Based on an empirical analysis of European corporations, we investigate the impact of sovereign risk on the pricing of corporate credit risk. In our paper, we show that sovereign credit default swaps (CDS) are positively correlated with corresponding corporate CDS spreads and are a significant factor for corporate CDS pricing models. We also find that this impact increases throughout the sovereign debt crisis in 2010-2011 and is more distinctive for Eurozone countries that were more exposed to the sovereign debt crisis than others. We further observe that this effect is particularly pronounced for corporations with a high dependency on their domestic market.
We study the exposure of mortgage borrowers in Switzerland to interest rate, income and house price risks and examine how the households' choice of risky mortgages is related to individual interest rate expectations and risk-aversion. Our analysis is based on a unique data set of household mortgage applications from September 2012 until January 2014. Our assessment of risk exposure among mortgage borrowers in Switzerland is highly sensitive to the underlying assumptions on mortgage costs, household income and house value. Our main results suggest that
the exposure of mortgage borrowers to interest rate and house price risks is limited in the medium-term. We further document that the choice of mortgage contract seems to be more influenced by affordability concerns than risk concerns. In particular, individual interest rate expectations hardly affect mortgage contract choice.
We examine the determinants of households' and banks' choice of mortgage rate fixation periods (FP) in a low interest rate environment. The existing literature interprets equilibrium FP, often reduced to the choice between Fixed Rate Mortgages (FRM) and Adjustable Rate Mortgages (ARM), as purely demand driven. Using a unique dataset with offers from multiple banks for each mortgage request, we are the first to explicitly disentangle demand and supply determinants of FP choices. We show that banks can advance their own FP preferences along several dimensions. Their desired FP must account both for the implied Interest Rate Risk (IRR), and for the Credit Risk implications from shifting that IRR to households. Our empirical results confirm that banks do indeed take into account both types of risk, although some margins of response are used only to small extent.
In this paper, I examine the role of culture for households' saving decisions. Exploiting historical language borders within Switzerland, I isolate the effect of culture from economic, institutional, demographic and geographic factors for a homogeneous and representative sample of households. The analysis is based on the Swiss Household Panel that I complement with geographic and socio-economic data. I show that households located in the Romanic-speaking part (Italian, French) are more than 10 percentage points less likely to save than German-speaking households. I show that these differences are consistent with different distributions of time preferences and norms of taking informal consumer credit in financial distress across language regions.
The recent financial crisis has reemphasized the importance of research on issues such as the relevance of too-big-to-fail guarantees, deposit insurance, and risk management by financial institutions, all of which have been widely discussed by practitioners, policymakers, and academics. The book Financial Institutions, In and Out of Crisis by Anthony Saunders, John M. Schiff Professor of Finance at New York University, is a careful selection of 20 academic papers that discuss many of the issues that became relevant during the crisis.
We summarize some methods useful in formulating and solving Hansen-Sargent robust control problems, and suggest extensions to discretion and simple rules. Matlab, Octave, and Gauss software is provided. We illustrate these extensions with applications to the term structure of interest rates, the time inconsistency of optimal monetary policy, the effects of expectations on the variances of inflation and output, and on whether central banks should make their forecasts public.
Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the equity premium puzzle. We quantify the amount of pessimism and doubt in survey data on US consumption and income. Individual forecasters are in fact pessimistic, but show marked overconfidence rather than doubt. However, the implications for Abel's model depend on how the empirically heterogeneous beliefs are mapped into beliefs of a representative agent. We use an Arrow-Debreu economy to show that disagreement increases the equity premium. When incorporating this in our estimation, we find little empirical evidence of either overconfidence or doubt.
We study the inflation uncertainty reported by individual forecasters in the Survey of Professional Forecasters 1969-2001. Three popular measures of uncertainty built from survey data are analyzed in the context of models for forecasting and asset pricing, and improved estimation methods are suggested. Popular time series models are evaluated for their ability to reproduce survey measures of uncertainty. The results show that disagreement is a better proxy of inflation uncertainty than what previous literature has indicated, and that forecasters underestimate inflation uncertainty. We obtain similar results for output growth uncertainty.
Studies on the capital structure of Asian corporations are rare, and most of those studies support different explanations of financing decisions compared to the ones accepted for the USA and Europe. We test relationships that are typical of the Tradeoff Theory and the Pecking Order Theory, and analyze the speed of adjustment toward target capital structures for 1239 companies with capitalizations of more than US$1 billion listed on 11 Asian stock exchanges and belonging to eight industrial sectors. Our results are based on generalized method of moments (GMM) estimations for the determinants of capital structures and system-GMM estimations for the speed of adjustment, and robustness is checked using book leverage and market leverage on the basis of ordinary least squares estimations and two-stage least squares estimations. We contribute to the literature by finding strong evidence that companies in Asia pursue target capital structures, as predicted by the Tradeoff Theory. Only in one respect does the Pecking Order Theory demonstrate superior explanatory power. We further show that the convergence to target capital structures is consistent with international evidence, estimated at an annual adjustment speed of 24-45% of original leverage levels. Finally, our comparison among eight industries shows that the capital structure choice in Asia is influenced by fixed effects.
