Research
Peg Abandonment and Cross-Currency Contagion (joint with Florian Balke, Arne Reichel, and Mark Wahrenburg)
accepted for publication, Management Science.
Abstract:
Using a novel dataset comprising bid-ask quotes for foreign exchange swaps from individual dealers, we examine the consequences of the Swiss National Bank's sudden termination of the minimum exchange rate in 2015 on other pegged currencies. Our findings indicate a spill-over effect, as dealer banks began to reassess the risk associated with unexpected peg terminations, subsequently leading to wider bid-ask spreads for pegged currencies. This highlights that even in strong economies, the credibility of a currency peg is influenced not only by the actions of the respective central bank but also by the stability of other pegged currencies.
Conflicted Analysts and Initial Coin Offerings (joint with Valerie Laturnus, Sasan Mansouri, and Alexander Wagner)
Management Science, 2023, 69(11), 6641-6666.
Abstract:
This paper studies the contribution of analysts to the functioning and failure of the market for Initial Coin Offerings (ICOs). The assessments of freelancing analysts exhibit biases due to reciprocal interactions of analysts with ICO team members. Even favorably rated ICOs tend to fail raising some capital when a greater portion of their ratings reciprocate prior ratings. 90 days after listing on an exchange the market capitalization relative to the initial funds raised is smaller for tokens with more reciprocal ratings. These findings suggest that conflicts of interest help explain the failure of ICOs.
"Let me get back to you" - A machine learning approach to measuring non-answers (joint with Sasan Mansouri and Fabian Woebbeking)
Management Science, 2023, 69(10), 6333-6348.
Abstract:
Using a supervised machine learning framework on a large training set of questions and answers, we identify 1,364 trigrams that signal nonanswers in earnings call questions and answers (Q&A). We show that this glossary has economic relevance by applying it to contemporaneous stock market reactions after earnings calls. Our findings suggest that obstructing the flow of information leads to significantly lower cumulative abnormal stock returns and higher implied volatility. As both our method and glossary are free of financial context, we believe that the measure is applicable to other fields with a Q&A setup outside the contextual domain of financial earnings conference calls.
Spillovers of Funding Dry-Ups (joint with Inaki Aldasoro, Florian Balke and Egemen Eren)
published as BIS WP 810 and SAFE WP 259.
Journal of International Economics, 2022, 137.
Abstract:
We uncover a new channel for spillovers of funding dry-ups. The US money market fund (MMF) reform led to an exogenous reduction in unsecured MMF funding for some banks. We use novel data to trace those banks to a corporate deposit funding platform. As they sought to replace the lost dollar funding, the funding squeeze spilled over to other banks with no MMF exposure. The latter paid more for corporate dollar deposits, and their pool of funding providers deteriorated. Their dollar lending volumes and margins declined. Our results suggest banks’ competitiveness in funding markets affect their competitiveness in lending markets.
Integration Culture of Global Banks and the Transmission of Lending Shocks (joint with Deyan Radev)
published in Journal of Banking & Finance, 2022, 134.
Abstract:
We document that a centralization decision-making culture of global banks affects the transmission of shocks from parent banks to their subsidiaries. Using a novel measure of integration culture of multinational banking conglomerates based on the prevalence of a language of power and authority in financial reports, we find that subsidiaries of banks with a relatively more autocratic integration culture cut lending significantly more after solvency shocks to the parent company. Our result is robust to instrumenting integration culture with political and economic factors of the parent bank’s home country.
Corporate culture and banking (joint with Sasan Mansouri)
published in Journal of Economic Behavior & Organisation, 2021, 186, 46-75.
Abstract:
This paper empirically analyzes the role of corporate culture in banking. We define culture based on the Competing Value Framework (Quinn and Rohrbaugh, 1983) and find that banks with a more pronounced competition-oriented culture have stronger bonus-focused compensation schemes, while banks with a strong focus on creativity show lower stock returns and higher bankruptcy risk. These findings suggest that risk management practices are not merely driven by incentives from compensation schemes, but rather driven by differences in corporate culture.
Capital Regulation with Heterogeneous Banks (joint with Christian Seckinger)
published in Journal of Banking & Finance, 2018, 88, 455-465.
