Knowledge that Transforms

The attention paid to the role of money as a store of privacy is increasing. In a monetary transaction, full privacy protection coincides with anonymity. In such situations, an empirical question arises: Is anonymity relevant in shaping the demand for money? We attempt to answer this question through laboratory experiments. The results show that anonymity matters and increases the overall appeal of a medium of payment, and that this effect is stronger for risk-prone individuals. Moreover, the trade-off between the two properties of liquidity and return is relatively high – to accept higher illiquidity risks, individuals require a more-than-proportional increase in the expected return. In general, the experiments suggest that the future attractiveness of alternative currencies depends on whether the three properties of money are mixed in a way that is consistent with the individual’s preferences.

This paper investigates the nexus between climate-related variables, commodity price co-movements and financial stability. First, we project the commodity price time series onto a multilayer network. Centrality measures computed on the network are used to detect the existence of common trends between the series and to characterize the role of different nodes during phases of market downturns and upturns, unveiling the onset of financial instability. Then, an econometric analysis is introduced to show how climate-related variables affect financial stability by influencing co-movements of commodity prices. Overall, the paper reveals how synthetic indicators of commodity price co-movements generate valuable signals to study the nexus between climate-related conditions and the dynamics of financial systems.

We empirically examine the effects of economic policy uncertainty (EPU) on earnings management in Japan. We find that EPU is negatively associated with earnings management, indicating that managers have incentive to reduce earnings management when EPU increases. We then examine the monitoring roles of various entities, focusing on the main bank that holds equity in their client firm. We find that the relationship between EPU and earnings management is less pronounced for firms with a main bank. The result is consistent with the view that the main bank’s monitoring role works well in normal times, resulting in less room for management to improve earnings quality when EPU is high. We find a similar result when considering firms with and without analyst coverage. These results suggest a moderating role of main banks and analysts in the relationship between EPU and earnings management. Finally, we find that the effect of EPU differs depending on subcategories on policy uncertainty and the extent of each firm’s exposure to that type of uncertainty.

The paper focuses on the role of climate and weather derivatives (CDs/WDs for short) as instruments to hedge climate risk. The aim of this paper is twofold: (i) we introduce a copula-based pricing methodology for multivariate CDs/WDs, whose flexible theoretical framework allows to be suited to any pricing application and possible structure of multivariate products, and (ii) we discuss the impact of CDs/WDs on climate risk and their implication for financial stability. Using the proposed framework, we illustrate a calibration example on a case study on Italian data. We find that Archimedean copula functions characterized by left tail dependence are generally more suitable to fit the data, depending on the season and the location. We also explore the advantages of using more sophisticated, i.e. multivariate, functions and assess the improvement of fitting. Subsequently, leveraging both the theoretical model and the empirical results, we discuss the relation between climate risk hedging and financial stability. Especially, we move from modeling complexities and limitations to illustrate how incorrect calculations (i.e. mispricings, or over/under estimations of capital at risk) can, alongside with climate change effect, increase rather than reduce the climate physical risk and hence the concerns for financial stability. Finally, we discuss this point in relation with the legislative framework, noting how, in the current context of uncertain legislation and imperfect pricing, climate hedging risks are likely to do more harm than good.

We consider a network of equity mutual funds characterized by different levels of compliance with Environmental, Social, and Governance (ESG) aspects. We measure the impact of portfolio liquidation in a stress scenario on funds with different ESG ratings. Fire-sales spillover from portfolio liquidation propagates from one fund to another through indirect contagion mediated by common asset holdings. The analysis is conducted quarterly from March 2016 through June 2018 using daily data from different sources at the fund and firm levels. Our estimation strategy relies on a network analysis where funds are not taken as stand-alone entities but are interconnected components of a unified system. We find evidence that the relative market value loss of the High ESG ranked funds is lower than the loss experienced by the Low ESG ranked counterparts in the time span with lower volatility. In the higher-volatility period there is not always a clear dominance of one class over another. Results are robust when controlling for size and for feedback effects, and for different model specifications. Our analysis offers new insights to both asset managers and policymakers to exploit the aggregate effect of portfolio diversification related to the system as a whole.

We empirically investigate how bank internationalization, organizational complexity, and geographical complexity stemming from foreign-affiliate type and geographic dispersion affect parent bank stability and profitability. We base our analysis on unique, hand-collected data for the worldwide locations of subsidiaries and branches of EU banks. Our results show that internationalization benefits bank stability by reducing default risk, and it is significantly associated with lower earnings volatility but poorer profitability. With regard to foreign organizational complexity, banks with both foreign subsidiaries and foreign branches are more stable than banks with foreign branches exclusively, which are more stable than banks with only foreign subsidiaries. Nevertheless, higher geographic complexity is associated with lower default risk, higher volatility in earnings, and higher profitability. Further investigations on the sovereign debt crisis and bank size indicate that the sovereign debt crisis in 2011 amplified the relationship and our findings mainly hold for small banks.