Research articles for the 2020-05-29

A Rational Asset Pricing Model for Premiums and Discounts on Closed‐End Funds: The Bubble Theory
Jarrow, Robert,Protter, Philip
This paper provides a new explanation for closed‐end fund (CEF) discounts and premiums using the local martingale theory of asset price bubbles. This is a rational asset pricing model that is shown to be consistent with the existing empirical evidence on CEF discounts/premiums. Additional testable implications of the model are derived, which await subsequent research for their resolution. This bubble theory also applies equally well to understanding discounts and premiums on exchange traded funds.

Active versus Index Equity Investing - Early Evidence from India
Raju, Rajan,Mittal, Ananya
This paper examines the relative performance of actively managed equity mutual funds against liquid, low-cost index-tracking exchange-traded-funds in India and investigates the merit of investing in index trackers. This is an important discussion as a majority of flows to equity schemes in the Indian fund industry currently go to share classes of actively managed funds with the highest total expense ratios. This high expense ratio raises the question of whether an investor would be better off investing in a low-cost index tracker. To deal with the active-vs-index decision for an investor, we build a simple yet robust framework using Information Ratio and R-square and use this framework to examine the performance of key equity scheme categories against two index trackers in India. The paper preliminarily affirms that low-cost index ETFs in India are credible alternatives to actively managed funds both in terms of performance and cost to the investor. The results provide preliminary evidence of, broadly defined, closet indexing in the Indian active fund management industry and raises issues of reasonableness and relevance of choice of benchmarks by active fund managers specifically in fund categories like focused schemes.

An Efficient Approach to Quantile Capital Allocation and Sensitivity Analysis
Asimit, Vali,Peng, Liang,Wang, Ruodu,Yu, Alex
In various fields of applications such as capital allocation, sensitivity analysis, and systemic risk evaluation, one often needs to compute or estimate the expectation of a random variable, given that another random variable is equal to its quantile at some prespecified probability level. A primary example of such an application is the Euler capital allocation formula for the quantile (often called the value‐at‐risk), which is of crucial importance in financial risk management. It is well known that classic nonparametric estimation for the above quantile allocation problem has a slower rate of convergence than the standard rate. In this paper, we propose an alternative approach to the quantile allocation problem via adjusting the probability level in connection with an expected shortfall. The asymptotic distribution of the proposed nonparametric estimator of the new capital allocation is derived for dependent data under the setup of a mixing sequence. In order to assess the performance of the proposed nonparametric estimator, AR‐GARCH models are proposed to fit each risk variable, and further, a bootstrap method based on residuals is employed to quantify the estimation uncertainty. A simulation study is conducted to examine the finite sample performance of the proposed inference. Finally, the proposed methodology of quantile capital allocation is illustrated for a financial data set.

Are Courts Biased? The Anchoring Heuristic and Judicial Decisions in Personal Bankruptcy Proceedings
Mugerman, Yevgeny,Nadiv, Neta,Ofir, Moran
This research examines the seminal heuristic of anchoring and adjustment and its effects on personal bankruptcy proceedings. Using a unique and detailed database of bankruptcy files we analyze the effect of the official receiver’s recommendation on court decisions. The official receiver in bankruptcy proceedings is appointed by a judicial authority and is required to bring before the court any relevant information needed in order to reach a judicial decision. As part of her responsibilities, the official receiver is required to submit a financial report, which serves as the basis for the court’s proposal for the debtor’s payment plan. This report sets out the main factual infrastructure for determining the payment order under bankruptcy proceedings and should include information relevant to the court's discretion. The richness of the data allows us to investigate the impact of the receiver’s recommendation on court final decisions. We find that overall, the receiver’s recommendation serves as an anchor to the judges, and, moreover, that deviations from this recommendation by the court are extremely rare. Notably, this outcome differs dramatically from that of corporate proceedings. Since personal bankruptcy proceedings do not allow for substantive oversight, which examines the plausibility of the actions or recommendations that the receiver seeks, there is no pure rational explanation for this finding.

