Lorenzo Cappiello, F. Holm-Hadulla, A. Maddaloni, L. Arts, Nicolas Même, P. Migiakis, Caterina Behrens, Alban Moura, Stefano Corradin, Annalisa Ferrando, Juha Niemelä, Margherita Giuzio, O. Pierrard, Lev Ratnovski, Adam Gulan, Alexandra Schober-Rhomberg, A. Hertkorn, Michael Sigmund, Christoph Kaufmann, Lucía Kazarian Avakian, Patricia Stupariu, K. Koskinen, Marco Taboga, Franck Sédillot, Luis Tavares, Jani Matilainen, Emme Van den, Falk Mazelis, Andrea Zaghini, B. McCarthy
The financing structure of the euro area economy has evolved since the global financial crisis with non-bank financial intermediation taking a more prominent role. This shift affects the transmission of monetary policy. Compared with banks, non-bank financial intermediaries are more responsive to monetary policy measures that influence longer-term interest rates, such as asset purchases. The increasing role of debt securities in the financing structure of firms also leads to a stronger transmission of long-rate shocks. At the same time, short-term policy rates remain an effective tool to steer economic outcomes in the euro area, which is still highly reliant on bank loans. Amid a low interest rate environment, the growth of market-based finance has been accompanied by increased credit, liquidity and duration risk in the non-bank sector. Interconnections in the financial system can amplify contagion and impair the smooth transmission of monetary policy in periods of market distress. The growing importance of non-bank financial intermediaries has implications for the functioning of financial market segments relevant for monetary policy transmission, in particular the money markets and the bond markets.
{"title":"Non-Bank Financial Intermediation in the Euro Area: Implications for Monetary Policy Transmission and Key Vulnerabilities","authors":"Lorenzo Cappiello, F. Holm-Hadulla, A. Maddaloni, L. Arts, Nicolas Même, P. Migiakis, Caterina Behrens, Alban Moura, Stefano Corradin, Annalisa Ferrando, Juha Niemelä, Margherita Giuzio, O. Pierrard, Lev Ratnovski, Adam Gulan, Alexandra Schober-Rhomberg, A. Hertkorn, Michael Sigmund, Christoph Kaufmann, Lucía Kazarian Avakian, Patricia Stupariu, K. Koskinen, Marco Taboga, Franck Sédillot, Luis Tavares, Jani Matilainen, Emme Van den, Falk Mazelis, Andrea Zaghini, B. McCarthy","doi":"10.2139/ssrn.3928291","DOIUrl":"https://doi.org/10.2139/ssrn.3928291","url":null,"abstract":"The financing structure of the euro area economy has evolved since the global financial crisis with non-bank financial intermediation taking a more prominent role. This shift affects the transmission of monetary policy. Compared with banks, non-bank financial intermediaries are more responsive to monetary policy measures that influence longer-term interest rates, such as asset purchases. The increasing role of debt securities in the financing structure of firms also leads to a stronger transmission of long-rate shocks. At the same time, short-term policy rates remain an effective tool to steer economic outcomes in the euro area, which is still highly reliant on bank loans. Amid a low interest rate environment, the growth of market-based finance has been accompanied by increased credit, liquidity and duration risk in the non-bank sector. Interconnections in the financial system can amplify contagion and impair the smooth transmission of monetary policy in periods of market distress. The growing importance of non-bank financial intermediaries has implications for the functioning of financial market segments relevant for monetary policy transmission, in particular the money markets and the bond markets.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125988283","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}
P. Åberg, M. Corsi, Vincent Grossmann-Wirth, Tom Hudepohl, Yvo D. Mudde, Tiziana Rosolin, Franziska Schobert
This paper discusses commercial banks’ demand for central bank reserves under two alternative monetary policy framework configurations, namely: (i) an interest rate corridor system with scarce liquidity, and (ii) a floor system with ample liquidity. It outlines the interaction between the monetary implementation framework used to steer short-term market interest rates and banks’ demand for reserves. We find that by implementing a floor system, the Eurosystem has eliminated the opportunity costs of holding reserves and enabled banks to hold relatively large buffers of reserves compared with the corridor system. Additionally, the demand for reserves may have increased endogenously, as the environment of ample liquidity conditions has incentivised many banks to adapt their business models. In parallel, the demand for reserves has also increased for more exogenous reasons such as post-global financial crisis liquidity regulation and increased liquidity concentration. Our estimates indicate an increase, over recent years, in the level of excess liquidity required in the euro area to avoid a rise in short-term market rates. Moreover, the dependency on the adopted monetary policy instruments and the external environment highlights the increased uncertainty in estimating future levels of required reserves
