Working Papers (Fac. de Económicas y Empresariales)
Permanent URI for this collectionhttps://hdl.handle.net/10171/70343
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- Margin Call: What if John Tuld were Christian? Thomistic Practical Wisdom in Financial Decision-Making(2017) Ferrero-Muñoz, I. (Ignacio); McNulty, R. E. (Robert E.); Rocchi, M. (Marta)Margin Call is a film depicting the high-tension 32 hours of an investment bank that discovers that its financial holdings are essentially worthless because it has become highly overexposed in the risky trading of mortgage-backed securities and the entire market is set to implode, triggering what the bank leaders know will be a global financial crisis. In a ten-minute overnight meeting, the CEO, John Tuld, must make a difficult choice for the firm and for himself. This paper aims at analyzing Tuld’s behavior in the light of the virtue of prudence as described by Thomas Aquinas, and reflects on how the problem might have been handled differently if John Tuld had been guided by Christian moral teachings. It also examines whether Christian ethics, with its ancient heritage, has sufficient specificity and transformative capacity to serve as a guide in contemporary financial decision-making.
- Term Structure Persistence(2012) Abbritti, M. (Mirko); Moreno-Ibáñez, A. (Antonio); Gil-Alana, L.A. (Luis A.); Lovcha, Y. (Yuliya)Stationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run short-rate expectations due to fast mean reversion. In this paper we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: Long-memory and short-memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 4 percentage points and exhibit a realistic countercyclical pattern.
- Short Sales Constraints and Financial Stability: Evidence from the Spanish 2011 Ban(2012) Mayordomo, S. (Sergio); Arce, O. (Óscar)This paper studies the main effects of the short sales ban implemented in August 2011 in the Spanish stock market along two dimensions: financial stability and market performance. Regarding the first, we show that short positions were a significant determinant of the probability of default of medium-sized banks before the ban. We find that, by weakening the contagion effect coming from the sovereign risk, the ban helped stabilise the probability of default of medium-sized banks, an effect which is not significant in the case of the largest banks and non-financials. Nonetheless, the stabilising power of the ban came at the cost of a large decline in the relative liquidity, trading volumes and price information efficiency of medium-sized banks stocks.
- Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain(2012) Rodríguez-Moreno, M. (María); Peña, J. I. (Juan Ignacio); Mayordomo, S. (Sergio)This paper presents a procedure for computing the theoretically optimal portfolio under the assumption that housing is an indivisible, illiquid asset that restricts the portfolio choice decision. The analysis also includes the financial constraints households may face when they apply for external funding. The set of financial assets that constitute the household's portfolios are bank time deposits, stocks, mortgage, and housing. We compare the theoretically optimal portfolio against Spanish household's actual choices using a unique data set, the Spanish Survey of Household Finance. In comparison with the optimal portfolio, households significantly underinvest in stocks and deposits. In the case of mortgages, the optimal and actual portfolios weights are not unequal. At a more disaggregated level, some additional differences emerge that are explained by demographic, educational, and income characteristics.
- Liquidity Commonalities in the Corporate CDS Market around the 2007-2012 Financial Crisis(2012) Rodríguez-Moreno, M. (María); Peña, J. I. (Juan Ignacio); Mayordomo, S. (Sergio)This study presents robust empirical evidence suggesting the existence of significant liquidity commonalities in the corporate Credit Default Swap (CDS) market. Using daily data for 438 firms from 25 countries in the period 2005-2012 we find that these commonalities vary over time, being stronger in periods in which the global, counterparty, and funding liquidity risks increase. However, commonalities do not depend on firm's characteristics. The level of the liquidity commonalities differs across economic areas being on average stronger in the European Monetary Union. The effect of market liquidity is stronger than the effect of industry specific liquidity in most industries excluding the banking sector. We document the existence of asymmetries in commonalities around financial distress episodes such that the effect of market liquidity is stronger when the CDS market price increases. The results are not driven by the CDS data imputation method or by the liquidity of firms with high credit risk and are robust to alternative liquidity measures.
- Credit-Risk Valuation in the Sovereign CDS and Bonds Markets: Evidence from the Euro Area Crisis(2012) Peña, J. I. (Juan Ignacio); Mayordomo, S. (Sergio); Arce, O. (Óscar)We analyse the extent to which prices in the sovereign credit default swap (CDS) and bond markets reflect the same information on credit risk in the context of the current crisis of the European Monetary Union (EMU). We first document that deviations between CDS and bond spreads are related to counterparty risk, common volatility in EMU equity markets, market illiquidity, funding costs, flight-to-quality, and the volume of debt purchases by the European Central Bank (ECB) in the secondary market. Based on this we conduct a state-dependent price-discovery analysis that reveals that the levels of the counterparty risk and the common volatility in EMU equity markets, and the banks agreements to accept losses on their holdings of Greek bonds impair the ability of the CDS market to lead the price discovery process. On the other hand, the funding costs, the flight-to-quality indicator and the volume of debt purchases by the ECB worsen the efficiency of the bond market.
- Derivatives Holdings and Systemic Risk in the U.S. Banking Sector(2012) Rodríguez-Moreno, M. (María); Peña, J. I. (Juan Ignacio); Mayordomo, S. (Sergio)This paper studies the impact of the banks portfolio holdings of financial derivatives on the banks individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 91 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that the banks holdings of foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. We find that before the subprime crisis credit derivatives decreased systemic risk whereas during the crisis increased it. So, credit derivatives seemed to change their role from shock absorbers to shock issuers. This effect is not observed in the other types of derivatives.
- Testing for Persistence with Breaks and Outliers in South African House Price(2012) Aye, G. C. (Goodness C.); Gupta, R. (Rangan); Gil-Alana, L.A. (Luis A.)This study examines the time series behaviour of South African house prices within a fractional integration modelling framework while identifying potential breaks and outliers. We used quarterly data on the six house price indexes, namely affordable, luxury, middle-segment (all sizes, large, medium and small sizes), covering the periods 1966:Q1-2012:Q1 for the different middle-segments, 1966:Q3-2012:Q1 for the luxury segment and 1969:Q4-2012:Q1 for the affordable segment. In general, there is persistence in South African house prices with breaks identified. Our results show that in the cases of affordable and luxury, shocks will be transitory, disappearing in the long run, while for the remaining four series of the middle-segment, shocks will be permanent. Hence, for the middle-segment series strong policy measures must be adopted in the event of negative shocks, in order to recover the original trends.
- Product Market Frictions, Bargaining and Pass-Through(2012) Abbritti, M. (Mirko)Empirical evidence shows that the pass-through of cost shocks to prices is very low, and delayed. This is in stark contrast with the standard framework of monopolistic competition used in macro models, which, absent nominal rigidities, implies complete pass-through of cost shocks to prices. This paper develops a model of pricing dynamics in business to business relationships where incomplete pass-through arises endogenously. The model is based on two assumptions. First, both retailers and wholesalers invest resources to form new, long-term, business relationships. Second, once a business relationship is formed, the prices and the quantities of the intermediate good exchanged are set in a bilateral bargaining between wholesalers and retailers. The repeated nature of the interactions between firms raises the question of whether wholesale prices are allocative. We show that wholesale prices still play an allocative role in the model, but this role is likely to be quite limited.
- Technology Choice and Unit vs Ad Valorem Tax(2012) Molero, J.C. (Juan Carlos); Galera, F. (Francisco); Rodríguez-Tejedo, I. (Isabel)This paper compares the effects of unitary and ad valorem taxes in a homogeneous good market where two technologies are freely available. We find that, both in monopolies and Cournot oligopolies, unit taxes may be welfare superior to ad valorem taxes.