Arrowâ€"Debreu Equilibria for Rank‐Dependent Utilities with Heterogeneous Probability Weighting
Jin, Hanqing,Xia, Jianming,Zhou, Xun Yu
We study Arrow–Debreu equilibria for a one‐period‐two‐date pure exchange economy with rank‐dependent utility agents having heterogeneous probability weighting and outcome utility functions. In particular, we allow the economy to have a mix of expected utility agents and rank‐dependent utility ones, with nonconvex probability weighting functions. The standard approach for convex economy equilibria fails due to the incompatibility with second‐order stochastic dominance. The representative agent approach devised in Xia and Zhou (2016) does not work either due to the heterogeneity of the weighting functions. We overcome these difficulties by considering the comonotone allocations, on which the rank‐dependent utilities become concave. Accordingly, we introduce the notion of comonotone Pareto optima, and derive their characterizing conditions. With the aid of the auxiliary problem of price equilibria with transfers, we provide a sufficient condition in terms of the model primitives under which an Arrow–Debreu equilibrium exists, along with the explicit expression of the state‐price density in equilibrium. This new, general sufficient condition distinguishes the paper from previous related studies with homogeneous and/or convex probability weightings.

Barings: Development of a Disaster
McConnell, Patrick J.
The sudden collapse of Barings Bank in February 1995 was unexpected, shocking the bank’s management, regulatory authorities and the international banking industry. However, should the failure have come as such a surprise? As the formal inquiry into the events surrounding the collapse found, the seeds of a potential ”disaster” had been sown a number of years before the failure and warning signs had been ignored by senior management. In an often cited work in decision literature, Turner identified a number of features that are common to the development of “man made” disasters, many of which are apparent in events leading up to the failure of Barings. This paper reviews the Barings case using Turner’s framework and identifies some lessons for banks in creating a risk management organisation.

COVID-19 Could Cause Bigger Cracks in Turkey’s Fragile Crisis Prone Economy
Taskinsoy, John
The cash strapped Turkey's gloomy economy was already ailing before the emergence of COVID-19 pandemic. The August rout of 2018 caused serious cracks as lira tumbled against the dollar (25% in three days and 41% in just two weeks); consequently, core inflation peaked at 26% and key interest rate shot up to 24% in October 2018. Currency crisis (the worst since 2001 Turkish economic crisis) along with coronavirus health crisis and the resultant Great Lockdown jolted the Turkish economy from its roots sending chills to the bones of financial markets, which could cost $50 billion or more. If the Turkish government (President Erdogan in particular) is not able to come up with at least $50 billion to support its economy during this extraordinary tough time, coronavirus as a heavy puncture will send the ailing Turkish economy right to the burial ground, this was reflected in ineffectiveness of policy interventions by the Turkish central bank (i.e. abbreviated as TCMB). According to Fitch’s latest forecast, Turkish economy is expected to contract 3% in 2020 (i.e. forecast of 3.9% growth).

Climate Change and Credit Risk
Gianfrate, Gianfranco
We investigate the relationship between exposure to climate change and firm credit risk. We show that the distance-to-default, a widely used market-based measure of corporate default risk, is negatively associated with the amount of a firm’s carbon emissions and carbon intensity. Therefore, companies with high carbon footprint are perceived by the market as more likely to default, ceteris paribus. The carbon footprint decreases the distance-to-default following shocks - such as the Paris Agreement - that reveal policymakers’ intention to implement stricter climate policies. Overall, these results indicate that the exposure to climate risks affects the creditworthiness of loans and bonds issued by corporate. Financial regulators and policymakers should consider carefully the impact of climate change risks on the stability of both lending intermediaries and corporate bond markets.

Do CFOs Matter? International Evidence from the M&A Process
Ferris, Stephen P.,Sainani, Sushil
This study examines the effect of Chief Financial Officers (CFOs) on mergers and acquisitions using an innovative CFO Influence Index. We use the U.K. for our analysis because the perceived influence of CFOs is high. We find that more influential CFOs as measured by experience, stature, and pay are associated with more deal completions and the pursuit of smaller, domestic targets. High influence CFOs complete their due diligence more quickly and are able to identify higher quality targets for which they pay less. We also discover that firms with high influence CFOs enjoy greater long-term operating and financial performance post-merger. We conclude that influential CFOs are effective in creating shareholder value during M&A, especially when the deal is complex.

