Publications

Do designated market makers provide liquidity during downward extreme price movements?  (with K. Christensen, A. Kolokolov, L. Pelizzon, and R. Renò)

Journal of Financial Markets - Forthcoming (2025)

We study the trading activity of designated market makers (DMMs) in electronic markets using a unique dataset with audit-trail information on trader classification. DMMs may either adhere to their market-making agreements and offer immediacy during periods of heavy selling pressure, or they might lean with the wind to profit from private information. We test these competing theories during extreme (downward) price movements,  which are detected using a novel methodology. We show that DMMs provide liquidity when the selling pressure is concentrated on a single stock, but consume liquidity (leaving liquidity provision to slower traders) when several stocks are affected.

previously circulated as "High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?"

Flood protection gap: evidence for public finances and insurance premiums (with A. Pagano, FE. Di Girolamo, and M. Petracco)

Risk Management and Insurance Review Volume28,  Issue 1 -  (2025) 

Climate-related physical risks pose serious concerns for both public and private finances, and is of utmost importance to contain economic losses when natural catastrophes occur. Against this background, the paper models the impact of currently uninsured flood events on the economy and estimates its overall costs for the EU27. First, the paper estimates the share of premiums associated with insured flood events over total premiums. Then, it investigates the extra premiums written needed to close the flood protection gap by requiring all EU countries to have at least a minimum level of insurance protection. The results show that insurance premiums written should at least be doubled to reach a harmonized level of penetration equal to 50%. Third, the paper proposes a stylised approach to quantify the potential economic losses associated with uninsured flood events at different levels of insurance penetration, when the insurance protection fails due to defaults in the insurance sector. The model can be used to assess the size of loss that might affect public finances if no preventive measures are taken to increase society's resilience against climate and weather-related risks and compare it with a safeguard mechanism under a 'worst case' scenario. The results show that losses affecting public finances might amount to EUR 27 billion today. Under an alternative scenario accounting for an increase in insured losses due to an uptake in the insurance sector, losses would decrease by up to 50%.

JRC Working Papers in Economics and Finance, issue no. 2023/10

Market Liquidity and Competition Among Designated Market Makers  (with L. Pelizzon, M.G. Subrahmanyam, and D. Yuferova)

Management Science - Volume 71 - Issue 1 (2025)  Available on SSRN

Do competition and incentives offered to designated market makers (DMMs) improve market liquidity?We employ data from NYSE Euronext Paris to show that exogenous changes in contract design lead to significant decreases in quoted and effective spreads. In particular, market liquidity increases the most for stocks with the largest increase in competition among DMMs. Our analysis shows that competition among DMMs is an important aspect of contract design, along with elements such as rebates and requirements.

Best paper Award using Eurofidai Data (2023) - PLATO MI3 Best Paper Award at the 2019 CEPR-Imperial-Plato Market Innovator Conference on Market Structure in Europe and Beyond (London, UK). Featured here.

Local Banks and flood risk: the case of Germany  (with A. Pagano, and  FE. Di Girolamo)

Journal of Environmental Management - Volume 373, January 2025

This paper uses a simulation model to evaluate the effects of river flooding events occurring within Germany on regional banks. Under a 1.5 °C increase in temperature, the impact is overall rather small, even accounting for the devaluation of loans exposed to floods. Specifically, climate related risks would increase bank losses by 0.1% with large variability across NUTS2 regions. However, under a 3 °C increase, bank losses increases up to 1% of total assets. We show that the implementation of adaptation solutions would be successful in keeping risks at the current level. By supporting adaptation initiatives, such as investing in climate-resilient infrastructure or providing financial services to support sustainable practices, banks can play a crucial role in building the resilience of the financial sector and reducing the overall impact on the economy..

