The deregulation of securities laws—in particular the National Securities Markets Improvement Act (NSMIA) of 1996—has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an initial public offering (IPO) market failure. Rather, founders are using their increased bargaining power vis-à-vis investors to stay private longer.
{"title":"The Deregulation of the Private Equity Markets and the Decline in Ipos","authors":"M. Ewens, Joan Farre-Mensa","doi":"10.2139/ssrn.3017610","DOIUrl":"https://doi.org/10.2139/ssrn.3017610","url":null,"abstract":"\u0000 The deregulation of securities laws—in particular the National Securities Markets Improvement Act (NSMIA) of 1996—has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an initial public offering (IPO) market failure. Rather, founders are using their increased bargaining power vis-à-vis investors to stay private longer.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129932465","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}
Crowdfunding is a financial service that connects investors with business developers seeking financing through a platform. There are two forms: investment crowdfunding in the strict sense, whether equity or debt crowdfunding, and credit crowdfunding, which includes loans as the most usual model. In this paper we deal with the systematic and conceptual framework for crowdfunding regulation. We do so from a functional perspective. The form in which raising financing is implemented, whether through securities or loans, does not alter its function. Regulation of crowdfunding is guided by the same principles as the rest of financial services. Applying outmoded solutions for a market not based on current technology would be a mistake. The diversity of local frameworks is giving way to a degree of confluence from which certain considerations can be extracted. Reforms are guiding the legal framework towards the same type of solutions.
{"title":"Systematic and Conceptual Framework for Crowdfunding Regulation","authors":"F. Zunzunegui","doi":"10.2139/ssrn.3444868","DOIUrl":"https://doi.org/10.2139/ssrn.3444868","url":null,"abstract":"Crowdfunding is a financial service that connects investors with business developers seeking financing through a platform. There are two forms: investment crowdfunding in the strict sense, whether equity or debt crowdfunding, and credit crowdfunding, which includes loans as the most usual model. In this paper we deal with the systematic and conceptual framework for crowdfunding regulation. We do so from a functional perspective. The form in which raising financing is implemented, whether through securities or loans, does not alter its function. Regulation of crowdfunding is guided by the same principles as the rest of financial services. Applying outmoded solutions for a market not based on current technology would be a mistake. The diversity of local frameworks is giving way to a degree of confluence from which certain considerations can be extracted. Reforms are guiding the legal framework towards the same type of solutions.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"115 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114264008","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 analyse the effects of EMIR and Basel III regulations on short-term interest rates. EMIR requires central clearing houses (CCP) to continually acquire safe assets, thus expanding the lending supply of repurchase agreements (repo). Basel III, in contrast, disincentivises the borrowing demand by tightening banks’ balance sheet constraints. Using unique datasets of repo transactions and CCP activity, we find compelling evidence for both supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences originated from the new regulatory framework.
{"title":"Regulatory Effects on Short-Term Interest Rates","authors":"A. Ranaldo, Patrick Schaffner, Michalis Vasios","doi":"10.2139/ssrn.3397082","DOIUrl":"https://doi.org/10.2139/ssrn.3397082","url":null,"abstract":"We analyse the effects of EMIR and Basel III regulations on short-term interest rates. EMIR requires central clearing houses (CCP) to continually acquire safe assets, thus expanding the lending supply of repurchase agreements (repo). Basel III, in contrast, disincentivises the borrowing demand by tightening banks’ balance sheet constraints. Using unique datasets of repo transactions and CCP activity, we find compelling evidence for both supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences originated from the new regulatory framework.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128405533","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 should a capital markets regulator introduce competition and restrictions into business segments? This paper examines a possible basis to aid such decision making in the regulation of stock exchanges that deal with equities and linked derivatives. Market microstructure invariance hypotheses is extended to the ‘Invariance of Trades in stock exchanges’ continuing with the intuition that financial markets transfer risks in business time. The market quality of stock exchanges is examined using this hypothesis and measures such as per day Turnover-per-trade. Market quality is found to be broken in a few Asian exchanges (BSE, NSE, Korea Exchange, Shanghai and Shenzhen Exchange) that show high implied risk. Broken exchanges cannot meet their welfare role, which starts with formation of prices of underlying assets. High risk levels in these exchanges have potential to distort the welfare functions in the economy. Regulatory intervention in form of inducing competition, increased primary listing and restriction on derivative segment activity is recommended for the NSE.
