Finance

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    Contrary to common belief, market correlations between assets are constant

Contrary to common belief, market correlations between assets are constant

The decision whether to buy a financial asset and add it to an existing portfolio depends on three main variables: (1) what is the asset’s return? (2) What is the asset’s level of risk? and (3) how well does the asset fit into my existing portfolio?

The third question is usually answered by looking at the correlation between assets. At […]

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    When EU corporate bond spreads widen, recession may be around the corner

When EU corporate bond spreads widen, recession may be around the corner

Corporate bond spreads – the difference in yields between a risky corporate bond and a low-risk government bond – have significant ability to predict GDP growth rates for the largest European economies and the onset of recessions. We found that in our recent research. The study also shows that when bond spreads widen, they reduce GDP growth by a […]

When corporate scandal hits retail investors close to home

Besides inflicting losses to shareholders, corporate fraud may also have indirect effects on people’s willingness to participate in the stock market, which may generate even larger losses by increasing the cost of capital for other firms. Evidence of the externalities generated by corporate fraud, however, is quite limited.

In our paper, we explore the effect of corporate scandals on the demand […]

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    How private equity firms are designed to earn big while risking little of their own

How private equity firms are designed to earn big while risking little of their own

Private equity firms are financial actors that sponsor investment funds that raise billions of dollars each year. The funds typically buy out high-performing companies using high amounts of debt and plan to resell them in a five-year window – promising investors outsized returns in the process. They propose to do this through a combination of operational improvements and financial […]

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    Debunking the investment myth that high risks yield high returns

Debunking the investment myth that high risks yield high returns

My wife is a surgeon, and her field of medicine has been transformed by the ‘evidence-based’ approach. Every pill she prescribes is extensively tested and empirically validated. You will agree that this makes sense, since it directly affects our physical health.

However, when it comes to our financial health we are not yet that advanced. When somebody makes a profitable […]

January 17th, 2017|Finance, Pim van Vliet|0 Comments|

Macroprudential policies can backfire

The purpose of macroprudential policies, or ‘macropru’, is to prevent excessive risk accumulating in the financial system, to contain financial crises when they happen, and to ensure the financial system contributes to economic growth.

There are many directions the authorities can take when implementing macropru (e.g. Cerutti et al. 2016). Most are passive, focusing on crisis resolution and fixed rules […]

The business value of appearing on The New York Times

The New York Times building, by Haxorjoe, under a CC-BY-SA-3.0 licence
Firms that are more visible in the press are better governed and more profitable. But investors underestimate the value of visibility and could profit from investing into high-visibility firms.

In our study, ‘The Value of Visibility’, we analyse 90 years of The New York Times’ coverage of more than 22,000 publicly listed US […]

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    Fed interest rates meetings: where women’s voices are rarely heard

Fed interest rates meetings: where women’s voices are rarely heard

FOMC meeting in Washington, D.C., Federal Reserve Bank of Philadelphia, Public Domain
In the wake of the great recession, the Federal Reserve gained new prominence as it kept interest rates low in an effort to prop up an ailing economy. Changes to the Fed’s interest rate are decided by the Federal Open Market Committee (FOMC), which is made up of Fed […]

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    Wealth managers shouldn’t avoid markets with complex regulations

Wealth managers shouldn’t avoid markets with complex regulations

Business centre exterior, by quinntheislander, under a CC0 licence
For many private banks, increased complexity and compliance has encouraged exits from some markets. The US is a good example. A number of private banks no longer provide services to Americans because of the aggressive enforcement of US tax, securities and other laws by the authorities — in part as a reaction […]

Can current offshore wealth management centres survive?