Abstract:
We study the impact of capital regulation on the quality of the banking sector in the presence of heterogeneous banks. Closely related to Morrison and White (2005), we provide a general equilibrium framework with heterogeneous individuals that differ in their ability of successfully completing a risky investment project. In addition to the classical moral hazard problem, we identify with an additional countervailing selection problem an unintended consequence of a stricter capital regulation. More regulatory capital decreases the deposit rate and mitigates the severity of the moral hazard problem. This decrease in the deposit rate, however, comes at the cost of a worsening of the selection problem. We show that rising heterogeneity in the banking sector increases the allocation effect and thus, improves the selection among individuals.
Why banks are not too big to fail - evidence from the CDS market (joint with Isabel Schnabel)
published in Economic Policy, 2013, 28(74), 335-369.
Abstract:
This paper argues that bank size is not a satisfactory measure of systemic risk because it neglects aspects such as interconnectedness, correlation, and the economic context. In order to differentiate the effect of bank size from that of systemic importance, we control for systemic risk using the CoVaR measure introduced by Adrian and Brunnermeier (2011). We show that a bank's contribution to systemic risk has a significant negative effect on banks’ credit default swap (CDS) spreads, supporting the too‐systemic‐to‐fail hypothesis. Once we control for systemic risk, bank size (relative to gross domestic product (GDP)) has either no or a positive effect on banks’ CDS spreads. The effect of bank size increases in the home country's debt ratio and turns positive already at moderate debt ratios. This result is consistent with the too‐big‐to‐save hypothesis. We show further that the effect of systemic risk rises sharply at the onset of the financial crisis in August 2007, but weakens after the failure of Lehman Brothers, reflecting changing bailout expectations. Taken together, our results suggest that banks are not too big to fail, but they may be too systemic to fail and too big to save.
Risk Factors of Collateralized Loan Obligations and Corporate Bonds (joint with Mohammad Izadi, Anas Rahhal, and Mark Wahrenburg)
published in Zeitschrift für Bankrecht und Bankwirtschaft, 2020, 32(6), 347-355.
Abstract:
Structured products like collateralized loan obligations (CLOs) tend to offer significantly higher yield spreads than corporate bonds with the same rating. At the same time, empirical evidence does not indicate that this higher yield is reduced by higher default losses of CLOs. The evidence thus suggests that CLOs offer higher expected returns compared to corporate bonds with similar credit risk. This study aims to analyze whether this return difference is captured by asset pricing factors. We show that market risk is the predominant risk factor for both corporate bonds and CLOs. CLO investors, however, additionally demand a premium for their risk exposure towards systemic risk. This premium is inversely related to the rating class of the CLO.
Syndicated loans and CDS positioning (joint with Inaki Aldasoro)
published as BIS WP 679, Bank for International Settlements and ESRB WP 58, European Systemic Risk Board.
This paper was written during a research stay in the ESRB.
Abstract:
This paper analyzes banks' usage of CDS by matching syndicated loan data with a unique EU-wide dataset on bilateral CDS positions. Stronger banks in terms of capital, funding and profitability tend to hedge more. We find no evidence of banks using the CDS market for capital relief. Banks are more likely to hedge exposures to relatively riskier borrowers and less likely to sell CDS protection on domestic firms. Lead arrangers tend to buy more protection, potentially exacerbating asymmetric information problems. Dealer banks seem insensitive to firm risk. These results allow for a better understanding of banks' credit risk management.
Der Abbau von impliziten Garantien im Bankensystem: Eine empirische Analyse auf Basis von CDS-Spreads(joint with Isabel Schnabel)
How to talk down your stock returns (joint with Sasan Mansouri, Fabian Woebbeking, and Severin Zoergiebel)
r&r Journal of Banking & Finance
Abstract:
We analyze two competing hypotheses of how markets perceive (a lack of) factual language when senior management verbally conveys information in earnings calls. On one hand, avoiding complex terminology in favor of a broader language could improve the accessibility of financial disclosures. On the other hand, markets could interpreted the absence of precise financial terminology as blathering, i.e. obfuscating information by `beating around the bush.' We observe lower cumulative abnormal returns and a higher implied volatility following earnings calls where managers use a less precise language, supporting the argument that an excessive use of non-factual language is perceived as blathering that retards the reduction of information asymmetries. `Beating around the bush' is particularly pronounced when earnings management is more likely, when analysts' questions are tougher, and when last quarters' return on equity was poor.