{"title":"Demand for Central Bank Reserves and Monetary Policy Implementation Frameworks: The Case of the Eurosystem","authors":"P. Åberg, M. Corsi, Vincent Grossmann-Wirth, Tom Hudepohl, Yvo D. Mudde, Tiziana Rosolin, Franziska Schobert","doi":"10.2139/ssrn.3929179","DOIUrl":"https://doi.org/10.2139/ssrn.3929179","url":null,"abstract":"This paper discusses commercial banks’ demand for central bank reserves under two alternative monetary policy framework configurations, namely: (i) an interest rate corridor system with scarce liquidity, and (ii) a floor system with ample liquidity. It outlines the interaction between the monetary implementation framework used to steer short-term market interest rates and banks’ demand for reserves. We find that by implementing a floor system, the Eurosystem has eliminated the opportunity costs of holding reserves and enabled banks to hold relatively large buffers of reserves compared with the corridor system. Additionally, the demand for reserves may have increased endogenously, as the environment of ample liquidity conditions has incentivised many banks to adapt their business models. In parallel, the demand for reserves has also increased for more exogenous reasons such as post-global financial crisis liquidity regulation and increased liquidity concentration. Our estimates indicate an increase, over recent years, in the level of excess liquidity required in the euro area to avoid a rise in short-term market rates. Moreover, the dependency on the adopted monetary policy instruments and the external environment highlights the increased uncertainty in estimating future levels of required reserves","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131792615","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}
Kenechukwu Anadu, M. Cipriani, Ryan Craver, Gabriele La Spada
In this article, we discuss the run on prime money market funds (MMFs) that occurred in March 2020, at the onset of the COVID-19 pandemic, and describe the Money Market Mutual Fund Liquidity Facility (MMLF), which the Federal Reserve established in response to it. We show that the MMLF, like a similarly structured Federal Reserve facility established during the 2008 financial crisis, was an important tool in stemming investor outflows from MMFs and restoring calm in short-term funding markets. The usage of the facility was higher by funds that suffered larger outflows. After the facility’s introduction, outflows from prime MMFs decreased more for those funds that had a larger share of illiquid securities. Importantly, following the introduction of the MMLF, interest rates on MMLF-ineligible securities decreased at a slower rate than those on MMLF-eligible securities, even after controlling for credit risk.
{"title":"COVID Response: The Money Market Mutual Fund Facility","authors":"Kenechukwu Anadu, M. Cipriani, Ryan Craver, Gabriele La Spada","doi":"10.2139/ssrn.3951479","DOIUrl":"https://doi.org/10.2139/ssrn.3951479","url":null,"abstract":"In this article, we discuss the run on prime money market funds (MMFs) that occurred in March 2020, at the onset of the COVID-19 pandemic, and describe the Money Market Mutual Fund Liquidity Facility (MMLF), which the Federal Reserve established in response to it. We show that the MMLF, like a similarly structured Federal Reserve facility established during the 2008 financial crisis, was an important tool in stemming investor outflows from MMFs and restoring calm in short-term funding markets. The usage of the facility was higher by funds that suffered larger outflows. After the facility’s introduction, outflows from prime MMFs decreased more for those funds that had a larger share of illiquid securities. Importantly, following the introduction of the MMLF, interest rates on MMLF-ineligible securities decreased at a slower rate than those on MMLF-eligible securities, even after controlling for credit risk.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123765090","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 aimed at finding out the level of CSR practices and CSR disclosure performance of Philippine private-domestic commercial banks. It described the relationship between CSR Disclosure Performance with Financial Performance in terms of the bank’s profitability measured by ROA and ROE across the years 2014- 2018. The banks’ CSR Disclosure Performance is measured by the Indicators in GRI Sustainability Reporting Standards 2016 specifically, Economic, Environmental and Social. Bank’s Financial Performance is assessed using the common profitability ratios ROA and ROE. The study concludes that Philippine Commercial Banks include their CSR Disclosure in their Annual Reports and there is noticeably a lack of clear and systematic reporting. Although all the commercial banks disclose on their Economic CSR, the Environmental CSR is negligible, and the general CSR Performance score is evidently low. Bank’s profitability is significantly low and is showing a decreasing trend across 2014 to 2018. In terms of significance, the computed probability values are lower than .05 level of significance, hence the banks CSR disclosure on Economic and Environmental aspects are not significant determinants of the bank’ s Profitability as proxied by ROA and ROE. The Environmental aspect was not statistically tested due to lack of disclosed data.