The demand for central clearing: to clear or not to clear, that is the question (with G.Girardi, R. Panzica, L. Pelizzon and T.Peltonen)

Journal of Financial Stability -  Volume 72, June 2024, 101247

This paper empirically analyses whether post-global financial crisis regulatory reforms have created appropriate incentives to voluntarily centrally clear over-the-counter (OTC) derivative contracts. We use confidential European trade repository data on single-name sovereign credit default swap (CDS) transactions and show that both seller and buyer manage counterparty exposures and capital costs, strategically choosing to clear when the counterparty is riskier. The clearing incentives seem particularly responsive to seller credit risk, which is in line with the notion that counterparty credit risk (CCR) is asymmetric in CDS contracts. The riskiness of the underlying reference entity also impacts the decision to clear as it affects both CCR capital charges for OTC contracts and central counterparty clearing house (CCP) margins for cleared contracts. Lastly, we find evidence that when a transaction helps netting positions with the CCP and hence lower margins, the likelihood of clearing is higher.

ESRB Working paper n. 62/December 2017

Limiting too-big-to-fail: market reactions to policy announcements and actions (with S. Maccaferri and S.Schich)

Journal of Banking Regulation Volume 23, pages 368–389, (2022)

This paper focuses on the changes in related market perceptions in response to bank regulatory and resolution reform announcements as well as actual failure resolution actions. The empirical results are consistent with progress being made in reducing the value of implicit bank debt guarantees, especially on subordinated bank liabilities. As opposed to resolution actions, the reactions of risk premia to policy and regulatory announcements are more difficult to explain and no clear pattern seems to be emerging, confirming the view that action speaks louder than words.

Ratings matter: announcements in times of crisis and the dynamics of stock markets (with Nicoletta Rosati, Pedro Verga Matos, Vasco Oliveira)

Journal of International Financial Markets, Institutions and Money  Volume 64, January 2020

In this paper we propose a novel approach in analysing the impact of changes in sovereign credit ratings on stock markets. We study the evolution of a segmented form of the stock market index for several crisis-hit countries, including both European and Asian markets. Such evolution is modelled by a homogeneous Markov chain, where the transition probabilities from one starting level of the index to a new (lower or higher) level in the next period depend on some explanatory variables, namely the country’s rating, GDP and interest rate, through a generalised ordered probit model. The credit ratings turn out to be determinant in the dynamics of the stock markets for all three European countries considered - Portugal, Spain and Greece, while not all considered Asian countries show evidence of correlation of market indices with the ratings.

JRC Working Papers in Economics and Finance, issue no. 2019/8  

Most recent working papers

Crypto News and Policy Innovations: Are European Markets Affected? (with L. Barbaglia,  FE. Di Girolamo,  and C. Rho)

Digital and crypto currencies are becoming an integral part of financial markets. Nevertheless, regulation of these markets seems still at an early stage and the literature evaluating the impact of policy interventions is scarce. We investigate the reaction of crypto markets in the aftermath of a policy announcement using textual information from news and sentiment analysis. Our findings are threefold. First, there is evidence of peaks in news about crypto-assets in correspondence of the date of new developments in EU legislation, in particular about Central Bank Digital Currencies. Second, we find that both returns of cryptocurrencies and general stock market returns are directly proportional to the news sentiment about crypto markets. Third, our event study shows that the introduction of regulation on digital and crypto currencies is perceived as a negative shock by financial markets, especially for digital currencies.

JRC Working Papers in Economics and Finance, issue no. 2024/07- available in SSRN

What makes private stablecoins stable? (with S.Schich)

Stability of crypto assets, in terms of their exchange rate vis-à-vis fiat currency, is an elusive goal. This note argues that for privately issued stablecoins to be successful in terms of delivering stability vis-à-vis current fiat money, they need to “piggy-back” from the credibility of the prevailing fiat money systems. Using data for the prices of 31 different stablecoins and the fiat currency or other assets the former promise to be pegged to, we apply a set of dynamic panel regression in order to investigate what determines relative stability. We find evidence that the design of stablecoin stabilisation mechanisms, and in particular the extent to which fiat money is used as collateral, as well as the presence of external auditors of such backing to enhance the credibility of such backing is crucial for the stability in terms of exchange rate of privately issued stablecoins, controlling for other factors of price developments of stablecoins.

