Risk Shifting in Financial Markets and Sustainable Finance
The contemporary literature on financial intermediation suggests that banks play an important role in the transition towards a sustainable economy. The research group ‘Risk Shifting in Financial Markets and Sustainable Finance’ contributes to this debate by studying lenders' risk shifting incentives, their choices in supporting sustainable business, and how sustainable finance and legal innovations affect firms and households.
First, we analyze how banks respond to climate transition risks. Specifically, we investigate whether banks manage these risks by offloading loans to environmentally harmful firms or by incorporating sustainability pricing provisions into loan contracts. Our ongoing research delves into the role of banking supervision in facilitating the transition to net-zero, specifically by assessing the impact of climate stress tests on banks' lending practices. We also examine how depositors, firms, and financial institutions manage various forms of biodiversity risk.
Second, we illustrate the choice between risk pricing and risk shifting through securitisation by financial institutions. From a household finance perspective, we discuss how mortgage foreclosure laws and mortgage pricing policies should be designed to mitigate moral hazard of lenders and borrowers. We also highlight the effect of zombie mortgage laws on banks and non-bank lenders, and the implications arising for housing markets.
Another line of research aims to establish evidence of how financial regulation contributes to securitisation booms, which are considered to be at the root of the recent boom and bust cycles in housing markets. Specifically, we shed light on how banking deregulation and financial development increase the probability of a bank operating an originate-to-distribute model in the lead up to the financial crisis that started in 2007.
Finally, the research group investigates the role of financial institutions in supporting firms to mitigate risk from supply chain disruptions triggered by the Covid-19 pandemic.
Workpackage 1: Do financial institutions provide sustainable finance?
Workpackage 2: How do banks choose between risk pricing and risk shifting?
Workpackage 3: The Impact of Banking Supervision and Regulation on Financial Intermediaries
Research Cluster
Financial Resilience and RegulationYour contact
- Department Financial Markets
Refereed Publications
Legal Insider Trading and Stock Market Liquidity
in: De Economist, No. 1, 2016
Abstract
This paper assesses the impact of legal trades by corporate insiders on the liquidity of the firm’s stock. For this purpose, we analyze two liquidity measures and one information asymmetry measure. The analysis allows us to study as well the effect of a change in insider trading regulation, namely the implementation of the Market Abuse Directive (European Union Directive 2003/6/EC) on the Dutch stock market. The first set of results shows that, in accordance with theories of asymmetric information, the intensity of legal insider trading in a given company is positively related to the bid-ask spread and to the information asymmetry measure. We also find that the Market Abuse Directive did not reduce significantly this effect. Secondly, analyzing liquidity and information asymmetry around the days of legal insider trading, we find that small and large capitalization stocks see their bid-ask spread and the permanent price impact increase when insiders trade. For mid-cap stocks, only the permanent price impact increases. Finally, we could not detect a significant improvement of these results following the change in regulation.
Working Papers
Housing Consumption and Macroprudential Policies in Europe: An Ex Ante Evaluation
in: IWH Discussion Papers, No. 17, 2018
Abstract
In this paper, we use the panel of the first two waves of the Household Finance and Consumption Survey by the European Central Bank to study housing demand of European households and evaluate potential housing market regulations in the post-crisis era. We provide a comprehensive account of the housing decisions of European households between 2010 and 2014, and structurally estimate the housing preference of a simple life-cycle housing choice model. We then evaluate the effect of a tighter LTV/LTI regulation via counter-factual simulations. We find that those regulations limit homeownership and wealth accumulation, reduces housing consumption but may be welfare improving for the young households.