{"title":"CSR Disclosure and Financial Performance of Philippine Private Domestic Commercial Banks","authors":"Sofronio Bucala","doi":"10.2139/ssrn.3914518","DOIUrl":"https://doi.org/10.2139/ssrn.3914518","url":null,"abstract":"This study aimed at finding out the level of CSR practices and CSR disclosure performance of Philippine private-domestic commercial banks. It described the relationship between CSR Disclosure Performance with Financial Performance in terms of the bank’s profitability measured by ROA and ROE across the years 2014- 2018. The banks’ CSR Disclosure Performance is measured by the Indicators in GRI Sustainability Reporting Standards 2016 specifically, Economic, Environmental and Social. Bank’s Financial Performance is assessed using the common profitability ratios ROA and ROE. The study concludes that Philippine Commercial Banks include their CSR Disclosure in their Annual Reports and there is noticeably a lack of clear and systematic reporting. Although all the commercial banks disclose on their Economic CSR, the Environmental CSR is negligible, and the general CSR Performance score is evidently low. Bank’s profitability is significantly low and is showing a decreasing trend across 2014 to 2018. In terms of significance, the computed probability values are lower than .05 level of significance, hence the banks CSR disclosure on Economic and Environmental aspects are not significant determinants of the bank’ s Profitability as proxied by ROA and ROE. The Environmental aspect was not statistically tested due to lack of disclosed data.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124490094","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}
D. Klingebiel, Carmen M. Herrero Montes, Marco Ruíz, James K. Seward
This paper uses a unique survey data set of 105 central banks to investigate whether investment policies for central bank foreign reserve portfolios are linked to the governance arrangements for reserve management. The paper evaluates whether a central bank's investment decision-making structure impacts how much risk institutions take in their reserve management operations and the level of diversity in their reserve portfolios. Additionally, it explores the implications of the broader governance environment on reserve management. The analysis yields four key findings. First, internal governance arrangements matter for foreign reserve portfolio investment policy; the empirical results indicate that reserve portfolios are more diversified in central banks in which the middle office directly reports to the board. Second, controlling for the level of reserves, the macroenvironment, and the broader governance environment, reserve portfolios are more diversified in central banks where the back, middle, and front offices are separated. Third, the regression analysis also reveals that central banks in countries where the Ministry of Finance has an obligation to cover negative equity have fewer eligible currencies and are therefore less diversified. Fourth, central banks where boards actively exercise portfolio oversight usually have portfolios with more risk and diversification. Portfolios with longer investment horizons, more currencies, and a broader set of asset classes have performed better historically while limiting downside risk. Given that the analysis controls the broader governance environment, the data indicate that any central bank can improve its internal governance regardless of the external governance environment. This paper contributes to the literature on central bank foreign reserves management and on understanding the importance of governance arrangements in investment policy.
