To Securitise or to Price Credit Default Risk?
Huyen Nguyen, Danny McGowan
Abstract
We evaluate if lenders price or securitise mortgages to mitigate credit risk. Exploiting exogenous variation in regional credit risk created by differences in foreclosure law along US state borders, we find that financial institutions respond to the law in heterogeneous ways. In the agency market where Government Sponsored Enterprises (GSEs) provide implicit loan guarantees, lenders transfer credit risk using securitisation and do not price credit risk into mortgage contracts. In the non-agency market, where there is no such guarantee, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate about the design of loan guarantees, the common interest rate policy, and show that underpricing regional credit risk leads to an increase in the GSEs‘ debt holdings by $79.5 billion per annum, exposing taxpayers to preventable losses in the housing market.
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05.06.2020 • 8/2020
IWH Bankruptcy Update: Increase in large firm bankruptcies
With overall corporate bankruptcies remaining constant, ever more employees are subject to employer bankruptcy in Germany. This is the latest insight from the IWH Bankruptcy Update provided monthly by the Halle Institute for Economic Research (IWH).
Steffen Müller
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IWH-Transfertagung „Europas Finanzmarkt: Zwangsehe oder lose Bekanntschaft?“
Sithara Thies
Wirtschaft im Wandel,
No. 1,
2020
Abstract
Ein Jahrzehnt nach der weltweiten Finanzkrise steht das Finanzsystem noch immer vor enormen Herausforderungen. Wie diese in Europa gemeistert werden können, war Thema einer hochkarätig besetzten Tagung, die am 26. Februar 2020 am Leibniz-Institut für Wirtschaftsforschung Halle (IWH) stattfand.
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Democracy and Credit
Manthos D. Delis, Iftekhar Hasan, Steven Ongena
Journal of Financial Economics,
No. 2,
2020
Abstract
Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we find that democratization has a sizable negative effect on loan spreads: a 1-point increase in the zero-to-ten Polity IV index of democracy shaves at least 19 basis points off spreads, but likely more. Reversals to autocracy hike spreads more strongly. Our findings are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of other sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization can affect economic development.
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07.05.2020 • 7/2020
Launch of IWH Bankruptcy Update: Number of corporate bankruptcies in Germany constant despite Corona crisis
Despite the Corona outbreak, the number of corporate bankruptcies in Germany so far remains at 2019 levels. This is according to the new IWH Bankruptcy Update provided by the Halle Institute for Economic Research (IWH) on a monthly basis and much earlier than official statistics.
Steffen Müller
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The Creation and Evolution of Entrepreneurial Public Markets
Shai B. Bernstein, Abhishek Dev, Josh Lerner
Journal of Financial Economics,
No. 2,
2020
Abstract
This paper explores the creation and evolution of new stock exchanges around the world geared toward entrepreneurial companies, known as second-tier exchanges. Using hand-collected novel data, we show the proliferation of these exchanges in many countries, their significant volume of Initial Public Offerings (IPOs), and lower listing requirements. Shareholder protection strongly predicted exchange success, even in countries with high levels of venture capital activity, patenting, and financial market development. Better shareholder protection allowed younger, less-profitable, but faster-growing, companies to raise more capital. These results highlight the importance of institutions in enabling the provision of entrepreneurial capital to young companies.
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08.04.2020 • 5/2020
Economy in Shock – Fiscal Policy to Counteract
The coronavirus pandemic is triggering a severe recession in Germany. Economic output will shrink by 4.2% this year. This is what the leading economics research institutes expect in their spring report. For next year, they are forecasting a recovery and growth of 5.8%.
Oliver Holtemöller
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The Effects of Graduating from High School in a Recession: College Investments, Skill Formation, and Labor-Market Outcomes
Franziska Hampf, Marc Piopiunik, Simon Wiederhold
CESifo Working Paper,
No. 8252,
2020
Abstract
We investigate the short- and long-term effects of economic conditions at high-school graduation as a source of exogenous variation in the labor-market opportunities of potential college entrants. Exploiting business cycle fluctuations across birth cohorts for 28 developed countries, we find that bad economic conditions at high-school graduation increase college enrollment and graduation. They also affect outcomes in later life, increasing cognitive skills and improving labor-market success. Outcomes are affected only by the economic conditions at high-school graduation, but not by those during earlier or later years. Recessions at high-school graduation narrow the gender gaps in numeracy skills and labor-market success.
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