Knowledge that Transforms

Financial theory indicates that bank–firm relationships can induce a hold-up problem, resulting in higher interest rates. Yet only weak empirical confirmation of this result exists. Moreover, the potential influence of the business cycle on the bank–firm relationship still requires empirical consideration. With a unique contracts data set, collected from a French cooperative bank between 1996 and 2009, this study shows that the effects of bank–firm relationships on the credit rate depend on economic conditions and that the hold-up problem is at play only during economic recessions.

In this paper we develop an in-depth analysis of the systemic risk and contagion determinants through the differential effects of excluding one bank on the banking system. The measure allows for splitting the contribution of individual banks into systemic risk as the sum of two components—the stand-alone bank risk and the contagion risk—and measuring the role of assets, riskiness, capitalization, and interconnectedness as determinants of each of the two components. Results show that the variables determining the stand-alone risk component are different from those determining the contagion risk component, so that a bank which is relatively safe with respect to stand-alone risk, can be an important contagion vehicle, or vice versa. Results also show that crisis severity significantly affects results, so that the severity of different crises results in different weights for the input variables and different contributions for the banks considered. These results add highly significant information for macroprudential regulation, not only from the cross-sectional point of view, but also with reference to the time dimension.

The paper examines the nexus of foreign ownership and competition which is at the center of recent mandates for coordination between competition and regulation policies. We match estimates of market power with ownership data for 949 banks in 26 European countries over 1997-2013. We show that well-capitalised banks tend to enjoy high monopoly rents through cost-cutting strategies after entering emerging markets via M&As. Foreign presence has a U-shaped relationship with market power in the developed Europe, where Greenfield investments appear also as a mechanism through which country-level foreign presence leads to lower mark-ups. The results are robust to various specifications that address parameter heterogeneity and selection bias.

We examine whether the average earnings surprises announced yesterday affect investors’ responses to earnings news announced today. We find that in the short window surrounding an earnings announcement, the market rewards today's earnings news that is above yesterday's average earnings surprises with a premium, consistent with yesterday's average becoming a reference point for investors to classify today's earnings news as a gain or a loss. The price premium for an above-average earnings surprise is larger when more earnings announcements are made on the same day and when investors face greater uncertainty in assessing firms’ performance. We interpret this evidence as suggesting that investors rely more on the average as a reference point when they are more likely to be subject to cognitive constraints in processing information. We also find that firms announcing above-average earnings surprises exhibit a greater abnormal trading volume, consistent with the notion that beating reference points prompts investors to trade.

I use loan-level data from the syndicated loan market in the U.S. to investigate how monetary policy affects banks’ sensitivity to risk. Using loan-level data and banks’ sensitivity to risk enables me to identify the risk-taking channel and disentangle it from other monetary channels. I show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks’ sensitivity to risk. I then provide evidence for the significant contribution of risk-taking shocks and changes in banks’ risk-taking behavior to economic outcomes and business cycle fluctuations. The paper’s primary contribution is in providing new loan-level evidence for the existence of the risk-taking channel in the U.S., as well as a possible link between the risk-taking channel and business cycle fluctuations.

It is well documented that stocks with lottery-like characteristics are overpriced. We find that the lottery-related anomaly exists primarily among stocks that are far from their 52-week high prices. When implemented among such stocks, the strategy of buying the least lottery-like stocks and selling the most delivers a significantly positive risk-adjusted return of 2.22% per month. In contrast, it yields an insignificant negative return of -0.31% per month for stocks near their 52-week high. The pattern holds after controlling for capital gains overhang and idiosyncratic volatility. We also find that investors’ optimistic earnings forecasts for lottery-like stocks are attenuated by their nearness to the 52-week high. Our findings suggest that investors consider the 52-week high as the upper price limit and that this psychological barrier affects their preferences for lottery-like stocks.

We are the first to demonstrate the decline in the cross-sectional predictability of country and industry returns in recent years. We examine 53 anomalies in country and industry indices from 64 markets for the years 1973–2018. The profitability of the strategies has significantly decreased recently, driven particularly by the disappearance of value and reversal effects. The phenomenon is strongest in large developed markets. Neither changes in country- and industry-specific risks, nor investor learning from the academic literature can explain the effect. Our findings support the view that the fall in return predictability is caused by the overall improvement in market efficiency.

This paper presents and assesses a framework for monitoring vulnerabilities related to the residential real estate sector, which can be easily employed for policy purposes. The framework provides intuitive and transparent early warning signals through a composite vulnerability measure, which aggregates indicators in a model-free way across three dimensions of real estate sector vulnerabilities (i.e. valuation, household indebtedness and the bank credit cycle). Our vulnerability measure proves to be a significant predictor of historical real estate crises, with a better forecasting performance than the majority of advantageously in-sample calibrated model-based measures.

We consider a financial network where banks are heterogeneous in scale and each bank has only local knowledge regarding the network. Each bank must make counterparty and portfolio decisions while anticipating uncertainty regarding the network structure. Such network uncertainty is an important consideration in banks’ risk management practice, which aims to minimize the effect of exogenous liquidity shocks and hedge against possible fire-sale in asset markets. We show that network uncertainty gives rise to an endogenous core-periphery structure which is optimal in mitigating financial contagion yet concentrates systemic risk at the core of big banks.

This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks’ incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.