The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Makram El-Shagi, Gregor von Schweinitz
Journal of Banking and Finance,
2018
Abstract
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a feedback loop leading into default as a transitory state for all but the very worst ratings. We use a bivariate semiparametric dynamic panel model to reproduce the joint dynamics of sovereign ratings and government bond yields. The individual equations resemble Pesaran-type cointegration models, which allow for valid interference regardless of whether the employed variables display unit-root behavior. To incorporate most of the empirical features previously documented (separately) in the literature, we allow for different long-run relationships in both equations, nonlinearities in the level effects of ratings, and asymmetric effects in changes of ratings and yields. Our finding of a single good equilibrium implies the slow convergence of ratings and yields toward this equilibrium. However, the persistence of ratings is sufficiently high that a rating shock can have substantial costs if it occurs at a highly speculative rating or lower. Rating shocks that drive the rating below this threshold can increase the interest rate sharply, and for a long time. Yet, simulation studies based on our estimations show that it is highly improbable that rating agencies can be made responsible for the most dramatic spikes in interest rates.
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China’s Monetary Policy Communication: Frameworks, Impact, and Recommendations
Michael McMahon, Alfred Schipke, Xiang Li
IMF Working Paper No. 18/244,
2018
Abstract
Financial markets are eager for any signal of monetary policy from the People’s Bank of China (PBC). The importance of effective monetary policy communication will only increase as China continues to liberalize its financial system and open its economy. This paper discusses the country’s unique institutional setup and empirically analyzes the impact on financial markets of the PBC’s main communication channels, including a novel communication channel. The results suggest that there has been significant progress but that PBC communication is still evolving toward the level of other major economies. The paper recommends medium-term policy reforms and reforms that can be adopted quickly.
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Taken by Storm: Business Financing and Survival in the Aftermath of Hurricane Katrina
Emek Basker, Javier Miranda
Journal of Economic Geography,
Nr. 6,
2018
Abstract
We use Hurricane Katrina’s damage to the Mississippi coast in 2005 as a natural experiment to study business survival in the aftermath of a capital-destruction shock. We find very low survival rates for businesses that incurred physical damage, particularly for small firms and less-productive establishments. Conditional on survival, larger and more-productive businesses that rebuilt their operations hired more workers than their smaller and less-productive counterparts. Auxiliary evidence from the Survey of Business Owners suggests that the differential size effect is tied to the presence of financial constraints, pointing to a socially inefficient level of exits and to distortions of allocative efficiency in response to this negative shock. Over time, the size advantage disappeared and market mechanisms seem to prevail.
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A Market-based Measure for Currency Risk in Managed Exchange Rate Regimes
Stefan Eichler, Ingmar Roevekamp
Journal of International Financial Markets, Institutions and Money,
November
2018
Abstract
We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994–2014 period, we find that a deterioration in the fiscal balance and higher inflation increase currency risk. Interaction models reveal that the fiscal balance and inflation drive the determination of currency risk for countries with poor sovereign rating, low foreign reserves, low capital account openness and managed float regimes.
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Measuring the Impact of Household Innovation using Administrative Data
Javier Miranda, Nikolas Zolas
NBER Working Paper,
Nr. 25259,
2018
Abstract
We link USPTO patent data to U.S. Census Bureau administrative records on individuals and firms. The combined dataset provides us with a directory of patenting household inventors as well as a time-series directory of self-employed businesses tied to household innovations. We describe the characteristics of household inventors by race, age, gender and U.S. origin, as well as the types of patented innovations pursued by these inventors. Business data allows us to highlight how patents shape the early life-cycle dynamics of nonemployer businesses. We find household innovators are disproportionately U.S. born, white and their age distribution has thicker tails relative to business innovators. Data shows there is a deficit of female and black inventors. Household inventors tend to work in consumer product areas compared to traditional business patents. While patented household innovations do not have the same impact of business innovations their uniqueness and impact remains surprisingly high. Back of the envelope calculations suggest patented household innovations granted between 2000 and 2011 might generate $5.0B in revenue (2000 dollars).
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Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area and its Drivers
Hannes Böhm, Stefan Eichler
Abstract
We isolate the direct bank-to-sovereign distress channel within the eurozone’s sovereign-bank-loop by exploiting the global, non-eurozone related variation in stock prices. We instrument banking sector stock returns in the eurozone with exposure-weighted stock market returns from non-eurozone countries and take further precautions to remove any eurozone crisis-related variation. We find that the transmission of instrumented bank distress, while economically relevant, is significantly smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on reverse causality and omitted variables in previous studies. Furthermore, we show that the spillover of bank distress is significantly stronger for countries with poorer macroeconomic performances, weaker financial sectors and financial regulation and during times of elevated political uncertainty.
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The Role of Auditors in Merger and Acquisition Completion Time
Salim Chahine, Iftekhar Hasan, Mohamad Mazboudi
International Journal of Auditing,
Nr. 3,
2018
Abstract
Using a sample of 664 merger and acquisition (M&A) transactions and office‐level audit data, this study investigates the role of auditors in M&A completion time. We find that having a common auditor for both acquirer and target firms in M&A transactions increases the completion time of such transactions because the exposure to higher litigation and reputational costs outweighs the information‐access advantage of common auditors. However, auditors' past experience in M&A transactions helps reduce completion time and costs. These results are robust to having Big N auditors at both ends as well as to various acquirer, target, and deal characteristics.
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Connecting to Power: Political Connections, Innovation, and Firm Dynamics
Ufuk Akcigit, Salomé Baslandze, Francesca Lotti
NBER Working Paper,
Nr. 25136,
2018
Abstract
How do political connections affect firm dynamics, innovation, and creative destruction? To answer this question, we build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model generates a number of theoretical testable predictions and highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity. We test the predictions of our model using a brand-new dataset on Italian firms and their workers, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: when compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design.
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