{"title":"Broken Exchanges: An Analysis of Market Quality in NSE (India) and Welfare Concerns","authors":"Ranjan R. Chakravarty, Sudhanshu Sekhar Pani","doi":"10.2139/ssrn.3330989","DOIUrl":"https://doi.org/10.2139/ssrn.3330989","url":null,"abstract":"When should a capital markets regulator introduce competition and restrictions into business segments? This paper examines a possible basis to aid such decision making in the regulation of stock exchanges that deal with equities and linked derivatives. Market microstructure invariance hypotheses is extended to the ‘Invariance of Trades in stock exchanges’ continuing with the intuition that financial markets transfer risks in business time. The market quality of stock exchanges is examined using this hypothesis and measures such as per day Turnover-per-trade. Market quality is found to be broken in a few Asian exchanges (BSE, NSE, Korea Exchange, Shanghai and Shenzhen Exchange) that show high implied risk. Broken exchanges cannot meet their welfare role, which starts with formation of prices of underlying assets. High risk levels in these exchanges have potential to distort the welfare functions in the economy. Regulatory intervention in form of inducing competition, increased primary listing and restriction on derivative segment activity is recommended for the NSE.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"84 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130969292","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 build an agent-based model for the order book with three types of market participants: informed trader, noise trader and competitive market makers. Using a Glosten-Milgrom like approach, we are able to deduce the whole limit order book (bid-ask spread and volume available at each price) from the interactions between the different agents. More precisely, we obtain a link between efficient price dynamic, proportion of trades due to the noise trader, traded volume, bid-ask spread and equilibrium limit order book state. With this model, we provide a relevant tool for regulators and market platforms. We show for example that it allows us to forecast consequences of a tick size change on the microstructure of an asset. It also enables us to value quantitatively the queue position of a limit order in the book.
{"title":"From Glosten-Milgrom to the Whole Limit Order Book and Applications to Financial Regulation","authors":"Weibing Huang, M. Rosenbaum, Pamela Saliba","doi":"10.2139/ssrn.3343779","DOIUrl":"https://doi.org/10.2139/ssrn.3343779","url":null,"abstract":"We build an agent-based model for the order book with three types of market participants: informed trader, noise trader and competitive market makers. Using a Glosten-Milgrom like approach, we are able to deduce the whole limit order book (bid-ask spread and volume available at each price) from the interactions between the different agents. More precisely, we obtain a link between efficient price dynamic, proportion of trades due to the noise trader, traded volume, bid-ask spread and equilibrium limit order book state. With this model, we provide a relevant tool for regulators and market platforms. We show for example that it allows us to forecast consequences of a tick size change on the microstructure of an asset. It also enables us to value quantitatively the queue position of a limit order in the book.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-02-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131637511","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 proposes a framework for deriving early-warning models with optimal out-of-sample forecasting properties and applies it to predicting distress in European banks. The main contributions of the paper are threefold. First, the paper introduces a conceptual framework to guide the process of building early-warning models, which highlights and structures the numerous complex choices that the modeler needs to make. Second, the paper proposes a flexible modeling solution to the conceptual framework that supports model selection in real-time. Specifically, our proposed solution is to combine the loss function approach to evaluate early-warning models with regularized logistic regression and cross-validation to find a model specification with optimal real-time out-of-sample forecasting properties. Third, the paper illustrates how the modeling framework can be used in analysis supporting both microand macro-prudential policy by applying it to a large dataset of EU banks and showing some examples of early-warning model visualizations. JEL Classification: G01, G17, G21, G33, C52, C54
