Publications:  

Sustainable investing in times of crisis: Evidence from bond holdings and the COVID-19 pandemic (with S. Fatica)

Journal of Banking & Finance - (2024)

We examine the resilience of green bonds to the COVID-19 shock through the lens of institutional investors’ holdings. We show that the green label has a positive impact on bond holdings both in normal times and during the COVID crisis. Moreover, during the pandemic outbreak, green bonds experienced lower net sales, on average, than equivalent conventional bonds, while no significant differences emerge in normal times. The results hold across different investor classes, including mutual funds exposed to large outflows, and are not driven by issuers’ fundamentals. We also document that the ownership of green fixed income securities is more concentrated than that of comparable conventional bonds, and that concentration has increased in the first quarter of 2020. 

The demand for central clearing: To clear or not to clear, that is the question! (with M. Bellia, G. Girardi, L. Pelizzon, T. Peltonen)

Journal of Financial Stability - (2024)

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. 

When do investors go green? Evidence from a time-varying asset-pricing model (with L. Alessi and E. Ossola)

International Review of Financial Analysis - (2023)

This study employs individual stock returns to examine the evolution of the greenium, which is the risk premium linked to firms’ carbon emissions and environmental transparency. We estimate an asset-pricing model with time-varying risk premia, in which the greenium is associated with a priced ‘greenness and transparency’ factor. We show that investors in the European equity market tend to accept lower returns, ceteris paribus, and hold greener and more transparent assets when economic shifts toward low carbon become more credible. This occurred after the Paris Agreement, the first global climate strike, and the announcement of the EU Green Deal. Opposite signals, such as increases in the prices of oil or critical minerals for the low-carbon transition, are associated with increases in the greenium; that is, more polluting firms are perceived as less risky. 

The systemic risk of US oil and natural gas companies (with M. Caporin and F. Fontini) 

Energy Economics - (2023)

We analyse the evolution of the systemic risk impact of oil and natural gas companies since 2000. This period is characterised by several events that affected energy source markets: the real effect of the global financial crisis, the explosion of shale production and the diffusion of the Covid-19 pandemic. The price of oil and natural gas showed extreme swings, impacting companies’ financial situations, which, accompanied by technological developments in shale production, had an impact on the debt issuance and on the overall risk level of the oil and natural gas sector. By studying the systemic impact of oil and natural gas companies on risk in the financial market, measured by the  Δ CoVaR, we observe that in the most recent decade, their role is sensibly increasing compared to 2000–2010, even accounting for the possible effect associated with the increase in companies’ sizes. In addition, our results show evidence of a decreasing relevance of traditional drivers of systemic risk, suggesting that additional factors might be present. Finally, when focusing on the impact of Covid-19, we document its relevant role in fuelling the increase in the oil and natural gas companies’ systemic impact. 

The impact of network connectivity on factor exposures, asset pricing, and portfolio diversification (with M. Billio, M. Caporin, L. Pelizzon)  

International Review of Economics & Finance - (2022)

This paper extends the classic factor-based asset pricing model by including network linkages, leading to a network-augmented linear factor model. This extension of the model allows a better understanding of the determinants of systematic risk and shows that cross-sectional risk premia can be estimated more precisely. Moreover, we demonstrate that in the presence of network links a misspecified traditional linear factor model presents residuals that are correlated and heteroskedastic. We support our claims with an extensive simulation experiment and real data. 

Sustainable debt instruments: green bonds and beyond (with S. Fatica) 

Argomenti  - (2021)

Sustainable debt instruments play an increasingly important role in scaling up financing of private investment for the low carbon transition and the other ambitious environmental and social goals set at the EU and global level. After an overview of the literature on this new asset class, the paper highlights that reporting on the use of proceeds is considered a crucial element for the success  of  green  bond  markets,  as  it  provides  investors  with  an  unprecedented degree of transparency.

