25 Years IWH

Financial Markets

Research in this department centres on institutional changes in Europe’s financial markets. The department analyses the causes and consequences of banks’ international expansions, the link between market structures in banking and aggregate (financial) stability, contagion effects on international financial markets and the role of the financial system for the real economy.

The interdependence of the financial services sector with innovation and productivity in the real economy are of particular interest. Methodologically, research focuses on empirical methods that support analyses of feedback from the micro to the macro level and that allow for causal evaluations of regulatory interventions into financial systems.

Brown Bag Seminar

IWH-FIN-FIRE Workshop

Your contact

Professor Michael Koetter, PhD
Professor Michael Koetter, PhD
Leiter - Department Financial Markets
Send Message +49 345 7753-727

Refereed Publications

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Too Connected to Fail? Inferring Network Ties from Price Co-movements

Jakob Bosma Michael Koetter Michael Wedow

in: Journal of Business & Economic Statistics , forthcoming

Abstract

We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both CDS-based and Equity-based connections are significant predictors of bailouts.

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Cross-border Diversification in Bank Asset Portfolios

Claudia M. Buch J.C. Driscoll C. Ostergaard

in: International Finance , forthcoming

Abstract

We compute optimally diversified international asset portfolios for banks located in France, Germany, Italy, the United Kingdom and the United States using the mean–variance portfolio model with currency hedging. We compare these benchmark portfolios with the actual cross-border asset positions of banks from 1995 to 2003 and ask whether the differences are best explained by regulations, institutions, cultural conditions or other financial frictions. Our results suggest that both culture and regulations affect the probability of a country's being overweighted in banks' portfolios: countries whose residents score higher on a survey measure of trust are more likely to be overweighted, while countries that have tighter capital controls are less likely to be overweighted. From a policy standpoint, the importance of culture suggests a limit to the degree of financial integration that may be achievable by the removal of formal economic barriers.

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Regional, Individual and Political Determinants of FOMC Members' Key Macroeconomic Forecasts

Stefan Eichler Tom Lähner

in: Journal of Forecasting , forthcoming

Abstract

We study Federal Open Market Committee members' individual forecasts of inflation and unemployment in the period 1992–2004. Our results imply that Governors and Bank presidents forecast differently, with Governors submitting lower inflation and higher unemployment rate forecasts than bank presidents. For Bank presidents we find a regional bias, with higher district unemployment rates being associated with lower inflation and higher unemployment rate forecasts. Bank presidents' regional bias is more pronounced during the year prior to their elections or for nonvoting bank presidents. Career backgrounds or political affiliations also affect individual forecast behavior.

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Corporate Social Responsibility and Firm Financial Performance: The Mediating Role of Productivity

Iftekhar Hasan Nada Kobeissi Liuling Liu Haizhi Wang

in: Journal of Business Ethics , forthcoming

Abstract

This study treats firm productivity as an accumulation of productive intangibles and posits that stakeholder engagement associated with better corporate social performance helps develop such intangibles. We hypothesize that because shareholders factor improved productive efficiency into stock price, productivity mediates the relationship between corporate social and financial performance. Furthermore, we argue that key stakeholders’ social considerations are more valuable for firms with higher levels of discretionary cash and income stream uncertainty. Therefore, we hypothesize that those two contingencies moderate the mediated process of corporate social performance with financial performance. Our analysis, based on a comprehensive longitudinal dataset of the U.S. manufacturing firms from 1992 to 2009, lends strong support for these hypotheses. In short, this paper uncovers a productivity-based, context-dependent mechanism underlying the relationship between corporate social performance and financial performance.

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What Type of Finance Matters for Growth? Bayesian Model Averaging Evidence

Iftekhar Hasan Roman Horvath Jan Mares

in: The World Bank Economic Review , forthcoming

Abstract

We examine the effect of finance on long-term economic growth using Bayesian model averaging to address model uncertainty in cross-country growth regressions. The literature largely focuses on financial indicators that assess the financial depth of banks and stock markets. We examine these indicators jointly with newly developed indicators that assess the stability and efficiency of financial markets. Once we subject the finance-growth regressions to model uncertainty, our results suggest that commonly used indicators of financial development are not robustly related to long-term growth. However, the findings from our global sample indicate that one newly developed indicator—the efficiency of financial intermediaries—is robustly related to long-term growth.

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Working Papers

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Badly Hurt? Natural Disasters and Direct Firm Effects

Felix Noth Oliver Rehbein

in: IWH Discussion Papers , No. 25, 2017

Abstract

We investigate firm outcomes after a major flood in Germany in 2013. We robustly find that firms located in the disaster regions have significantly higher turnover, lower leverage, and higher cash in the period after 2013. We provide evidence that the effects stem from firms that already experienced a similar major disaster in 2002. Overall, our results document a positive net effect on firm performance in the direct aftermath of a natural disaster.

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Delay Determinants of European Banking Union Implementation

Michael Koetter Thomas Krause Lena Tonzer

in: IWH Discussion Papers , No. 24, 2017

Abstract

To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.

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Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe

Manuela Storz Michael Koetter Ralph Setzer Andreas Westphal

in: ECB Working Paper , 2017

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

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Pricing Sin Stocks: Ethical Preference vs. Risk Aversion

Stefano Colonnello Giuliano Curatola Alessandro Gioffré

in: IWH Discussion Papers , No. 20, 2017

Abstract

We develop a model that reproduces the return and volatility spread between sin and non-sin stocks, where investors trade off dividends with the ethical assessment of companies. We relax the assumption of boycott behaviour and investigate the role played by the dividend share of sin stocks on their return and volatility spread relative to non-sin stocks. We empirically show that the dividend share predicts a positive return and volatility spread. This pattern is reproduced by our model when dividends and ethicalness are complementary goods and investors are sufficiently risk averse.

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Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe

Manuela Storz Michael Koetter Ralph Setzer Andreas Westphal

in: IWH Discussion Papers , No. 13, 2017

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

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