Counterparty credit risk in OTC derivatives (joint with Florian Balke, arne Reichel, and Mark Wahrenburg)
Abstract:
We document how counterparty credit risk is priced in FX OTC derivatives. We employ a novel dataset of dealer-specific bid-ask quotes to analyze risk pricing using the decoupling of Swiss franc from the euro as an exogenous shock. First, the removal of the peg increased both the level of volatility and dealers' sensitivity to volatility for the FX spot prices of all currency pairs including the Swiss franc. Second, the exaggerations in Swiss francs induced dealers to price jump risks in currencies similarly pegged to the euro, e.g. the Danish krone. Finally, both effects are significantly more pronounced for riskier customers, suggesting that dealers price counterparty credit risk. Results indicate that there was a central bank-induced risk discount through credible currency pegs.
Implicit guarantees and market discipline: Has anything changed over the financial crisis? (joint with Isabel Schnabel)
Abstract:
This paper provides a quantitative assessment of the long-run effect of implicit bailout guarantees and analyzes how the effect of market discipline has changed over the financial crisis. By using bank-specific information on CDS spreads as well as ratings regarding the financial strength and regarding the probability for receiving external support, we confirm the existence of cost advantages for banks that benefit from implicit guarantees. We further highlight the significantly heterogeneous effect of the intrinsic creditworthiness of a financial institution: Banks are punished for excessive risk-taking the more the lower the probability for external support. Moreover, we show that banks' individual strength and banks' support were priced in different ways over the various episodes of the financial crisis.
Abstract:
This paper studies the market structure and pricing for CDS on major EU banks. We use a unique dataset of bilateral transactions, which allows us to shed light on the microstructure and the dynamics of CDS trading in the EU. Our sample comprises transaction data on around 200 EU banks for the bulk of 2016. We proceed in two steps: First, we provide the first empirical description of “who trades with whom on what” (i.e. which reference entity). Second, we use panel regression analysis to test a number of key hypotheses from the theoretical literature on OTC markets. We find that the bank CDS market is concentrated around 13 Dealer firms along two dimensions: Dealers are directly or indirectly active in most trades and they also serve as very active underlying reference entities. Trading frequency is significantly determined by the type of the underlying reference entity (dealer vs non-dealer bank) and comparatively less so by the risk characteristics of a bank reference entity. We also show that the 2016 EU stress test materially affected trading in the bank CDS market. Finally, we turn to the analysis of pricing determinants, where we find no evidence in favor of direct pricing of counterparty credit risk.
Excessive Credit and Bank Risk
Abstract:
This paper analyzes whether it is reasonable to base the regulatory measure of countercyclical capital buffer on the credit-to-GDP gap. While the credit gap has been found to be a good predictor for banking crises, it remains ambiguous whether this high probability of financial distress in times of excessive credit is due to an `exogenous' increase in banks' contribution to systemic risk arising from the economic context or whether banks actively change their behavior by choosing higher asset risk. We find a positive correlation between bank systemic risk and excessive credit that continues to be present once we control for the economic context in terms of asset price booms and the economic perspective. Additionally, we find higher bank asset risk for an increasing credit-to-GDP gap. These results suggest that banks domiciled in credit booming economies actively choose a riskier asset structure rather than suffer solely from increasing systemic risk arising from exogenous factors.
Real Effects of Asset Price Bubbles (joint with Johannes Tischer)
Abstract:
This paper studies the real effects during the run-up phase to asset price bubbles in the real estate sector. In times of rising asset prices, the collateral and the lending channel predict higher economic growth through a relaxation of investors' equity constraints and rising collateral values which ease access to capital for firms. However, the capital misallocation channel argues that too much capital flows to the bubbly sector, which tightens capital constraints especially for firms depending on external financing and hampers economic growth. Applying the methodology of Rajan and Zingales (1998), we find evidence for lower sectoral growth rates for industries that are highly dependent on external financing in countries with a more pronounced tendency of an asset price bubble, which supports the existence of the capital misallocation channel. This effect, however, is found to be more pronounced in countries with a market-based financial structure while the effect is less severe or even disappears in a bank-based financial system.