2019 / 2020

Title: Simulating liquidity stress in the derivatives market

Written in collaboration with Marco Bardoscia, Nicholas Vause and Michael Yoganayagam

Abstract:

We investigate whether margin calls between derivative counterparties could strain their ability to pay and thereby spread liquidity stress through the market. Using trade repository data on derivative portfolios, we simulate variation margin calls in a stress scenario and compare these with institutions' liquid-asset buffers. Where these buffers are insufficient to meet the margin calls we assume institutions borrow the shortfall, but only at the last moment when payment is due. We find that liquidity shortfalls are only a modest proportion of average daily cash borrowing in repo markets. Additionally, only a small part of those liquidity shortfalls could be avoided if payments were centrally coordinated, for  example by a regulator that directed institutions in distress to make partial payments. That said, our methodology could be used regularly to investigate whether margin calls could generate systemic liquidity strains. If that were the case, additional liquidity requirements targeted at institutions that spread liquidity stress would reduce potential liquidity shortfalls most effectively.

Date: Thursday 17th October, 13:00 - 14:00

Event Location: Castle Teaching Room, CJBS

Title: Agency Conflicts, Macroeconomic Risk, and Asset Prices

Abstract:

This paper develops a dynamic corporate finance model with macroeconomic risk to study the effect of conflicts between insiders and outside investors on the cost of equity. Agency conflicts, resulting from insiders’ willingness to favor their own interests at the expense of the firm are costly and reduce firms’ profit. They are also exposed to the business cycle, leading to time-varying agency costs. To test the model, I use top measures of agency conflicts and merge them with stock returns. The difference in the average value of these indexes in bad compared to good times is positively correlated to the cost of equity, even after controlling for preeminent market factors. Hence, firms with better governance in bad times have a lower cost of equity. Data are from 1990 to 2006.

Date: Thursday 31st October, 12:30 - 13:30

Event Location: W2.02, Cambridge Judge Business School

About Johan Walden

Title: The Geography of Beliefs

Written in collaboration with Harjoat Bhamra (Imperial College Business School) and  Raman Uppal (Edhec Business School).

Abstract:

Empirical evidence shows that beliefs of households deviate from rational expectations and instead may be influenced by characteristics such as place of residence, culture, and socioeconomic status, which can be modeled using network theory. We develop a model where a household's beliefs about stock returns are an \emph{endogenous} outcome of its location in a bipartite network of households and firms. We use this model to establish the relation between households' beliefs about stock returns, which are unobservable, and the portfolio weights allocated to these stocks by these households.  We use Finnish data for 126 stocks and the portfolio holdings of 885,868 households to estimate our model and find that distance in the network has a statistically and economically significant effect on the beliefs of households. Our estimates show that agents are connected to firms within a radius of about 145 miles from where they live, and geography has a strong effect on beliefs: a one standard deviation decrease in an agent's distance to a firm's headquarters predicts an increase in portfolio holdings by 165%. Our work provides microfoundations for the bias toward local stocks documented empirically. 

Date: Thursday 14th November, 13:00 - 14:00

Event Location: KH107, Keynes House, Judge Business School

About Olga Kuzmina

Title: Gender diversity in corporate boards: Evidence from a natural experiment. 

Written in collaboration with Valentina Melentyeva (University of Mannheim).

Abstract:

Using the data on the boards of directors of public companies across the world, we show that female representation in corporate boards does not affect the value of the company. To identify the causal effect of interest we use a novel instrument that exploits natural discontinuities in the gender composition of the board. We further explore if this zero result is due to the lack of power or due to the effect heterogeneity. By splitting the sample into groups of companies that could be expected to have different (or even opposite) effects, we find no heterogeneous effects. This holds even in specifications with reasonably high first-stage F-statistics, where power is likely not an issue. We further show that percentage of women may still affect certain board
characteristics (qualifications, independence, quality of governance, etc). However, as there is still no effect on performance, this may imply that the exact composition of the board does not matter in the end.

Date: Thursday 28th November, 13:00 - 14:00

Event Location: KH107, Keynes House, Cambridge Judge Business School

About Anne Villamil

Title: Bank Intermediation and Consumer Bankruptcy

Abstract:

 How does bankruptcy protection affects household balance sheet adjustments and aggregate consumption when credit tightens? We analyze the aggregate dynamics in household deleveraging and consumption in model in which households can default on unsecured credit. There is trade-off between a beneficial insurance and negative creditworthiness effects. When credit tightens, we find that: (i) Consumers decrease new borrowing and may default on existing credit, resulting in deleveraging and a drop in aggregate consumption with important selection effects due to changes in the composition of borrowers. (ii) Consumption and welfare reductions are especially harsh for poor households. (iii) Bankruptcy costs lead to a drop in aggregate consumption on impact, and exclusion from the credit market reduces the ability to smooth implying a slower recovery. The 2005 BAPCPA reform made filing for bankruptcy more difficult, and we find that it worsened the negative effects of credit tightening on aggregate consumption and welfare.