Do Smart Beta ETFs Deliver Persistent Performance?
Soggiu, Marco,Mateus, Cesario,B. Mateus, Irina
This paper analyses Smart Beta ETF performance and provides the first evidence on the funds’ performance persistence. Our sample is comprised of 152 US equity smart beta ETFs over the period June 2000 to May 2017. We found that as per the risk-adjusted performance about 40% of Smart Beta ETFs outperformed their related traditional ETFs after expenses. The analysis of performance persistence conducted based on the relative performance of Smart Beta ETFs showed that the performance of winners and losers does persists in the year ahead. The persistence in performance was documented in 7 out of 9 peer categories.

El mercado de la vivienda en España entre 2014 y 2019 (The Spanish housing market in 2014-2019)
Dirección General de Economía y Estadística, .
Spanish abstractEn este trabajo se describen los principales rasgos de la evolución del mercado de la vivienda en España durante el último período de expansión (2014-2019) y se discuten dos aspectos relacionados con su situación reciente. Por una parte, se analiza la evidencia acerca de las posibles dificultades de acceso de los hogares a la vivienda, encontrando que estas se habrían agravado durante los últimos años, especialmente para determinados colectivos, como los jóvenes y las familias con rentas bajas, sobre todo en algunas zonas, como las grandes áreas metropolitanas. Seguidamente se revisan las implicaciones que de ello se derivan desde el punto de vista de la eficiencia económica y de los retos sociales y se analizan medidas públicas que podrían considerarse para aliviar estas dificultades. La última sección ofrece una valoración de los posibles riesgos sistémicos asociados al mercado inmobiliario residencial, y se concluye que estos eran, a finales de 2019, más limitados que los que había en los años anteriores a la crisis financiera iniciada en 2008.English abstractThis paper describes the main features of the Spanish housing market during the latest expansionary period (2014-2019), and discusses two aspects relating to its recent situation. First, it analyses the evidence of households’ possible housing affordability difficulties. It finds that these difficulties have been exacerbated in recent years, especially for specific groups such as the young and low-income households, and particularly in certain zones, such as the major metropolitan areas. Next, it reviews the ensuing consequences from the standpoint of economic efficiency and of social challenges, analysing potential public measures that might be considered to alleviate these difficulties. Finally, it assesses the potential systemic risks associated with the residential real estate market, concluding that these were, at end-2019, more limited than those prevalent in the run-up to the financial crisis that broke in 2008.Note:Downloadable document is in Spanish.

Empirical Credit Spread Components of Banks and their Coverage in Structural Models â€" An Integrated Analysis
Vogelheim, Jan
During the global financial crisis and euro crisis, credit spreads of European banks have increased sharply, which has not only been attributed to default risk. Credit spreads can be estimated empirically or using structural models. In the KMV model, a firm defaults if the market value of assets falls below the Default Point (DP) based on liabilities. The Distance-to-Default (DD) measures how many standard deviations the asset value is away from DP. Based on DD, Moody's Analytics calculates a physical probability of default, the Expected Default Frequency (EDF). The paper analyzes the relation between the KMV structural model and empirical credit spread components. In addition to default risk, empirical credit default swap (CDS) spreads compensate risk-averse investors for liquidity risk and common spread risk. Default risk can generally be divided into a diffusion and jump component. Fundamental structural models cover default by a continuous decrease in the asset value below the default barrier, while unexpected jumps or (liquidity) shocks â€" such as bank runs â€" are not captured. Comparing model-based bank EDFs and empirical CDS-implied default probabilities, with a special focus on financial market and liquidity crises, the residual risks are derived. In contrast, previous studies primarily consider non-financial firms and phases of low financial market volatility.The present empirical study is the first integrated analysis of the determinants of one-year CDS spreads and the EDF of European banks from 2004 to mid-2015. Using a panel regression with time fixed effects, the residual impact on the logarithmized CDS-implied default probability, that cannot be explained by the logarithmized EDF, is decomposed into a systematic and idiosyncratic component. Since the global financial crisis and especially during the euro crisis, the EDF structural model assesses the default probabilities of European banks to be lower than the CDS market does â€" due to market-wide risks. The systematic residual impact increases substantially at the outbreak of both financial market and liquidity crises. At the onset of the global financial crisis and euro crisis, in particular market-wide liquidity risks imply a stronger increase in CDS spreads compared to EDFs.Combining market-based signals from European bank CDS spreads with model-based signals in an integrated analysis, the risk of a financial market crisis is derived. Market-wide indicators of funding and liquidity risk provide a statistically significant and economically important explanatory power for the systematic residual impact. Moreover, the risk premium is an essential determinant. Compared to alternative crisis indicators, the systematic residual impact achieves an equally good and during the euro crisis even better performance.

