The Financial Economics of Real Estate Markets and Regulation
The contemporary literature on real estate markets suggests that housing policies play a crucial role in achieving economic and financial stability and poorly designed policies can trigger economic and financial crisis. Our research group contributes to this debate by studying how financial and legal innovations affect housing markets, securitisation and the real economy. To answer these research questions, the research group generates a comprehensive European House Price Index for real estate rental and purchase markets in the European Union using web crawling and text mining techniques.
First, we aim to document how financial and legal frameworks affect risk transfer behaviour of financial institutions in housing markets through securitisation. For example, one of our research projects discusses how foreclosure laws and mortgage pricing policies should be designed to mitigate moral hazard of lenders and borrowers in mortgage markets.
The second 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 booms and busts 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 recent financial crisis.
Finally, our research aims to expand the understanding of the role of financial innovation in lender-borrower relationships, and its implications for the real economy.
Research ClusterFinancial Stability and Regulation
Profit Shifting and Tax‐rate Uncertainty
in: Journal of Business Finance & Accounting, forthcoming
Using firm‐level data for 1,084 parent firms in 24 countries and for 9,497 subsidiaries in 54 countries, we show that tax‐motivated profit shifting is larger among subsidiaries in countries that have stable corporate tax rates over time. Our findings further suggest that firms move away from transfer pricing and toward intragroup debt shifting that has lower adjustment costs. Our results are robust to several identification methods and respecifications, and they highlight the important role of tax‐rate uncertainty in the profit‐shifting decision while pointing to an adjustment away from more costly transfer pricing and toward debt shifting.
To Securitise or to Price Credit Default Risk?
in: IWH Discussion Papers, No. 10, 2020
We evaluate lenders‘ incentives to mitigate credit default risk through pricing or securitisation. Exploiting exogenous variation in credit default risk created by differences in foreclosure law along US state borders, we find that lenders in the mortgage market respond to the law in heterogeneous ways. In the agency market where the GSEs mandate a common interest rate policy, foreclosure law provokes a 4.5% increase in securitisation rates but does not affect interest rates. For nonagency loans where market participants demand risk premium, foreclosure law does not incentivise lenders to transfer the risk through the use of securitisation but causes a 625 basis point increase in interest rates. The results highlight how the GSEs‘ common interest rate policy inhibits lenders‘ risk-based pricing incentives, increases the GSEs‘ debt holdings by $70 billion per annum, and exposes taxpayers to preventable losses in the housing market.