HDR – Panama City, Panama, by Matthew Straubmuller, under a CC-BY-2.0 licence
Will all existing financial and wealth management centres survive? Are tax-free secrecy havens (the “offshore world”) a feature of the past? Is there room for entry of new locations looking to establish themselves or to diversify into offerings that have brought past success to their competitors? Or is being […]

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    Why European firms need more securitised bonds (not bank loans)

Why European firms need more securitised bonds (not bank loans)

Commerzbank Tower, by David Schiersner, under a CC-BY-2.0 licence
Bank lending to the real economy has still not recovered from the financial crisis in Europe. This problem is pervasive because of the relevance of the bank lending channel. About 80 per cent of companies’ debt financing is based on bank loans in Europe, while only 20 per cent is based on the […]

November 15th, 2016|Finance, Markus Demary|0 Comments|
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    What Donald Trump could do to ‘make America great again’ without destroying free trade

What Donald Trump could do to ‘make America great again’ without destroying free trade

US flag, by unsplash.com, under a CC0 licence
For nearly two years, unsettling comments by US presidential candidates rattled international investors. The prospect of US trade wars with China and Mexico hit global markets, already weakened by the surprising result of the Brexit referendum. The elections ended, but the financial community still cannot breathe a sigh of relief.

In order to calm […]

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    Hedge funds are heavily involved in the distressed debt market

Hedge funds are heavily involved in the distressed debt market

Securities and Exchange Commission, by Scott S, under a CC-BY-2.0 licence
Debt restructurings (or loan amendments) can prove disruptive for a firm’s operations and have real effects on production and investment. Done successfully, restructurings help realize firm value, while failure to do so is detrimental to the firm and some — if not all — of its claimholders.

The effect of trading […]

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    A proposal to help make credit ratings as accurate as possible

A proposal to help make credit ratings as accurate as possible

Fitch Ratings, by Solvency II Wire, under a CC-BY-2.0 licence
In a recently published article, we propose the introduction of a tailored liability regime to induce credit rating agencies (CRAs) to produce ratings as accurate as the available forecasting technology allows.

In a nutshell, credit rating agencies issue judgements on the quality of financial assets reducing asymmetric information on financial markets. In the recent […]

Fintech’s greatest promise may be in the developing world

M-PESA, by Rosenfeld Media, under a CC-BY-2.0 licence
For Mary Tonkei and Stephen Wainaina Waweru, and a lot of other people in the developing world, the fintech revolution is much more than a matter of convenience. It’s changing their way of life. Tonkei, a Maasai dairy farmer in Kenya, is able to run her entire business through her phone. Using a […]

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    Now Indonesia has a sovereign wealth fund – and it won’t be the last

Now Indonesia has a sovereign wealth fund – and it won’t be the last

Key players in international finance

Sovereign wealth funds (SWFs) are large state owned investment funds. With assets under management of about US $7 trillion globally, SWFs have become key players in international finance – even surpassing the combined size of global hedge funds and private equity firms.

In the vast majority of cases SWFs were funded by the proceeds of oil and […]

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    Untied to economic fluctuations, insurers are less likely to generate systemic risks

Untied to economic fluctuations, insurers are less likely to generate systemic risks

In a nutshell, macroprudential regulation is made up of two building blocks: surveillance and supervision. Surveillance is concerned with identifying, assessing and monitoring the build-up of systemic risks, i.e., those regarding the financial stability of a country or region. Supervision is aimed at preventing, mitigating and managing systemic risks.

A key lesson from the recent global financial crisis is that […]

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    New evidence shows the characteristics of financial cycles

New evidence shows the characteristics of financial cycles

Financial cycles are on average twice as long as business cycles. At the same time, there is substantial heterogeneity of national cycles across G-7 countries, ranging from very similar financial and business cycles in Germany to markedly different cycles in the United States and Italy.

We conclude that policies targeting financial cycles (such as countercyclical macroprudential policies) can act as […]

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    ECB money and credit data releases help markets improve rate expectations

ECB money and credit data releases help markets improve rate expectations

Monetary and credit data released by the European Central Bank (ECB), not just official communications and inflation and output projections, help markets to predict future interest rate moves. The ECB is one of the few central banks to emphasise the importance of its monetary analysis as a cross-check of its economic analysis. With the exception of the early years […]

Low volatility makes a financial crisis more likely

Received wisdom maintains that financial market volatility has a direct impact on the likelihood of a financial crisis. Perhaps the best expression of this is Hyman Minsky’s (1992) hypothesis that economic agents observing low financial risk are induced to increase risk-taking, which in turn may lead to a crisis. This is the foundation of his famous statement that ‘stability […]