Existence, Uniqueness, and Stability of Optimal Payoffs of Eligible Assets
Baes, Michel,Koch-Medina, Pablo,Munari, Cosimo
In a capital adequacy framework, risk measures are used to determine the minimal amount of capital that a financial institution has to raise and invest in a portfolio of prespecified eligible assets in order to pass a given capital adequacy test. From a capital efficiency perspective, it is important to be able to do so at the lowest possible cost and to identify the corresponding portfolios, or, equivalently, their payoffs. We study the existence and uniqueness of such optimal payoffs as well as their behavior under a perturbation or an approximation of the underlying capital position. This behavior is naturally linked to the continuity properties of the set‐valued map that associates to each capital position the corresponding set of optimal eligible payoffs. Upper continuity can be ensured under fairly natural assumptions. Lower continuity is typically less easy to establish. While it is always satisfied in a polyhedral setting, it generally fails otherwise, even when the reference risk measure is convex. However, lower continuity can often be established for eligible payoffs that are close to being optimal. Besides capital adequacy, our results have a variety of natural applications to pricing, hedging, and capital allocation problems.

Family Firms, Banks And Firm Value: Evidence From Malaysia
Liew, Chee Yoong,Devi, Susela
Purpose â€" This paper examines the relationship between the number of domestic banks that the firm engages with and firm value and how this relationship is moderated by ownership concentration at low and very high level on a sample of Malaysian family and non-family firms.Design/methodology/approach â€" For hypotheses testing, panel data analysis using the fixed effects model (FEM) is used because the FEM can address any endogeneity problems effectively (Chi, 2005). The panel data regression is conducted on both family firms and non-family firms.Findings â€" We find that there is a significant negative relationship between the number of domestic banks engaged by family firms, operating in industries where these firms do not have absolute monopoly, and firm value. However, there is no evidence that this significant negative firm value effect is stronger in family firms compared to non-family firms. Furthermore, the significant positive moderating effect of ownership concentration on this relationship within family firms in such industries is evident only at low level of ownership concentration. Interestingly, at very high level of ownership concentration, this significant positive moderating effect becomes negative. There is no evidence that these significant moderating effects are stronger in family firms compared to non-family firms.Research limitations/implications â€" This research has focused only on family and non-family firms.Practical implications â€" An implication of this research is that there is a need for the capital marketregulators to introduce appropriate policies to deter family firms from having a close relationship with domestic banks as well as monitor the number of domestic banks engaged by such firms. There may be policy implications for consideration by the Central Bank of Malaysia as well.Originality/value â€" This research provides some insights to both academia and industry regarding the consequences of domestic banking relationship and different levels of concentrated ownership in family firms in an emerging market. These insights can help improve the corporate governance as well as ownership structure of Malaysian public-listed family firms which dominate the capital market. Our findings refute the argument by Peng and Jiang (2010) by demonstrating that corporate reputational effects may be a substitute for institutional deficiencies.

Gender and Earnings Conference Calls
Francis, Bill B.,Shohfi, Thomas,Xin, Daqi
Using a sample of more than 65,000 earnings conference call transcripts from 2007 to 2016, we examine analyst and management gender differences in participation and behavior during conference calls. We find that female analysts are less likely to participate in earnings conference calls. In addition, female analysts appear later in the Q&A session to ask questions, are granted fewer follow-up opportunities, and speak less compared with their male counterparts. Female executives also have shorter discourses than male executives and female analysts’ questions elicit more executives’ positive sentiment. Female executives use less numeric content when answering analysts’ question but their tone is less uncertain. Subsequent to conference calls, the EPS magnitude of forecast revision is larger for female analysts.