Date: Thursday 23rd January, 13:00 - 14:00

Event Location: Upper Hall, Peterhouse College, Cambridge

About Alberto Manconi

Title: Are star lawyers also better lawyers?

Abstract: 

We study the performance of dominant law firms (“stars”) in litigation brought against publicly traded corporations. We use insurance coverage as a benchmark for expected settlement amounts, to separate to what extent (a) stars reach more favorable settlements on any lawsuit (a performance or treatment effect) or (b) stars are retained in lawsuits where a favorable settlement is ex ante more likely (a selection effect). Our findings indicate the latter, and that star firms have an economically small impact on settlement amounts. This result is not explained by measurement error or over-/under-insurance. The extent to which stars are associated with improvements in corporate governance also appears limited. The stars’ large market share and the high fees they earn may be justified by their ability to reduce uncertainty about the lawsuit outcome or by frictions, such as aggressive marketing and limited client sophistication and bargaining power, which limits the stars’ clients’ ability to turn to other law firms.

Date: Thursday 6th February, 13:00 - 14:00

Event Location: Upper Hall, Peterhouse College, Cambridge

About Ernst Maug

Title: When Shareholders Disagree: Trading after Shareholder Meetings

Abstract:

This paper analyzes how trading after shareholder meetings changes the composition of the shareholder base. Using data on daily trades we find that mutual funds reduce their holdings if their votes are opposed to the voting outcome. Trading volume is high even when stock prices do not change, peaks at the meeting date, and remains high up to four weeks after shareholder meetings. These findings are difficult to reconcile with models in which shareholders trade because of differences in information. Fund characteristics that proxy for heterogeneous preferences are relevant for funds’ trading decisions, but do not explain our results. We explore a model of trading based on differences of opinion, which offers sharp predictions on the relationship between volume and volatility, find strong support for its predictions in the data, and little to support models in which voting aggregates information. We conclude that shareholders disagree when they vote at meetings. Hence, trading after-meetings creates a shareholder base with more homogeneous beliefs. We argue that these findings have important implications for corporate governance.

Date: Thursday 20th February, 12:30 - 13:30

Event Location: KH107, Keynes House, Cambridge Judge Business School

About Gyöngyi Lóránth

Title: Financing and Resolving Banking Groups (joint with Albert Banal-Estanol and Julian Kolm)

Abstract:

Banking groups create financing synergies by transferring financing capacity across subsidiaries. Single-point-of-entry (SPOE) resolution imposes a single balance sheet on the banking group. This allows the regulator to shift
resources across banking units upon resolution, thus permitting the ex-post efficient continuation of units that are hit by negative liquidity shocks. However, SPOE resolution can also prevent the ex-ante efficient formation of banking groups because outside investors take the ex-post transfers into account. Multiple-point-of-entry (MPOE) resolution separates banking units and maintains limited liability within the group. Separate resolution can commit the regulator to shut down units, which reduces the ex-post required financing capacity and may ease the ex-ante financing constraints. In addition, SPOE resolution may not allow the group to exploit all financing synergies because it may prevent the choice of capital structure that minimizes the costs of incentive provision. Making the choice between SPOE and MPOE resolution bank specific increases efficiency relative to the adoption of a uniform resolution regime for all banks. Resolution improves outcomes relative to friction-less private financial restructuring.

Date: Thursday 5th March, 12:30 - 13:30

Event Location: KH107, Keynes House, Cambridge Judge Business School

Title: Not Disclosed

Abstract: Not Disclosed

Date: Thursday 30th April, 2020, 13:00 - 14:00

Event location: Online

Please Note: This seminar was cancelled. The speaker above replaced this cancelled author.

Date: Thursday 30th April, 13:00 - 14:00.

About Helene Rey

Title: Financial Cycles with Heterogeneous Intermediaries

Abstract: This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of the cross-section of financial intermediaries. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase aggregate risk while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability.

Date: Thursday 14th May, 13:00 - 14:00 

Event Location:  Online

Title: Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims

Abstract:

We study a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors and noise traders. The assets can include state contingent claims such as Arrow-Debreu securities, assets with only positive payoffs, options or other derivative securities. The probabilities of states depend on an aggregate shock, which is observed only by the informed investor. We derive a three-factor CAPM with asymmetric information, establish conditions under which asset prices reveal information about the shock, and show that information asymmetry amplifies the effects of payoff skewness on asset returns. We also find that volatility derivatives make incomplete markets effectively complete, and their prices quantify market illiquidity and shadow value of information to uninformed investors.

Date: Thursday 28th May, 13:00 - 14:00

Event Location:  Online

About Albert J. Menkveld

Title: Large Orders in Small Markets: Execution with Endogenous Liquidity Supply

Abstract:

We model the execution of large uninformed sell orders in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed-form. Our equilibrium findings provide a rationale for the empirically observed patterns of (i) short orders exhibiting higher intensity of execution and (ii) price pressure potentially subsiding before execution is completed. The model further generates a liquidity surface where the total price impact depends both on the size and duration of the order. Lastly, our analysis demonstrates that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity.

Date: Thursday 11th June, 13:00 - 14:00

Event Location: Online