for large firms and 2.87% for SMEs. This difference may be explained by the greater exposure of SMEs to short-term debt and their consequently higher refinancing risk. Indeed, we find that SMEs that recover from the state of insolvency may have similar leverage to defaulted SMEs; however their liability structure is significantly altered towards long-term debt and away from short-term debt. Our findings have important implications not only for bank regulators and policy-makers but also for credit risk modelling.
{"title":"The Differential Impact of Leverage on the Default Risk of Small and Large Firms","authors":"L. Cathcart, Alfonso Dufour, Ludovico Rossi, Simone Varotto","doi":"10.2139/ssrn.3226246","DOIUrl":"https://doi.org/10.2139/ssrn.3226246","url":null,"abstract":"Abstract We analyse a sample of 6 million firm-year observations of large corporations and small and medium sized enterprises (SMEs) spanning 6 European countries from 2005 to 2015, to determine the impact of leverage and different sources of funding on default risk. We find that financial leverage has a greater impact on the probability of default of SMEs than of large corporations. The difference in default probability between the top and bottom leverage quartiles is 1.24% for large firms and 2.87% for SMEs. This difference may be explained by the greater exposure of SMEs to short-term debt and their consequently higher refinancing risk. Indeed, we find that SMEs that recover from the state of insolvency may have similar leverage to defaulted SMEs; however their liability structure is significantly altered towards long-term debt and away from short-term debt. Our findings have important implications not only for bank regulators and policy-makers but also for credit risk modelling.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125085447","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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