Global Carbon Divestment and Firms' Actions
Choi, Darwin,Gao, Zhenyu,Jiang, Wenxi
We examine the actions of financial institutions and firms regarding greenhouse gas emissions. We find that financial institutions around the world reduce their exposure to stocks of high-emission industries after 2015, especially for those located in high-climate-awareness countries, suggesting that institutions are concerned about climate risks in recent years. In the presence of divestment, firms in the same countries tend to experience lower price valuation ratios, which make equity financing costlier, but they increase capital expenditure and research and development (R&D) expenses and reduce emissions resulting from their operations. Our results support the notion that divestment campaigns by financial institutions exert pressure on firms to adopt climate-friendly policies and decrease carbon footprints.

In Sickness and in Debt: The COVID-19 Impact on Sovereign Credit Risk
Augustin, Patrick,Sokolovski, Valeri,Subrahmanyam, Marti G.,Tomio, Davide
The COVID-19 pandemic is a once-in-a-century shock that affects countries with varying intensity. Governments entered the crisis with different fiscal conditions, predetermined prior to the crisis and independent of the timing of its onset. This setting provides a unique opportunity to evaluate the importance of a country’s fiscal capacity in explaining the relation between shocks to economic growth and sovereign default risk. In a sample of 30 developed countries, we find a positive and significant sensitivity of a country's default risk to the intensity of the virus spread for fiscally constrained governments. In support of the finding that fiscal capacity, and not differences in monetary policy, is the channel through which economic shocks impact sovereign default risk, we repeat the analysis on a sample of U.S. states and find similar results. Our analysis suggests that financial markets penalize sovereigns with low fiscal space, thereby impairing their resilience to external shocks.

Increasing Financial Literacy Among Undergraduate Students
Barreto, Montgomery,Gamble, Keith Jacks
This study examines the financial literacy levels of students at Middle Tennessee State University and the effectiveness of tools on campus to increase students’ knowledge of basic financial topics and their own student debt. We administer a survey across campus to students in multiple finance classes and to the general student population. Around half of our student respondents answer correctly all of the “Big Three” questions testing financial literacy, a higher proportion answering correctly than the average in several prior studies conducted around the world. We find mixed results regarding our respondents’ understanding of their own student loan debt with some aspects being well understood and others being vastly misunderstood. Our results show that the most effective instrument on campus to improve students’ financial literacy is the completion of a finance course. Respondents who have completed a Middle Tennessee State University finance course are more likely to answer questions on financial topics correctly and to understand their own student loan debt.

Independent Directors’ Tenure, Expropriation, Related Party Transactions And Firm Value: The Role Of Ownership Concentration In Malaysian Publicly Listed Corporations
Liew, Chee Yoong,Devi, Susela
This chapter analyses the relationship between related party transactions (RPT) and firm value and whether independent directors’ tenure (IDT) strengthens or weakens this relationship. Further, it examines ownership concentration’s role on this moderating effect of IDT in Malaysian family and non-family corporations. It is found that that IDT weakens the relationship between RPT and firm value. However, ownership concentration strengthens this moderating effect of IDT. Interestingly, family corporations are more likely to show a stronger impact of ownership concentration which we allude to concerns of maintaining reputation. The research results remain after controlling for technology corporations. The findings’ have important implications for policy makers, practitioners and regulators, especially in emerging economies globally.

Informativeness of Mutual Fund Advertisements: Does Advertising Communicate Fund Quality to Investors?
Obaid, Khaled,Pukthuanthong, Kuntara
We uncover a positive relation between advertising expenditures and skill in the mutual fund industry. Motivated by economic signaling models, we find that funds advertising in magazines outperform their peers by 83 basis points in the subsequent year. We determine that the performance differential between advertising and non-advertising funds is largest when investment opportunities are high and persists for 36 months. Generally, the positive relation between advertising expenditures and future fund flows is not sensitive to the content of the advertisements and is strongest when investor attention is high.

