If regulation fails to differentiate between priced and idiosyncratic risk, it incentivizes investors to reach for yield. Studying securitization exposures on the balance sheets of German banks, I show evidence consistent with this prediction. Banks with tight regulatory constraints (low capital adequacy ratios) invest more in higher yielding ABSs conditionally on rating-implied regulatory risk weights. ABS investments of constrained banks tend to perform worse ex post in terms of collateral delinquency and lose value. Differences in bank sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.
{"title":"Reaching for Yield in the ABS Market: Evidence from German Bank Investments","authors":"Matthias Efing","doi":"10.2139/ssrn.2527981","DOIUrl":"https://doi.org/10.2139/ssrn.2527981","url":null,"abstract":"If regulation fails to differentiate between priced and idiosyncratic risk, it incentivizes investors to reach for yield. Studying securitization exposures on the balance sheets of German banks, I show evidence consistent with this prediction. Banks with tight regulatory constraints (low capital adequacy ratios) invest more in higher yielding ABSs conditionally on rating-implied regulatory risk weights. ABS investments of constrained banks tend to perform worse ex post in terms of collateral delinquency and lose value. Differences in bank sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124310268","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}
When a bank is burdened with Non Performing Loans, an underinvestment problem may arise. Banking Authorities often take the initiative to segregate these Non Performing Loans into a Bad Bank (BB), so that the remaining part of the bank, the Good Bank, finds it profitable to make new loans. These BBs typically involve an injection of public funds. We propose a different type of bank break up that does not require any government subsidy. The idea is to give to the bank’s shareholders the option to create a BB on their own, and finance it ex-ante by requiring the bank to issue a bail-inable bond that is drawn down when the option is exercised. No tax payer money is involved. Such a restructuring differs from the bail-in regimes in the Bank Recovery and Resolution Directive in the EU and the Dodd-Frank Act in the USA in that it recognizes to the bank’s shareholders the information rents that result from their private information on the bank’s legacy loans.
当银行背负着不良贷款时，就会出现投资不足的问题。银行当局经常主动将这些不良贷款分离成坏账银行(BB)，以便银行的其余部分，即好银行，发现发放新贷款是有利可图的。这些论坛通常涉及公共资金的注入。我们提出了一种不需要任何政府补贴的不同类型的银行拆分。这个想法是给银行股东自己创建BB的选择权，并通过要求银行发行可担保债券的方式预先融资，该债券在行使选择权时被赎回。不涉及纳税人的钱。这种重组不同于欧盟的《银行复苏与处置指令》(Bank Recovery and Resolution Directive)和美国的《多德-弗兰克法案》(Dodd-Frank Act)中的纾困机制，因为它向银行股东承认了他们对银行遗留贷款的私人信息所产生的信息租金。
{"title":"Bank Restructuring without Government Intervention","authors":"M. Lucchetta, Bruno Parigi, J. Rochet","doi":"10.2139/ssrn.3501564","DOIUrl":"https://doi.org/10.2139/ssrn.3501564","url":null,"abstract":"When a bank is burdened with Non Performing Loans, an underinvestment problem may arise. Banking Authorities often take the initiative to segregate these Non Performing Loans into a Bad Bank (BB), so that the remaining part of the bank, the Good Bank, finds it profitable to make new loans. These BBs typically involve an injection of public funds. We propose a different type of bank break up that does not require any government subsidy. The idea is to give to the bank’s shareholders the option to create a BB on their own, and finance it ex-ante by requiring the bank to issue a bail-inable bond that is drawn down when the option is exercised. No tax payer money is involved. Such a restructuring differs from the bail-in regimes in the Bank Recovery and Resolution Directive in the EU and the Dodd-Frank Act in the USA in that it recognizes to the bank’s shareholders the information rents that result from their private information on the bank’s legacy loans.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-06-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124783912","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 study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences in conditions of the loans granted after a robbery compared to changes in loan conditions that occur contemporaneously at unaffected branches. In general loan officers seem to adopt so-called avoidance behaviour. In accordance with the literature on posttraumatic stress their avoidance behavior is halved within two weeks after the robbery and the effect further varies depending on the presence of a firearm during the robbery.