Available on SSRN

Policy works (European Commission Joint Research Centre)

Drivers of bank profitability in the euro area   (with G. Cousin)

Bank profitability matters for financial stability and for monetary policy transmission. At the same time, bank profitability is affected by monetary policy decisions and by the broader macroeconomic environment. Over the past years, macroeconomic conditions have changed fundamentally. From being too low, inflation became far too high, triggering a strong tightening of monetary policy. Focusing on the euro area, this chapter explores the drivers of bank profitability and highlights how changes in macroeconomic conditions can affect it.. The analysis allows us to assess how the profitability of this representative bank may respond to different economic shocks, with a focus on shifts in the interest rate environment economic activity and NPL ratios. We find that the average bank profitability is driven by the level of the short-term interest rates in the sample. Hence, we find that the recent steep increase in short-term interest rates benefits bank profitability..

Published in the Quarterly Report on the Euro Area (QREA), Vol. 22 No. 3 (2023)

COVID-19: the stabilising impact of EU bond issuance on sovereigns and banks  (with L. Calès, L. Frattarolo, D. Monteiro, and M. Petracco. European Commission)

This section explores the effects of the large-scale EU bond issuance and the ECB asset purchases in the context of a hypothetical financial crisis that would have been induced by the COVID-19 downturn. Stylised simulations show that the crisis response policies of the EU have strongly mitigated the risks associated with sovereign-bank loops in euro area countries. In particular, monetary policy action together with the introduction of a common debt instrument can more than halve potential losses to public finances from a hypothetical banking crisis. Moreover, these positive effects accrue to all Member States, even after accounting for costs linked to the extension of joint guarantees. The results also suggest that a recovery package offering a mix of both loans and grants to affected countries can be optimal for the euro area as a whole from the perspective of attenuating sovereign-bank loops

Published in the Quarterly Report on the Euro Area (QREA), Vol. 20 No. 3(2021)

Banks’ bail-in and the new banking regulation: an EU event study (with S. Maccaferri)

This paper contains our contribution, in collaboration with DG FISMA, to the "Evaluation of the effects of too-big-to-fail reforms: consultation report" published by the Financial Stability Board (FSB) on 28 June 2020

FSB Consultation Report 28 June 2020 and  JRC Working Papers in Economics and Finance, issue no. 2020/07 

The Sovereign-Bank Nexus in the Euro Area: Financial and Real Channels (with L. Calès, L. Frattarolo, A. Maerean, D. Monteiro, M. Petracco and L. Vogel. European Commission)

This paper reviews the direct (financial) channels and the indirect (real) channels through which banks and sovereigns interact, and that can give rise to feedback loops between the two sectors. While significant progress has been achieved in mitigating the direct channel of the loop in recent years, the indirect mechanisms of the loop stayed largely intact. Focusing on diversification as a standalone measure, a review of the literature and model-based simulations suggest an ambiguous impact on systemic risk. However, in those cases where diversification can either reduce total risks or keep them unchanged, it can also deliver an important shock absorption effect in crisis periods. In such cases, simulations show that higher cross-border integration of banking sectors would dilute the impact of asymmetric shocks across the regions of a monetary union, thus increasing the overall welfare of risk averse households.

European Economy Discussion Paper 122. November 2019

Published in the Quarterly Report on the Euro Area (QREA), Vol. 19, No. 1 (2020)

Blockchain Now And Tomorrow: Assessing Multidimensional Impacts of Distributed Ledger Technologies (with JRC co-authors) 

This report provides multidimensional insights into the state of blockchain technology by identifying ongoing and  upcoming transformations in a range of sectors and setting out an anticipatory approach for further exploration. Moving beyond the hype and debunking some of its controversies, we aim to offer both an in-depth and practical understanding of blockchain and its possible applications. 

Available at EU Science HUB

China: Challenges and Prospects from an Industrial and Innovation Powerhouse (with JRC co-authors) 

This report analyses China's approach to attain a dominant position in international markets through a combination of industrial, R&I, trade and foreign direct investment policies. It offers an assessment of China's current position compared to the EU and US innovation systems across a range of dimensions. It concludes that China has become a major industrial competitor in several rapidly expanding high tech sectors, which may well result in attaining China's goal of becoming an innovation leader in specific areas. As a response, the EU will need to boost its industrial and R&I performance and develop a trade policy that can ensure a level playing field for EU companies in China and for Chinese companies in the EU. 