Portfolio Choice with Small Temporary and Transient Price Impact
Ekren, ibrahim,Muhle‐Karbe, Johannes
We study portfolio selection in a model with both temporary and transient price impact introduced by Garleanu and Pedersen. In the large‐liquidity limit where both frictions are small, we derive explicit formulas for the asymptotically optimal trading rate and the corresponding minimal leading‐order performance loss. We find that the losses are governed by the volatility of the frictionless target strategy, like in models with only temporary price impact. In contrast, the corresponding optimal portfolio not only tracks the frictionless optimizer, but also exploits the displacement of the market price from its unaffected level.

Pre-Investment Due Diligence and Audit Practices of Venture Capital Firms in India
Bushra, Seema,Rao, D. N.,Gulati, Krity
The pre-investment due diligence is a comprehensive systematic investigation, verification and evaluation of the prospective project before funds are committed. The paper aims to develop a comprehensive due diligence and audit framework to facilitate consistent evaluation of investment proposals. A brief literature review concerning the pre-investment assessment activities has been presented. In order to develop a pragmatic comprehensive framework, which requires a great deal of information and documents to be perused, the Focus group interview method has been adopted. The resultant discussions had been summarized under various heads - Business proposal screening, Term sheet, Current Valuation and Capital structure, amount of funds needed, structuring the deal, the antecedents of the core management team including the promoters, details of the product/service, nature of completion, industry/sector attractiveness etc. The paper as part of due diligence and audit process suggests the list of documents.The framework suggested would enable venture capital firms to adopt consistent and robust practices resulting in risk mitigation of its investments in new business ventures.

Price Dispersion in Bitcoin Exchanges
Tsang, Kwok Ping,Yang, Zichao
Bitcoin is traded in a number of exchanges, and there is a large and time-varying price dispersion among them. We identify the sources of price dispersion using a standard time-varying vector auto-regression model with stochastic volatility. Using weekly data over the past 3 years, we find that shocks to transaction fees and bitcoin price growth explain on average 20%, and sometimes more than 60%, of the variation of price dispersion. We argue that the two variables are related to the profitability and risk of trading across the exchanges, and the impulse response functions are consistent with our interpretation.

Role of FinTech in Accelerating Financial Inclusion in India
Raj, Brij,Upadhyay, Varun
The term ‘FinTech’ is a combination of the words ‘financial’ and ‘technology’. It can be broadly defined as technology-enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets, institutions and the provision of financial services. FinTech, therefore, has the potential to reshape the financial services and financial inclusion landscape in India in fundamental ways. Through their innovations, new business models and applications, FinTech firms can help increase competition and play an important role in accelerating Financial Inclusion in India by helping reduce costs and improving access to financial services to the under-served, persons in low income groups, rural and other under-served sectors of the Indian economy. An estimate suggests that almost 90% of micro units in India are still outside the formal credit system. This segment, along with the small enterprises, can benefit immensely from a collaboration between banks and FinTech players, whereby their other payment records can form a basis for assessing their credit worthiness. It is noteworthy that a number of FinTech players have witnessed strong growth over the past few years and from being virtually unheard of, at the beginning of this decade, today we have as many as 1218 entities operating in India. This paper, therefore, takes stock of the technological revolution that is shaping the future of finance in India and the important role FinTech can play in accelerating Financial Inclusion in India. It also discusses the regulatory initiatives taken to spur the FinTech movement in India, the framework for Regulatory Sandbox in India and the steps required to help achieve the potential that the sector offers towards growth and inclusion. The paper draws insights from the work of leading FinTech firms focused on enhancing financial inclusion in our country and discussions with industry experts and officials leading the FinTech agenda in our country. It proposes accelerating the agenda of financial inclusion through innovation and offers solutions on how FinTech can help in this regard. The paper also discusses the importance of an ecosystem which promotes collaboration and advocates the need for banks and FinTech firms to work together for their mutual benefit. It discusses how to harness the benefits of FinTech while ensuring that concerns relating to data confidentiality and customer protection are also addressed. As regards the potential risks and their mitigation, the important role of RegTech and SupTech i.e. technologies which help improve efficiency through the use of automation, introducing new capabilities and streamlining workflows, is also discussed. The key to success in FinTech is to harness the benefits while managing the risks. Therefore, this paper concludes with the need to have an appropriate regulatory and supervisory framework to facilitate the growth of this sector to ensure that FinTech continues to help accelerate Financial Inclusion in India.