{"title":"Fear, Anger and Credit. On Bank Robberies and Loan Conditions","authors":"Paola Morales Acevedo, S. Ongena","doi":"10.2139/ssrn.2653726","DOIUrl":"https://doi.org/10.2139/ssrn.2653726","url":null,"abstract":"We study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences in conditions of the loans granted after a robbery compared to changes in loan conditions that occur contemporaneously at unaffected branches. In general loan officers seem to adopt so-called avoidance behaviour. In accordance with the literature on posttraumatic stress their avoidance behavior is halved within two weeks after the robbery and the effect further varies depending on the presence of a firearm during the robbery.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-06-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124185465","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}
Companies implementing R & D projects encounter their own unique features: they require large capital investments, long-term implementation, they are associated with high growth potential and a low probability of success, as well as financing problems. Some of the problems encountered have been studied before and are still being investigated. In recent years, there have been studies at the model level of problems on the financing of R & D projects. The problem of risks arising from the implementation of R & D projects has been dealt with at a narrative level in many papers. At the model level, from our point of view, this problem has not yet been sufficiently studied. The model presented in this paper allows to investigate the risks that companies face while implementing R&D projects and to develop a method for assessing the corresponding risks using a modified VaR measure. The formulae have been obtained to calculate this measure and they have been transformed to simple analytical expressions under the assumptions of a uniform distribution of cash flow of the project or by triangular distribution. The constructed model takes into account the most important causes of risks in projects with R&D, which investors intuitively sense. The constructed model allows to evaluate the risks of projects with R & D using the VaR risk measure with all possible parameters present in the model. This model can be used in practice both for preliminary risk assessment of an R & D project even before its implementation and taking a decision on risk-based implementation, as well as for standardising the decision-making process on projects with R & D with a standardised “risk appetite” using VaR risk measuring method.
{"title":"Risk Assessment Models of the Activities of Companies Implementing R&D Projects","authors":"V. B. Minasyan","doi":"10.2139/ssrn.3379018","DOIUrl":"https://doi.org/10.2139/ssrn.3379018","url":null,"abstract":"Companies implementing R & D projects encounter their own unique features: they require large capital investments, long-term implementation, they are associated with high growth potential and a low probability of success, as well as financing problems. Some of the problems encountered have been studied before and are still being investigated. In recent years, there have been studies at the model level of problems on the financing of R & D projects. The problem of risks arising from the implementation of R & D projects has been dealt with at a narrative level in many papers. At the model level, from our point of view, this problem has not yet been sufficiently studied. The model presented in this paper allows to investigate the risks that companies face while implementing R&D projects and to develop a method for assessing the corresponding risks using a modified VaR measure. The formulae have been obtained to calculate this measure and they have been transformed to simple analytical expressions under the assumptions of a uniform distribution of cash flow of the project or by triangular distribution. The constructed model takes into account the most important causes of risks in projects with R&D, which investors intuitively sense. The constructed model allows to evaluate the risks of projects with R & D using the VaR risk measure with all possible parameters present in the model. This model can be used in practice both for preliminary risk assessment of an R & D project even before its implementation and taking a decision on risk-based implementation, as well as for standardising the decision-making process on projects with R & D with a standardised “risk appetite” using VaR risk measuring method.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132979885","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}
Andrea Bergesio, P. Huber, Pablo Koch-Medina, Lutz Wilhelmy
We describe a framework for the valuation of insurance liabilities that relies on first principles in finance theory. Key features of the economic value of liabilities are its market-consistency and the inclusion of the costs of financial frictions. We compare this framework to the Solvency II approach and highlight the differences.
{"title":"The Valuation of Insurance Liabilities: A Framework Based on First Principles","authors":"Andrea Bergesio, P. Huber, Pablo Koch-Medina, Lutz Wilhelmy","doi":"10.2139/ssrn.3386182","DOIUrl":"https://doi.org/10.2139/ssrn.3386182","url":null,"abstract":"We describe a framework for the valuation of insurance liabilities that relies on first principles in finance theory. Key features of the economic value of liabilities are its market-consistency and the inclusion of the costs of financial frictions. We compare this framework to the Solvency II approach and highlight the differences.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128977924","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}
Sophisticated algorithmic techniques are complementing human judgement across the fund industry. Whatever the type of rebalancing that occurs in the course of a longer horizon, it probably violates the buy-and-hold assumption. In this article, we develop the methodology to predict, dissect and interpret the h-day financial risk in data-driven portfolios. Our risk budgeting approach is based on a flexible risk factor model that accommodates the dynamics in portfolio composition directly within the risk factors. Once these factors are defined, we cast portfolio risk measures, such as value-at-risk, into an additive mean-variance-skewness-kurtosis format. The simulation study confirms the gains in accuracy compared to the widespread square-root-of-time rule. Our main empirical findings rely on the two-decade performance of a portfolio insurance investment strategy. Rather than looking at total portfolio risk, we conclude that it is more informative to look inside the portfolio.
