Research articles for the 2019-07-05
Bout Depression Babies and Red Diaper Babies: Do Macroeconomic Experiences Affect Everybody’s Risk Taking in the Same Way?
SSRN
We study how macroeconomic growth experienced throughout a person’s lifetime affects the decision to participate in the stock market, and how this interacts with political education. For people who have been raised in the market economy of the Federal Republic of Germany, we find that macroeconomic growth experienced throughout the lifetime predicts the likelihood of holding stocks and recent experiences have a higher impact. These findings do not extend to people who have been raised under the communistic regime of the former German Democratic Republic and thus have experienced a market economy only since the German reunification in 1989.
SSRN
We study how macroeconomic growth experienced throughout a person’s lifetime affects the decision to participate in the stock market, and how this interacts with political education. For people who have been raised in the market economy of the Federal Republic of Germany, we find that macroeconomic growth experienced throughout the lifetime predicts the likelihood of holding stocks and recent experiences have a higher impact. These findings do not extend to people who have been raised under the communistic regime of the former German Democratic Republic and thus have experienced a market economy only since the German reunification in 1989.
Changing Vulnerability in Asia: Contagion and Systemic Risk
SSRN
This paper investigates the changing network of financial markets between Asian markets and those ofthe rest of the world during January 2003â€"December 2017 to capture both the direction and strengthof the links between them. Because each market chooses whether to connect with emerging marketsas a bridge to the wider network, there are advantages to having access to this bridge for protectionduring periods of financial stress. Both parties gain by overcoming the information asymmetry betweenemerging and global markets. We analyze networks for four key periods, capturing networks in financialmarkets before and after the Asian financial crisis and the global financial crisis. Increased connectionsduring crisis periods are evident, as well as a general deepening of the global network. The evidence onAsian market developments suggests caution is needed on regulations proposing methods to createstable networks, because these may result in reduced opportunities for emerging markets.
SSRN
This paper investigates the changing network of financial markets between Asian markets and those ofthe rest of the world during January 2003â€"December 2017 to capture both the direction and strengthof the links between them. Because each market chooses whether to connect with emerging marketsas a bridge to the wider network, there are advantages to having access to this bridge for protectionduring periods of financial stress. Both parties gain by overcoming the information asymmetry betweenemerging and global markets. We analyze networks for four key periods, capturing networks in financialmarkets before and after the Asian financial crisis and the global financial crisis. Increased connectionsduring crisis periods are evident, as well as a general deepening of the global network. The evidence onAsian market developments suggests caution is needed on regulations proposing methods to createstable networks, because these may result in reduced opportunities for emerging markets.
Deposit Insurance, Market Discipline and Bank Risk
SSRN
Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on within-bank variation in the ratio of firm deposits to total household and firm deposits, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate for private, domestic banks that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control.
SSRN
Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on within-bank variation in the ratio of firm deposits to total household and firm deposits, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate for private, domestic banks that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control.
Geopolitical Risk and Volatility Spillovers in Oil and Stock Markets
SSRN
Geopolitical events are widely reported in the press and may influence the risk premium demanded by investors in addition to demand and supply of energy resources. Using the daily geopolitical risk index of Caldara and Iacoviello (2018), we demonstrate that geopolitical risk plays an important role in determining both oil price volatility and (to a lesser extent) stock market volatility. An increase in geopolitical risk is associated with positive (negative) oil (stock) returns and is consistent with geopolitical risk been linked more closely to supply disruption. The impact of geopolitical risk is greater for oil prices and this may be related to the localised nature of some geopolitical events (e.g. terror attacks in oil fields) that directly affect oil production but receive limited global press coverage. A dynamic conditional correlation (DCC) model is preferred given the dynamic nature of the oil-stock return correlation. This model shows short- and long-term volatility persistence for oil and stock prices, together with spillover effects that run from oil to stock returns. Understanding the impact of geopolitical events on volatility is important given the significant role it plays in investment decisions and policy-making, and allows us to assess the systemic nature of geopolitical risk.
SSRN
Geopolitical events are widely reported in the press and may influence the risk premium demanded by investors in addition to demand and supply of energy resources. Using the daily geopolitical risk index of Caldara and Iacoviello (2018), we demonstrate that geopolitical risk plays an important role in determining both oil price volatility and (to a lesser extent) stock market volatility. An increase in geopolitical risk is associated with positive (negative) oil (stock) returns and is consistent with geopolitical risk been linked more closely to supply disruption. The impact of geopolitical risk is greater for oil prices and this may be related to the localised nature of some geopolitical events (e.g. terror attacks in oil fields) that directly affect oil production but receive limited global press coverage. A dynamic conditional correlation (DCC) model is preferred given the dynamic nature of the oil-stock return correlation. This model shows short- and long-term volatility persistence for oil and stock prices, together with spillover effects that run from oil to stock returns. Understanding the impact of geopolitical events on volatility is important given the significant role it plays in investment decisions and policy-making, and allows us to assess the systemic nature of geopolitical risk.