Available at EU Science HUB

Working papers

Do CDS markets care about the G-SIB status? (with W. Heynderickx, S. Maccaferri, and S.Schich)

Ending too big to fail" is a declared policy aim and a key element of the globally coordinated  financial regulatory reform. An official list of banks considered to be global systemically important (G-SIBs) is published on an annual basis since 2011. The goal of the present paper is to assess to what extent equity and CDS markets care about the official releases of the G-SIB lists and, in particular, whether the inclusion of a bank in the G-SIB list is good or bad news for bank debt and equity holders. The analysis applies both event-studies and panel regressions and relies upon European banks' CDS senior and subordinated quotes and equity prices to evaluate their reactions to the publications of the G-SIB lists. The analysis spans from the first leaked G-SIB list by the Financial Times as of 2009 to the 2017 offcial publication of the list.

JRC Working Papers in Economics and Finance, issue no. 2020/02

High-Frequency Market Making: Liquidity Provision, Adverse Selection, and Competition (Job Market Paper)

Using data from the NYSE Euronext Paris, with a specific identifier for electronic market- making activity, I examine the role of designated liquidity providers played by high-frequency traders (HFTs) in line with the MiFID II regulation. I find that HFTs do provide liquidity to the market, but strategically try to avoid other fast traders because they pay higher adverse selection costs when providing liquidity to them. When HFT-MMs provide liquidity to slow traders, there is no evidence of adverse selection. I exploit a change in the liquidity provision agreement that introduces more competition among market makers. Higher competition is beneficial for the market. The liquidity provision increase, the quoted bid-ask spread decrease, as well as the adverse selection costs faced by all traders, especially NONHFTs. 

Available on SSRN

Coming Early to the Party (with L. Pelizzon, M.G. Subrahmanyam, J. Uno and D. Yuferova)

We examine the strategic behavior of High Frequency Traders (HFTs) during the pre-opening phase and the opening auction of the NYSE-Euronext Paris exchange. HFTs actively participate, and profitably extract information from the order flow. They also post “flash crash” orders, to gain time priority. They make profits on their last-second orders; however, so do others, suggesting that there is no speed advantage. HFTs lead price discovery, and neither harm nor improve liquidity. They “come early to the party”, and enjoy it (make profits); however, they also help others enjoy the party (improve market quality) and do not have privileges (their speed advantage is not crucial). 

Available on SSRN

Best Paper on Equity Markets at the 25th Finance Forum, Pompeu Fabra University Barcelona (Jul 2017).

Featured in BME 

Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods (with L. Pelizzon, M.G. Subrahmanyam, J. Uno and D. Yuferova)

We study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to market quality, defined by price discovery and liquidity provision, in the opening auction. We use a unique dataset from the Tokyo Stock Exchange (TSE) based on server-IDs and find that HFTs dynamically alter their presence in different stocks and on different days. In spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and contribute significantly to market quality in the pre-opening period, the opening auction that ensues and the continuous trading period. Their contribution is largely different from that of the other HFTs during the continuous period. 

Available on SSRN

Intraday Pricing and Liquidity of Treasury Auctions 

This paper examines the influence of the bond supply, during the primary auction days, to the price pressure and liquidity in the secondary market. The focus is on the behavior of the secondary market quotes around the time of the auction, to capture the imperfect capital mobility and limit the risk-bearing capacity of the dealers that participate in the primary market. Using quote data from the Mercato Telematico dei titoli di Stato (MTS), we find evidence of a pronounced inverted V-Shape on the yield difference, which goes up with a maximum at the auction time, and the recovers two hours after. This indicates a strong price pressure around the auction time. The analysis of liquidity shows that the bid-ask spread becomes larger during the auction, an effect that is not present during the non-auction days.

Available on SSRN