Jean-David Sigaux
with F. Barbiero (ECB) and G. Schepens (ECB)
Journal of Finance (2024)
Media coverage: Politico, 19/06/2024
ABSTRACT: This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction-level data on short-term repurchase agreements (repo), we show that borrowers pay a 1.1 to 2.6 basis points premium when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan-level credit registry data suggest that the results extend to the corporate loan market as well.
Journal of Banking and Finance (2024)
ABSTRACT: I develop a model explaining the gradual price decrease observed ahead of anticipated asset sales, such as Treasury auctions. In the model, risk-averse investors expect a noisy increase in the net supply of a risky asset. They face a trade-off between hedging the noise with long positions, and speculating with short positions. As a result of hedging, the equilibrium price is above the expected price. As the sale approaches, the noise decreases due to the arrival of information, investors hedge less, and the price decreases. I illustrate the relevance of the theory in the days preceding Italian Treasury issuances. I find that meetings between the Treasury and primary dealers explain a 2.4 bps yield increase.
with C. Kubitza (ECB) and Q. Vandeweyer (Chicago Booth)
R&R Journal of Finance
ABSTRACT: We study the implications of deviations from covered interest rate parity for international capital flows using novel data covering euro-area derivatives and securities holdings. Consistent with a dynamic model of currency risk hedging, we document that investors’ holdings of USD bonds decrease following a widening in the USD-EUR cross-currency basis (CCB). This effect is driven by investors with larger FX rollover risk and hedging mandates, and it is robust to instrumenting the CCB. These shifts in bond demand significantly affect bond prices. Our findings shed light on a new determinant of international capital flows with important consequences for financial stability.
with L. Baldo, F. Heider, P. Hoffmann and O. Vergote
ABSTRACT: We study how banks manage their liquidity among the various assets at their disposal. We exploit the introduction of the ECB's two-tier system which heterogeneously reduced the cost of additional reserves holdings. We find that the treated banks increase reserve holdings by borrowing on the interbank market, decreasing lending to affiliates of the same group, and selling marketable securities. We also find that banks have a preference for a stable portfolio composition of liquid assets over time. Our results imply that frictions in one market for liquidity can spill over to several markets.
with P. Hartmann, A. Leonello, S. Manganelli, M. Papoutsi, and I. Schnabel
VoxEU (2022)
ABSTRACT: Market imperfections strongly influence the volume of greenhouse gas emissions, which is a key driver of climate change. While governments should lead climate policies in the first place, a broad coalition of actors across society, including central banks, needs to contribute to transition to a carbon-neutral economy in a timely and orderly fashion. The ECB’s mandate states that it must pursue its primary and secondary objectives in conformity with an open market economy, favouring an efficient allocation of resources. This column argues that this provision clarifies how the ECB shall take climate considerations into account, including but going beyond climate-related financial risks. This is relevant, for example, for monetary policy operations and supervisory policies.
ABSTRACT: We study the determinants of individual banks’ excess reserve holdings in the context of the ECB’s public sector purchase programme by testing hypotheses concerning the roles of risk-taking, investment opportunities, and market structure. Excess reserves systematically accrue on the balance sheets of banks with a low share of customer deposits, low opportunity costs, and high payments settlement activity.