{"title":"A Framework for Early-Warning Modeling with an Application to Banks","authors":"J. Lang, T. Peltonen, Peter Sarlin","doi":"10.2139/ssrn.3265201","DOIUrl":"https://doi.org/10.2139/ssrn.3265201","url":null,"abstract":"This paper proposes a framework for deriving early-warning models with optimal out-of-sample forecasting properties and applies it to predicting distress in European banks. The main contributions of the paper are threefold. First, the paper introduces a conceptual framework to guide the process of building early-warning models, which highlights and structures the numerous complex choices that the modeler needs to make. Second, the paper proposes a flexible modeling solution to the conceptual framework that supports model selection in real-time. Specifically, our proposed solution is to combine the loss function approach to evaluate early-warning models with regularized logistic regression and cross-validation to find a model specification with optimal real-time out-of-sample forecasting properties. Third, the paper illustrates how the modeling framework can be used in analysis supporting both microand macro-prudential policy by applying it to a large dataset of EU banks and showing some examples of early-warning model visualizations. JEL Classification: G01, G17, G21, G33, C52, C54","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"124 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128679744","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 extent to which regulatory intervention targeting interchange fees has been consistent with the economic theory of two-sided markets and examines the available evidence on the impact of these regulations. The last two decades have seen a drive to regulate the interchange fees of open payment card systems that was primarily motivated by merchants’ complaints. Although pursuing the same objective of decreasing interchange fees, the theoretical and legal basis for interventions were diverse and often based on questionable premises. Economic research on two sided markets has shown that prices in such markets serve to distribute the costs and benefits of the system among the different types of users in a way that maximizes their voluntary participation. Prices to the different types of users are not mainly determined by costs but by the value that these users indirectly bring to the system, contributing to its attractiveness for other users. Regulatory interventions were mostly founded on a partial analysis of payment card systems and their impact was riddled with unintended consequences. Besides a transfer of rent from consumers and issuing banks to mostly large merchants, there is no empirical evidence that any other policy objectives in the form of overall efficiency or consumer welfare was achieved. Two decades of regulatory intervention in payment card systems provide sufficient evidence to call for much caution for further intervention in an increasingly dynamic and fast changing market.
{"title":"Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact","authors":"Eliana Garcés, Brent Lutes","doi":"10.2139/ssrn.3346472","DOIUrl":"https://doi.org/10.2139/ssrn.3346472","url":null,"abstract":"This paper assesses the extent to which regulatory intervention targeting interchange fees has been consistent with the economic theory of two-sided markets and examines the available evidence on the impact of these regulations. The last two decades have seen a drive to regulate the interchange fees of open payment card systems that was primarily motivated by merchants’ complaints. Although pursuing the same objective of decreasing interchange fees, the theoretical and legal basis for interventions were diverse and often based on questionable premises. Economic research on two sided markets has shown that prices in such markets serve to distribute the costs and benefits of the system among the different types of users in a way that maximizes their voluntary participation. Prices to the different types of users are not mainly determined by costs but by the value that these users indirectly bring to the system, contributing to its attractiveness for other users. Regulatory interventions were mostly founded on a partial analysis of payment card systems and their impact was riddled with unintended consequences. Besides a transfer of rent from consumers and issuing banks to mostly large merchants, there is no empirical evidence that any other policy objectives in the form of overall efficiency or consumer welfare was achieved. Two decades of regulatory intervention in payment card systems provide sufficient evidence to call for much caution for further intervention in an increasingly dynamic and fast changing market.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"122 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134281175","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}
Prior to the 2009 Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act), penalty repricing was widely used by lenders as a means to raise interest rates on borrowers with a higher risk of defaulting. We use the CARD Act, which prohibited penalty repricing on credit cards, as a case study to understand the implications of covenant restrictions on lenders and borrowers. In the first part of our paper, we conduct an event study to examine the heterogeneous effects of penalty repricing among revolvers (high-risk borrowers) and transactors (low-risk borrowers). We find that penalty repricing has a larger impact on borrowers who face liquidity constraints in making credit card repayments; after repricing, revolvers' average monthly interest charge increases by 12.81 dollars, which is around 10 times higher than the average increase seen by transactors. In the second part of our paper, we estimate a model with unobserved heterogeneity and dynamic risks in defaulting. In the counterfactual analysis, regulating penalty repricing results in higher initial interest rates (1.75 percentage points), higher average lending (5.01 dollars each month per loan), and higher borrower surplus (9.13 dollars each month per loan) relative to the case where lenders are allowed to penalty reprice.
