Finance

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    Will the review of the Dodd-Frank Act start a regulatory competition with the EU?

Will the review of the Dodd-Frank Act start a regulatory competition with the EU?

The US-President has signed an executive order which directs the US Treasury department to revise financial regulation, especially the Dodd-Frank Act. But starting a regulatory competition with the EU will endanger global financial stability.

 The Dodd-Frank Wall Street Reform and Consumer Protection Act was initiated under the Obama administration as a response to the Global Financial Crisis. President Trump argues […]

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    How credit rating agencies calculated their ratings during the Eurozone crisis

How credit rating agencies calculated their ratings during the Eurozone crisis

Sovereign credit rating decisions taken by major agencies such as Moody’s, Standard & Poor’s (S&P) and Fitch are often considered a ‘black box.’ Empirical analysis has concluded that up to 40 per cent of credit rating decisions cannot be explained by economic fundamentals.

This is not a trivial issue because sovereign credit ratings provide a measure of the probability that […]

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    The state, inequality and the politics of economic ideas: three blind spots in shadow banking

The state, inequality and the politics of economic ideas: three blind spots in shadow banking

Shadow banking has become a systemic pillar of global finance. A typical map shows a complex network of shadow entities such as highly levered off-balance-sheet vehicles, broker-dealers, private equity firms, money market funds or hedge funds. Yet (large) regulated banks also moved in the shadows, driven by a combination of yield, regulatory and tax arbitrage in order to engage […]

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    Firms in less competitive industries are riskier investments

Firms in less competitive industries are riskier investments

The financial economics literature regularly assumes that the markets in which firms sell their products are perfectly competitive, i.e., that firms take product prices as given while making corporate decisions. Alternatively, many models in the literature assume that firms operate in isolation, and hence their decisions do not affect other firms. Reality lies in between. The most prominent firms […]

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    Strengthening private capital markets: less of the same is more

Strengthening private capital markets: less of the same is more

The financial market landscape has changed dramatically since the global financial crisis nine years ago. A key feature of today is the dominance of central banks in financial markets, especially in Europe. However, central bank activism has crowded out long-term investors (insurance companies, pension funds and sovereign wealth funds).

Not only do long-term investors hold assets worth about USD 70 trillion […]

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    Companies that do better by their customers also do better in the stock market

Companies that do better by their customers also do better in the stock market

A debate about whether firms with superior customer satisfaction also earn better-than-average stock returns has been persistent in the academic business and marketing literature (Fornell, Mithas, Morgeson, and Krishnan 2006). Proponents of the customer satisfaction-stock market relationship make a simple, intuitive argument that is highly relevant to both consumers and investors: Companies that do better by their customers also […]

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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 […]