{"title":"Central Bank Governance and Reserve Portfolios Investment Policies: An Empirical Analysis","authors":"D. Klingebiel, Carmen M. Herrero Montes, Marco Ruíz, James K. Seward","doi":"10.2139/ssrn.3914415","DOIUrl":"https://doi.org/10.2139/ssrn.3914415","url":null,"abstract":"This paper uses a unique survey data set of 105 central banks to investigate whether investment policies for central bank foreign reserve portfolios are linked to the governance arrangements for reserve management. The paper evaluates whether a central bank's investment decision-making structure impacts how much risk institutions take in their reserve management operations and the level of diversity in their reserve portfolios. Additionally, it explores the implications of the broader governance environment on reserve management. The analysis yields four key findings. First, internal governance arrangements matter for foreign reserve portfolio investment policy; the empirical results indicate that reserve portfolios are more diversified in central banks in which the middle office directly reports to the board. Second, controlling for the level of reserves, the macroenvironment, and the broader governance environment, reserve portfolios are more diversified in central banks where the back, middle, and front offices are separated. Third, the regression analysis also reveals that central banks in countries where the Ministry of Finance has an obligation to cover negative equity have fewer eligible currencies and are therefore less diversified. Fourth, central banks where boards actively exercise portfolio oversight usually have portfolios with more risk and diversification. Portfolios with longer investment horizons, more currencies, and a broader set of asset classes have performed better historically while limiting downside risk. Given that the analysis controls the broader governance environment, the data indicate that any central bank can improve its internal governance regardless of the external governance environment. This paper contributes to the literature on central bank foreign reserves management and on understanding the importance of governance arrangements in investment policy.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129813242","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 data from the largest peer-to-peer (P2P) lender in the United States, I document advantageous selection in loan amount. By exploiting a natural experiment within the platform, I show that borrowers who select larger loans are less likely to default. This selection is driven by households who live in states with bankruptcy-friendly laws, where borrowers' default costs are lower. Standard models where borrowers maximize their utility cannot rationalize my results and make the opposite prediction. In a simple model of household borrowing, I show that my results can be explained by the fact that borrowers facing higher loan prices search more intensively for cheaper loans. This effect is stronger for the safest borrowers, as they enjoy the greatest benefits from the switching.
{"title":"Advantageous Selection in Fintech Loans","authors":"Marco Pelosi","doi":"10.2139/ssrn.3786766","DOIUrl":"https://doi.org/10.2139/ssrn.3786766","url":null,"abstract":"Using data from the largest peer-to-peer (P2P) lender in the United States, I document advantageous selection in loan amount. By exploiting a natural experiment within the platform, I show that borrowers who select larger loans are less likely to default. This selection is driven by households who live in states with bankruptcy-friendly laws, where borrowers' default costs are lower. Standard models where borrowers maximize their utility cannot rationalize my results and make the opposite prediction. In a simple model of household borrowing, I show that my results can be explained by the fact that borrowers facing higher loan prices search more intensively for cheaper loans. This effect is stronger for the safest borrowers, as they enjoy the greatest benefits from the switching.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116994500","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 focuses on physical and R&D investments to examine the effect of bank shocks on corporate investment behavior at the firm level or economywide. I use matched bank-firm lending data of 1990 to 2014 belonging to Japanese enterprises to identify bank loan supply shocks from firms' borrowing shocks. During this period, bank concentration accelerated in Japan, which enhanced the granularity of bank shocks. The estimation result of the Q type investment function reveals that, when a firm relies heavily on loans, bank shocks become highly relevant for its physical investment compared with R&D investment. Specifically, a negative bank shock of one standard deviation introduces a 6% decline in the physical investment rate, while it brings about less than a 1% decline in the R&D investment rate, when the firm has its loan-to-asset ratio at the 75th percentile of the distribution. Consistent with this finding, the aggregate level analysis shows that granular bank shocks account for 8% of the variation in Japan's aggregate physical investment and have no explanatory power on Japan's aggregate R&D investment.