High-Quality Information Technology and Capital Investment Decisions
SSRN
We examine the effect of high-quality information technology (IT) on management’s capital investment decisions. Evaluating capital investment decisions with contemporary investment efficiency and long-term measures of investment effectiveness, we document a positive relation between high-quality IT and capital investment decision quality. In particular, we find high-quality IT is associated with more optimal levels of investment as well as fewer future fixed asset write-downs. We also disaggregate investment efficiency and find the relation with IT quality holds for investment decisions related to capital expenditures and acquisition but not research and development expenditures. Overall, our results suggest managers equipped with better internal information from higher quality IT are able to make superior capital investment decisions. Our study contributes to the literature by providing evidence of a significant determinant of capital investment decision quality and documenting a specific mechanism that mediates the indirect effect of IT quality on future performance.
SSRN
We examine the effect of high-quality information technology (IT) on management’s capital investment decisions. Evaluating capital investment decisions with contemporary investment efficiency and long-term measures of investment effectiveness, we document a positive relation between high-quality IT and capital investment decision quality. In particular, we find high-quality IT is associated with more optimal levels of investment as well as fewer future fixed asset write-downs. We also disaggregate investment efficiency and find the relation with IT quality holds for investment decisions related to capital expenditures and acquisition but not research and development expenditures. Overall, our results suggest managers equipped with better internal information from higher quality IT are able to make superior capital investment decisions. Our study contributes to the literature by providing evidence of a significant determinant of capital investment decision quality and documenting a specific mechanism that mediates the indirect effect of IT quality on future performance.
Robo-Advisors: A Substitute for Human Financial Advice?
SSRN
Using representative US investor data, we investigate whether automated financial advisors, also referred to as robo-advisors, reduce investors’ demand for human financial advice offered by financial service providers. Our results provide a strong negative relationship between using robo-advisors and seeking human financial advice. We show that the substitution effect of robo-advisors is especially driven by investors who fear to be victimized by investment fraud. Our findings suggest that robo-advisors seem to offer a valid alternative for seeking investment advice, especially among those investors who worry about potential conflicts of interest that appear in the context of human financial advice.
SSRN
Using representative US investor data, we investigate whether automated financial advisors, also referred to as robo-advisors, reduce investors’ demand for human financial advice offered by financial service providers. Our results provide a strong negative relationship between using robo-advisors and seeking human financial advice. We show that the substitution effect of robo-advisors is especially driven by investors who fear to be victimized by investment fraud. Our findings suggest that robo-advisors seem to offer a valid alternative for seeking investment advice, especially among those investors who worry about potential conflicts of interest that appear in the context of human financial advice.
Trading Equity for Liquidity: Bank Data on the Relationship between Liquidity and Mortgage Default
SSRN
For many families, homeownership is a vital part of the American dream, and their mortgage will be their greatest debt and their mortgage payment will be their largest recurring monthly expense. This report aims to answer important questions about the role of liquidity, equity, income levels, and payment burden as determinants of mortgage default using a unique data set of JPMorgan Chase customers with a Chase mortgage and Chase deposit accounts. Our analysis suggests that liquidity may have been a more important predictor of mortgage default than equity, income level, or payment burden. Borrowers with little post-closing liquidity defaulted at a considerably higher rate than borrowers with at least three mortgage payment equivalents of liquidity after closing. During the life of their mortgage, borrowers with little liquidity but more equity defaulted at considerably higher rates than borrowers with more liquidity but less equity. Trading equity for liquidity at origination by making a slightly smaller down payment and holding the residual cash in an “emergency mortgage reserve†account may lead to lower default rates. A policy or pilot program could test the impact of this trade-off and, if impactful and cost-effective, the program could serve as an alternative to underwriting standards based on meeting a total debt-to-income (DTI) threshold at origination.
SSRN
For many families, homeownership is a vital part of the American dream, and their mortgage will be their greatest debt and their mortgage payment will be their largest recurring monthly expense. This report aims to answer important questions about the role of liquidity, equity, income levels, and payment burden as determinants of mortgage default using a unique data set of JPMorgan Chase customers with a Chase mortgage and Chase deposit accounts. Our analysis suggests that liquidity may have been a more important predictor of mortgage default than equity, income level, or payment burden. Borrowers with little post-closing liquidity defaulted at a considerably higher rate than borrowers with at least three mortgage payment equivalents of liquidity after closing. During the life of their mortgage, borrowers with little liquidity but more equity defaulted at considerably higher rates than borrowers with more liquidity but less equity. Trading equity for liquidity at origination by making a slightly smaller down payment and holding the residual cash in an “emergency mortgage reserve†account may lead to lower default rates. A policy or pilot program could test the impact of this trade-off and, if impactful and cost-effective, the program could serve as an alternative to underwriting standards based on meeting a total debt-to-income (DTI) threshold at origination.