What greenium matters in the stock market? The role of greenhouse gas emissions and environmental disclosures ( with L.Alessi and E. Ossola)

Journal of Financial Stability - (2021)

This study provides evidence on the existence of a negative greenium, i.e. a risk premium related to the greenness of a firm, based on European individual stock returns. We define a priced ‘greenness and transparency’ factor based on companies’ greenhouse gas emissions and the quality of their environmental disclosures, and show that what is priced by the market is the combination of environmental performance and environmental transparency. Based on this factor, we offer a tool to assess the exposure of a portfolio to the risk associated with the low-carbon transition, and hedge against it. We estimate that in a stressed scenario where greener and more transparent firms very much outperform brown stocks, there would be losses at the global level, including for European large banks, should investors fail to price climate-transition risks. These results call for the introduction of climate stress tests for systemically important financial institutions. 

The pricing of green bonds: are financial institutions special? (with S. Fatica and M. Rancan)

Journal of Financial Stability - (2021)

The financial system plays a major role in the transition to a low-carbon economy. We shed light on this analyzing recent developments in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium for green bonds issued by supranational institutions and corporates but no yield differences in case of issuances by financial institutions. We also document an effect for external review and repeated access to the green bond market. Second, we show that banks that issue green bonds reduce lending towards carbon-intensive sectors, but limited to the loan amounts granted in the role of lead bank in the deal. This mixed evidence about lending suggests that, at the time of issuance, investors may not be able to identify a clear link between the green bond issued by a financial institution and a specific green investment project, which would explain the absence of a green premium for financial issuers. 

Green Bonds as a Tool Against Climate Change? (with S.Fatica)

Business Strategy and Environment - (2021)

Although green bonds are becoming increasingly popular in the corporate finance practice, little is known about their implications and effectiveness in terms of issuers' environmental engagement. With the use of matched bond-issuer data, we test whether green bond issues are associated to a reduction in total and direct (Scope 1) emissions of nonfinancial companies. We find that, compared with conventional bond issuers with similar financial characteristics and environmental ratings, green issuers display a decrease in the carbon intensity of their assets after borrowing on the green segment. The decrease in emissions is more pronounced, significant and long-lasting when we exclude green bonds with refinancing purposes, which is consistent with an increase in the volume of climate-friendly activities due to new projects. We also find a larger reduction in emissions in case of green bonds that have external review, as well as those issued after the Paris Agreement. 

Estimation and model-based combination of causality networks among large US banks and insurance companies. with (G. Bonaccolto and M. Caporin)

Journal of Empirical Finance - (2019)

Causality is a widely-used concept in theoretical and empirical economics. The recent financial economics literature has used the standard Granger causality to detect for the presence of contemporaneous links among financial institutions, that, in turn, determine a network structure. Subsequent studies have combined the estimated networks with traditional pricing or risk measurement models to improve their fit to empirical data. In this paper, we provide two contributions. First, we show how to use a linear factor model as a device for estimating a combination of several networks that monitor the links across variables from different viewpoints. Second, we highlight the advantages of combining quantile-based methods with the Granger causality when the focus is on risk propagation. The empirical evidence supports our contributions.

Systemic risk and financial interconnectedness: network measures and the impact of the indirect effect. (With M. Billio, M. Costola, L. Pelizzon)

Systemic Risk Tomography: Signals, Measurement and Transmission Channels - (2015)

This paper considers several network measures of connectedness applied to the network extracted using pairwise quantile regressions, i.e. it proposes the use of quantile based network measures to estimate the importance of Globally Systemically Important Financial Institutions. The purpose is to assert the different informative content between quantile based\ud network measures and quantile based loss measures such as CoVaR. We consider Globally\ud Systemically Important Banks and Insurers and several Hedge Fund indices. We investigate\ud whether systemic risk indicators based on network measures are similar to those based on\ud CoVaR and show that they are capturing different features. In particular, quantile regression\ud based on network measures capture the indirect effect of risk spillovers that is instead ignored by\ud quantile based loss measures. Finally, we compare quantile based network measures and quan-\ud tile based losses measures highlighting the predicting power of the former during the global\ud systemic crisis of 2007/2008