{"title":"Do Bank Shocks Affect Physical or R&D Investments More?","authors":"Hirokazu Mizobata","doi":"10.2139/ssrn.3911062","DOIUrl":"https://doi.org/10.2139/ssrn.3911062","url":null,"abstract":"This study focuses on physical and R&D investments to examine the effect of bank shocks on corporate investment behavior at the firm level or economywide. I use matched bank-firm lending data of 1990 to 2014 belonging to Japanese enterprises to identify bank loan supply shocks from firms' borrowing shocks. During this period, bank concentration accelerated in Japan, which enhanced the granularity of bank shocks. The estimation result of the Q type investment function reveals that, when a firm relies heavily on loans, bank shocks become highly relevant for its physical investment compared with R&D investment. Specifically, a negative bank shock of one standard deviation introduces a 6% decline in the physical investment rate, while it brings about less than a 1% decline in the R&D investment rate, when the firm has its loan-to-asset ratio at the 75th percentile of the distribution. Consistent with this finding, the aggregate level analysis shows that granular bank shocks account for 8% of the variation in Japan's aggregate physical investment and have no explanatory power on Japan's aggregate R&D investment.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122476593","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 the onset of the COVID-19 crisis in March 2020, small business lending through fintech lenders collapsed. We explore the reasons for the market shutdown using detailed data about loan applications, offers, and take-up from a major small business fintech credit platform. We document that while the number of loan applications increased sharply early in March 2020, the supply of credit collapsed as online lenders dropped from the platform and the likelihood of applicants receiving loan offers fell precipitously. Our analysis shows that the drying up of the loan supply is most consistent with fintech lenders becoming financially constrained and losing their ability to fund new loans.
{"title":"Why Did Small Business Fintech Lending Dry Up During March 2020?","authors":"Itzhak Ben-David, Mark S. Johnson, René M. Stulz","doi":"10.3386/w29205","DOIUrl":"https://doi.org/10.3386/w29205","url":null,"abstract":"With the onset of the COVID-19 crisis in March 2020, small business lending through fintech lenders collapsed. We explore the reasons for the market shutdown using detailed data about loan applications, offers, and take-up from a major small business fintech credit platform. We document that while the number of loan applications increased sharply early in March 2020, the supply of credit collapsed as online lenders dropped from the platform and the likelihood of applicants receiving loan offers fell precipitously. Our analysis shows that the drying up of the loan supply is most consistent with fintech lenders becoming financially constrained and losing their ability to fund new loans.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132225296","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 test whether and how commercial bank lending responded to a large dividend tax cut in 2003. While the Jobs Growth and Tax Relief Reconciliation Act (JGTRRA) was billed as a supply-side stimulus, studies of this legislation have failed to detect any increases in capital spending at nonfinancial firms. In contrast, we find strong increases in loan supply following the tax cut at publicly traded banks, though not at privately held banks. Dividend payouts increased at both sets of banks. Our results provide at least some support for all three branches of dividend tax theory.
{"title":"Dividend Taxes and Investment Spending: Are Banks Different?","authors":"Robert DeYoung, Karen Y. Jang","doi":"10.2139/ssrn.3908194","DOIUrl":"https://doi.org/10.2139/ssrn.3908194","url":null,"abstract":"We test whether and how commercial bank lending responded to a large dividend tax cut in 2003. While the Jobs Growth and Tax Relief Reconciliation Act (JGTRRA) was billed as a supply-side stimulus, studies of this legislation have failed to detect any increases in capital spending at nonfinancial firms. In contrast, we find strong increases in loan supply following the tax cut at publicly traded banks, though not at privately held banks. Dividend payouts increased at both sets of banks. Our results provide at least some support for all three branches of dividend tax theory.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122683328","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}
Irma Alonso Alvarez, P. Serrano, Antoni Vaello-Sebastià
This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on the probability of future market crashes. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal a cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.
{"title":"The Impact of Heterogeneous Unconventional Monetary Policies on the Expectations of Market Crashes","authors":"Irma Alonso Alvarez, P. Serrano, Antoni Vaello-Sebastià","doi":"10.2139/ssrn.3907951","DOIUrl":"https://doi.org/10.2139/ssrn.3907951","url":null,"abstract":"This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on the probability of future market crashes. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal a cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.","PeriodicalId":331807,"journal":{"name":"Banking & Insurance eJournal","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132485768","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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