State Ownership and Corporate Innovative Efficiency
Cao, Jerry,Cumming, Douglas J.,Zhou, Sili
In this paper, we investigate the innovative efficiency of SOEs in China. Innovative efficiency refers to output of patents per dollar spending of R&D expenditure. The data indicate that minority SOEs are substantially more innovatively efficient than nonSOEs and majority SOEs. The relative innovative efficiency of minority SOEs is more pronounced amongst firms with high financial constraints. The data are consistent with the view that, in the Chinese context, there are favorable benefits to partial state ownership through access to talent, connections, and technological resources that enable efficient patent outcomes from R&D expenditure.

The COVID-19 Shock and Consumer Credit: Evidence from Credit Card Data
Horvath, Akos,Kay, Benjamin,Wix, Carlo
We use credit card data from the Federal Reserve's Y-14M reports to study the early impact of the COVID-19 shock on the use and availability of consumer credit. First, we find that in counties severely affected by the pandemic, creditworthy borrowers reduce their use of credit, while the least creditworthy borrowers increase their outstanding balances. Second, both pandemic severity and non-pharmaceutical interventions have a negative effect on credit use, but the pandemic itself is the key driver. Third, we provide preliminary evidence that the COVID-19 shock increases the APR spreads of newly issued cards to riskier borrowers.

The COVID-19 Shock and Equity Shortfall: Firm-level Evidence from Italy
Carletti, Elena,Oliviero, Tommaso,Pagano, Marco,Pelizzon, Loriana,Subrahmanyam, Marti G.
This paper estimates the drop in profits and the equity shortfall triggered by the COVID-19 shock and the subsequent lockdown, using a representative sample of 80,972 Italian firms. We find that a 3-month lockdown entails an aggregate yearly drop in profits of €170 billion, with an implied equity erosion of €117 billion for the whole sample, and €31 billion for firms that became distressed, i.e., ended up with negative book value after the shock. As a consequence of these losses, about 17% of the sample firms, whose employees account for 8.8% of total employment in the sample (about 800 thousand employees), become distressed. Small and medium-sized enterprises (SMEs) are affected disproportionately, with 18.1% of small firms, and 14.3% of medium-sized ones becoming distressed, against 6.4% of large firms. The equity shortfall and the extent of distress are concentrated in the Manufacturing and Wholesale Trading sectors and in the North of Italy. Since many firms predicted to become distressed due to the shock had fragile balance sheets even prior to the COVID-19 shock, restoring their equity to their pre-crisis levels may not suffice to ensure their long-term solvency.

The Impact of Heterogeneous Unconventional Monetary Policies on Market Uncertainty
Alonso Alvarez, Irma,Serrano, Pedro,Vaello-Sebastià, Antoni
This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on market uncertainty. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. The most effective measures are the forward guidance and liquidity actions, rather than asset purchases. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal an original cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.

The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme
Clemens, Marius,Gebauer, Stefan,König, Tobias
While the first two pillars of the European Banking Union have been implemented, a European deposit insurance scheme (EDIS) is still not in place. To facilitate its introduction, recent proposals argue in favor of a reinsurance scheme. In this paper, we use a regime-switching open-economy DSGE model with bank default and bank-government linkages to assess the relative efficiency of such a scheme. We find that reinsurance by both a national fiscal backstop and EDIS is efficient in stabilizing the macro economy, even though welfare gains are slightly larger with EDIS and debt-to-GDP ratios rise under the fiscal reinsurance. We demonstrate that risk-weighted contributions to EDIS are welfare-beneficial for depositors and discuss trade-offs policy makers face during the implementation of EDIS. In a counterfactual exercise, we find that EDIS would have stabilized economic activity in Germany and the rest of the euro area just as well as a fiscal backing of insured deposits during the financial crisis. However, the debt-to-GDP ratio would have been lower with EDIS.