Knowledge that Transforms

This paper presents an assessment of macroprudential borrower-based measures (BBMs). Despite such measures being in place, several countries saw renewed increases in house prices and indebtedness when rates were low after the Global Financial Crisis. Against this background, we develop a novel modeling framework that allows to explore the link between multiple BBM limits and lifetime credit risk parameters. While our analysis is based on Lithuania’s household loan data, we draw three general lessons that have broader implications. First, we find that BBMs significantly reduce individual mortgage credit risk, thereby providing aggregate resilience. Second, our model indicates that the stance of an income-based measure, specifically the DSTI limit, may have been loose during the low-rate era, highlighting a potential weakness of the tool. Third, we provide empirical evidence supporting more stringent regulation of investor loans and propose a calibration approach.

We investigate the changes in risk sensitivities of interest rates following a shift in Prosper.com's pricing mechanism from auctions to posted prices. We find that the shift leads to reduced sensitivities of loan pricing to credit risk. Furthermore, this change results in higher profits for the platform while investors receive less compensation for the credit risk they undertake. Additionally, borrowers encounter less credit rationing. Analyses of repeat borrowers under both pricing regimes and tests with data under Prosper's upgraded posted prices confirm these findings. We argue that less risk-based pricing results from the incentives of the lending platform.

We study the impact of macroeconomic and financial uncertainties on cross-sectional returns in the Chinese stock market. We find that stocks with a lower macroeconomic uncertainty beta generate higher excess returns, implying that macroeconomic uncertainty commands a negative risk premium. Meanwhile, the exposure to financial uncertainty is not priced in stock returns. Unlike financial uncertainty, macroeconomic uncertainty is a state variable that predicts a deterioration in economic activity, suggesting that investors require a premium for holding stocks that correlate negatively with it.

Using a time series asset pricing model, I empirically show that underpricing of U.S. Treasury securities is explained by risk premia that compensate dealers for bearing price risk. This finding suggests that the Treasury could reduce underpricing by reducing the post-auction price risk (volatility) to auction participants, which can be achieved mathematically by reducing the time from auction to settlement. I calculate that underpricing cost the Treasury $46.3 billion from January 2000 through June 2016. I estimate that standardizing the settlement period to 1-day could have saved the Treasury $15.6 billion over the same period. In addition, I use the estimated model to forecast expected risk-adjusted returns (that result from underpricing) for each auction, and find that these forecasts predict Treasury auction demand. This finding suggests that auction demand depends on underpricing, albeit on an expected risk-adjusted basis. Further, this expected underpricing may actually help the Treasury to sell debt and avoid auction failures.

This paper examines whether corporate social responsibility (CSR) aligns with shareholder interests or stems from agency conflicts. To explore this, we utilize the staggered adoption of state-level Corporate Opportunity Waiver (COW) laws, which potentially weaken the fiduciary duty of loyalty among directors and officers, thereby exacerbating agency conflicts. Through a difference-in-differences analysis, we find that CSR activities significantly decrease following the enactment of COW laws. This decline is more pronounced in firms with weaker corporate governance, greater external opportunities for directors and officers, less incentivized CEOs, and those operating in less competitive industries. Additionally, our results show that the positive effect of CSR on financial performance is diminished by the adoption of COW laws. These findings support the value-enhancing perspective of CSR and highlight the importance of fiduciary duty of loyalty in promoting CSR.

Prior research on the impact of market power on firms’ willingness to extend trade credit has produced inconsistent results, highlighting a critical gap in understanding firm behavior. This study addresses this issue by analyzing a comprehensive dataset of industrial firms across 26 countries, focusing on how the relationship between market power and trade credit depends on a country’s financial development level. Firms with monopolistic power often restrict credit provision to improve cash flow. However, our findings reveal a U-shaped relationship, where monopolistic firms in countries with either underdeveloped or highly developed financial sectors are more likely to extend trade credit than those in mid-level financial systems. This highlights the moderating role of financial development in shaping the interaction between market power and trade credit behavior.

Marshalling a large and novel dataset of cell towers and using the purchase of Yu’E Bao as a proxy for Chinese households’ investment in money market funds, this paper investigates how broadband infrastructure affects the welfare of households in wealth management. We find that with the improvement in broadband infrastructure, Internet service becomes more available to households and they tend to convert bank deposits with suppressed rates of interest into money market funds that provide less regulated and hence higher rates of return. Further analyses show that the effect of broadband infrastructure on the conversion of bank deposits into money market funds is more pronounced in counties with lower density of bank branches and among less educated people. Our empirical findings suggest that by alleviating the policy distortions imposed on the traditional banking sector, online financial products and service are powerful tools in the promotion of financial inclusion.

We construct a comprehensive dataset linking macroprudential policy instruments to household survey data from European Union countries. We show that two commonly used lender-based macroprudential policy instruments — levy on financial institutions and minimum capital requirement — affect new mortgage loans depending on the household’s income levels. Following higher levies on financial institutions, higher-income households on average experience a larger reduction in mortgage loan size compared to lower-income households. In contrast, following higher minimum capital requirements, lower-income households on average experience a larger reduction in loan size. We provide evidence of the different channels through which these differential effects operate.

We find that elevated economic policy uncertainty (EPU) is associated with reductions in corporate bond dealer inventories and worsening liquidity, suggesting bond dealers react to increased inventory risk by reducing their capital commitments and compensating themselves via increased transaction costs. A one standard deviation increase in EPU is associated with a 2.19% widening in bid-ask spreads, 2.36% increase in Amihud illiquidity, and 3.38% reduction in average inventories. This effect is greater for bonds issued by firms with direct exposure to government policy, and less pronounced in small firms, illiquid bonds, and calmer markets, suggesting that EPU affects bond liquidity more when macroeconomic, but not idiosyncratic, factors are the primary determinant of bond risk.

This study examines whether international tourism affects financial market investments. Using over two decades of data for more than 30 countries, we find that recreational travel between countries is associated with higher levels of foreign equity investments and reduced home bias. This evidence of tourism-induced foreign investment is consistent with the familiarity hypothesis and is unlikely to reflect superior information. We alleviate potential endogeneity concerns using several econometric techniques, including instrumental variables, quasi-natural experiments, and multiple placebo tests. Collectively, these results suggest that tourism has positive externalities in financial markets.