{"title":"Predicting and Decomposing the Risk of Data-driven Portfolios","authors":"Nabil Bouamara, Kris Boudt, J. Vandenbroucke","doi":"10.2139/ssrn.3242137","DOIUrl":"https://doi.org/10.2139/ssrn.3242137","url":null,"abstract":"Sophisticated algorithmic techniques are complementing human judgement across the fund industry. Whatever the type of rebalancing that occurs in the course of a longer horizon, it probably violates the buy-and-hold assumption. In this article, we develop the methodology to predict, dissect and interpret the h-day financial risk in data-driven portfolios. Our risk budgeting approach is based on a flexible risk factor model that accommodates the dynamics in portfolio composition directly within the risk factors. Once these factors are defined, we cast portfolio risk measures, such as value-at-risk, into an additive mean-variance-skewness-kurtosis format. The simulation study confirms the gains in accuracy compared to the widespread square-root-of-time rule. Our main empirical findings rely on the two-decade performance of a portfolio insurance investment strategy. Rather than looking at total portfolio risk, we conclude that it is more informative to look inside the portfolio.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-04-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124211337","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}
I study the effect of limited attention on resource allocation by venture capitalists. Using engagement in the IPO process as a measure of distraction, I document that investments made by distracted venture capitalists into new portfolio companies tend to underperform. Such companies are 7% less likely to go public or get acquired, and also exhibit lower exit multiples. The adverse effect of the attention constraints is present only in the vicinity of the distracting IPO and manifests itself both for individual partners and venture capital funds. Overall, the results indicate that the scarcity of attention hypothesis holds in the context of deal sourcing and screening in venture capital, highlighting the presence of skill in the company selection process.
{"title":"The Impact of Venture Capital Screening","authors":"Rustam Abuzov","doi":"10.2139/ssrn.3353343","DOIUrl":"https://doi.org/10.2139/ssrn.3353343","url":null,"abstract":"I study the effect of limited attention on resource allocation by venture capitalists. Using engagement in the IPO process as a measure of distraction, I document that investments made by distracted venture capitalists into new portfolio companies tend to underperform. Such companies are 7% less likely to go public or get acquired, and also exhibit lower exit multiples. The adverse effect of the attention constraints is present only in the vicinity of the distracting IPO and manifests itself both for individual partners and venture capital funds. Overall, the results indicate that the scarcity of attention hypothesis holds in the context of deal sourcing and screening in venture capital, highlighting the presence of skill in the company selection process.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116830415","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 article we examine some macroeconomic data over the last several decades, and see if we can we can find anything interesting. In particular, we investigate how macroeconomic data affect equity prices.
{"title":"Adventures in Financial Time Series","authors":"Igor Rivin","doi":"10.2139/SSRN.3344910","DOIUrl":"https://doi.org/10.2139/SSRN.3344910","url":null,"abstract":"In this article we examine some macroeconomic data over the last several decades, and see if we can we can find anything interesting. In particular, we investigate how macroeconomic data affect equity prices.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116052340","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}
At odds with the common “rational expectations” framework for bubbles, economists like Hyman Minsky, Charles Kindleberger and Robert Shiller have documented that irrational behavior, ambiguous information or certain limits to arbitrage are essential drivers for bubble phenomena and financial crises. Following this understanding that asset price bubbles are generated by market failures, we present a framework for explosive semimartingales that is based on the antagonistic combination of (i) an excessive, unstable pre-crash process and (ii) a drawdown starting at some random time. This unifying framework allows one to accommodate and compare many discrete and continuous time bubble models in the literature that feature such market inefficiencies. Moreover, it significantly extends the range of feasible asset price processes during times of financial speculation and frenzy and provides a strong theoretical background for future model design in financial and risk management problem settings. This conception of bubbles also allows us to elucidate the status of rational expectation bubbles, which, by design, suffer from the paradox that a rational market should not allow for misvaluation. While the discrete time case has been extensively discussed in the literature and is most criticized for its failure to comply with rational expectations equilibria, we argue that this carries over to the finite time “strict local martingale”-approach to bubbles.
{"title":"Inefficient Bubbles and Efficient Drawdowns in Financial Markets","authors":"Mitchell T Schatz, D. Sornette","doi":"10.2139/ssrn.3210598","DOIUrl":"https://doi.org/10.2139/ssrn.3210598","url":null,"abstract":"At odds with the common “rational expectations” framework for bubbles, economists like Hyman Minsky, Charles Kindleberger and Robert Shiller have documented that irrational behavior, ambiguous information or certain limits to arbitrage are essential drivers for bubble phenomena and financial crises. Following this understanding that asset price bubbles are generated by market failures, we present a framework for explosive semimartingales that is based on the antagonistic combination of (i) an excessive, unstable pre-crash process and (ii) a drawdown starting at some random time. This unifying framework allows one to accommodate and compare many discrete and continuous time bubble models in the literature that feature such market inefficiencies. Moreover, it significantly extends the range of feasible asset price processes during times of financial speculation and frenzy and provides a strong theoretical background for future model design in financial and risk management problem settings. This conception of bubbles also allows us to elucidate the status of rational expectation bubbles, which, by design, suffer from the paradox that a rational market should not allow for misvaluation. While the discrete time case has been extensively discussed in the literature and is most criticized for its failure to comply with rational expectations equilibria, we argue that this carries over to the finite time “strict local martingale”-approach to bubbles.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-02-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115502056","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}
Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.
{"title":"Repo Rates and the Collateral Spread Puzzle","authors":"Kjell G. Nyborg","doi":"10.2139/ssrn.3335203","DOIUrl":"https://doi.org/10.2139/ssrn.3335203","url":null,"abstract":"Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.","PeriodicalId":269529,"journal":{"name":"Swiss Finance Institute Research Paper Series","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130981817","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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