{"title":"Regulating Penalty Repricing in the Credit Card Market","authors":"S. Chomsisengphet, Hsin-Tien Tsai","doi":"10.2139/ssrn.3259704","DOIUrl":"https://doi.org/10.2139/ssrn.3259704","url":null,"abstract":"Prior to the 2009 Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act), penalty repricing was widely used by lenders as a means to raise interest rates on borrowers with a higher risk of defaulting. We use the CARD Act, which prohibited penalty repricing on credit cards, as a case study to understand the implications of covenant restrictions on lenders and borrowers. In the first part of our paper, we conduct an event study to examine the heterogeneous effects of penalty repricing among revolvers (high-risk borrowers) and transactors (low-risk borrowers). We find that penalty repricing has a larger impact on borrowers who face liquidity constraints in making credit card repayments; after repricing, revolvers' average monthly interest charge increases by 12.81 dollars, which is around 10 times higher than the average increase seen by transactors. In the second part of our paper, we estimate a model with unobserved heterogeneity and dynamic risks in defaulting. In the counterfactual analysis, regulating penalty repricing results in higher initial interest rates (1.75 percentage points), higher average lending (5.01 dollars each month per loan), and higher borrower surplus (9.13 dollars each month per loan) relative to the case where lenders are allowed to penalty reprice.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"388 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115026820","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 assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.
{"title":"Investment Bank Monitoring and Bonding of Security Analysts’ Research","authors":"Oya Altinkiliç, Vadim S. Balashov, R. Hansen","doi":"10.2139/ssrn.3223868","DOIUrl":"https://doi.org/10.2139/ssrn.3223868","url":null,"abstract":"We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128833996","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 studies whether rule-based circuit breakers in the form of short-lived volatility interruptions exhibit a magnet effect in times of high-frequency trading. Based on a sample of 3,271 volatility interruptions on two major European venues, we analyze whether trading aggressiveness, trading activity, and volatility accelerate close to volatility interruptions indicating a magnet effect. Although the duration of the interruptions is meaningful given today's high-frequent securities markets, we do not find any evidence for a magnet effect. Rather, our results show that trading aggressiveness, trading activity, and volatility gradually slow down towards the triggering threshold and that price changes even revert in case of downward-triggered interruptions. These findings hold both for different levels of high-frequency trading activity and for disclosed and undisclosed price limits triggering the circuit breaker.
{"title":"Is There a Magnet Effect of Rule-Based Circuit Breakers in Times of High-Frequency Trading?","authors":"B. Clapham","doi":"10.2139/ssrn.3190316","DOIUrl":"https://doi.org/10.2139/ssrn.3190316","url":null,"abstract":"This paper studies whether rule-based circuit breakers in the form of short-lived volatility interruptions exhibit a magnet effect in times of high-frequency trading. Based on a sample of 3,271 volatility interruptions on two major European venues, we analyze whether trading aggressiveness, trading activity, and volatility accelerate close to volatility interruptions indicating a magnet effect. Although the duration of the interruptions is meaningful given today's high-frequent securities markets, we do not find any evidence for a magnet effect. Rather, our results show that trading aggressiveness, trading activity, and volatility gradually slow down towards the triggering threshold and that price changes even revert in case of downward-triggered interruptions. These findings hold both for different levels of high-frequency trading activity and for disclosed and undisclosed price limits triggering the circuit breaker.","PeriodicalId":414741,"journal":{"name":"Econometric Modeling: Financial Markets Regulation eJournal","volume":"177 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121123194","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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