Price discovery on traded inflation expectations: does the financial crisis matter?

We analyze contributions of different markets, related by an approximate arbitrage relationship, to price discovery on traded inflation expectations and how it changed during the financial crisis. We use a new high-frequency data-set on inflation-indexed and nominal government bonds as well as inflation swaps to calculate information shares of break-even inflation rates in the euro area and the USA. In the euro area, for maturities up to 5 years new information comes from both the swap and the bond markets. For longer maturities, the swap market provides less and less information in the euro area. In the USA, the bond market dominates the price discovery process for all maturities. The severe financial crisis that spread out in Autumn 2008 drove a wedge between bond and swap break-even inflation rates in both currencies. Price discovery ceased to take place on the swap market. Disruptions coming from the short-end of the market even separated price formation on both segments for maturities of up to 6 years in the USA. Against the backdrop of the most severe financial crisis in decades, contributions to price formation concentrated a lot more on the presumably safest financial instrument: government bonds.     

Cross‐Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area

We provide evidence for the euro area of spillovers from foreign public debt auctions into domestic secondary‐market auction cycles. We also confirm existing evidence of such spillovers from domestic issues into the domestic secondary market. Consistent with a theory of primary dealers’ limited risk‐bearing capacity, we find that auction cycles from domestic issues are stronger during the recent crisis period, whereas cross‐border effects are stronger in the precrisis period, but this evidence is not strong. This finding likely reflects the opposing effects of reduced sovereign bond market integration during the crisis and higher yield covariances caused by more market volatility.     

The impact of bond market development on economic growth before and after the global financial crisis: Evidence from developed and developing countries

This paper investigates the impact of bond market development on economic growth before and after the global financial crisis in 44 selected countries. A dynamic model based on endogenous growth theory is employed for the study for the period 1990–2017. We find robust evidence that the global financial crisis has distorted the link between bond market development and economic growth: before the global financial crisis, the bond market's impact on economic growth was positive; after the global financial crisis, the evidence is mixed. The main finance–growth channel by which proceeds from the bond market are eventually allocated to the most productive investments appears to be broken.     

Underpricing in the Corporate Bond Market

This article examines underpricing of initial public offerings(IPOs) and seasoned offerings in the corporate bond market.We investigate whether underpricing represents a solution toan information problem or a liquidity problem. We find thatunderpricing occurs with both IPOs and seasoned offerings andis highest among riskier, unknown firms. Our evidence suggeststhat information problems drive underpricing, with support forboth the bookbuilding view of underpricing and the asymmetricinformation theory. We do not find evidence in favor of theRock model of underpricing or any evidence that illiquiditycauses underpricing.     

Trust no more? The impact of the crisis on citizens’ trust in central banks

Citizens’ trust in economic institutions has generally declined since the onset of the crisis. In particular, Eurobarometer surveys show that trust in the European Central Bank (ECB) has fallen significantly during the crisis. This paper studies the determinants of public trust in the ECB over the lifetime of the euro. Net trust in the ECB has decreased significantly in those countries which have experienced increasing sovereign bond yields and financial market turbulence. The finding that country-specific variables affect citizens’ trust in the ECB may seem counterintuitive. However, it is consistent with strong evidence in the political science literature showing that domestic considerations play a significant role when citizens get an opportunity to express their opinion on EU matters.     

On the financial market impact of euro area monetary policy: A comparative study before and after the Global Financial Crisis

Using daily data from thirteen euro area and four non-euro countries covering the years 2000 to 2018, we explore whether the Global Financial Crisis 2008–2010 and the introduction of unconventional monetary policy measures has led to a change in the financial market impact of euro area monetary policy. For this purpose, we construct a conservative measure of monetary policy innovations based on the heteroscedasticity-approach of Rigobon and Sack (2004), and investigate the response of national and euro-wide equity indices, derived volatility indices, as well as of government bond yields. We find that financial market participants respond more strongly to monetary policy after the Global Financial Crisis. Moreover, we find that cross-country differences in the responsiveness of government bond yields correlate with average national unemployment rates and with inflation rates, suggesting that monetary policy communication was more effective in countries that had faced a severe economic downturn.     

Bond market investor herding: Evidence from the European financial crisis

During the recent financial crisis, numerous EU officials, market participants and the media suggested that irrational herding was a key factor for the financial turmoil and the soaring yield spreads. In this paper we test for evidence of herd behavior in European government bond prices and, overall, we find no evidence of investor herding either before or after the EU crisis. We do find, however, in an original contribution to the bond market literature, strong evidence that during the EU crisis period, macroeconomic information announcements induced bond market investor herding; a finding that confirms the notion of ‘spurious’ herding proposed by Bikhchandani and Sharma (2001) for bond markets. Further tests reinforce this finding and also indicate the existence of herding spill-over effects.     

Loan underpricing and the provision of merger advisory services

This paper investigates the primary and secondary syndicated bank loan market to analyze the effect on pricing when the financial institution commingles syndicated lending with merger advisory services. In particular, we investigate the connection between the acquirer’s choice of financial advisor in a merger and future financing commitments. We find evidence of underpricing of syndicated bank loans in both the primary and secondary market. In the primary market, we show that non-acquisition loans granted by merger advisors to acquiring firms after the merger announcement date are charged a lower all-in-spread relative to acquisition loans if there has been a prior lending relationship. Consistent with this finding, we find that syndicated bank loans for non-acquisition purposes arranged by the acquirer’s advisor after the merger announcement date trade in the secondary market at a significant discount. Since the terms on these non-acquisition loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of loss leader and potentially conflicted loans (priced at below-market terms) that are offered by the acquirer’s relationship bank advisor in order to win merger advisory business.     

Does competition influence the bank lending channel in the euro area?

This paper examines how competition influences the bank lending channel in the euro area countries. Using a large panel of banks from 12 euro area countries for the period 2002–2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy via the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that bank market power has a significant impact on the effectiveness of monetary policy. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of the single monetary policy.     

Tail risk in the European sovereign bond market during the financial crises: Detecting the influence of the European Central Bank

Since 2008, the European Central Bank (ECB) is conducting an expansionary monetary policy on an unprecedented scale. The consequence is a historical low interest rate environment in the eurozone and inflated prices for the majority of euro area government bonds. This paper presents a study of the tail behavior of triple-A rated euro area government bonds during the financial crisis 2007/08, the European sovereign debt crisis and the episode of expansionary monetary policy by the ECB. First, the analysis determines whether daily returns of euro area government bonds exhibit fat tails. Second, tests are conducted for variation in tail risk among euro area government bonds with different maturities. Third, it is estimated whether the tail behavior has significantly changed during the financial crisis, the European sovereign debt crisis and the resulting market interventions by the ECB. The study is based on daily data of the spot yield curve for triple-A rated euro area government bonds with a remaining maturity from three months to thirty years. Evidence is found for fat tails for the left-and right-hand side of the return distribution for all considered bond maturities in the sample. Moreover, the results indicate a convex term structure of tail risks and a structural change in the tail behavior of short-term bonds with a remaining maturity of less than one year during the past two crises. In contrast, the test outcomes for the majority of the considered long-term bonds do not indicate any significant change in the tail behavior, despite the introduction of unconventional asset purchase programs by the ECB which directly target these securities.     

International spillovers from Euro area and US credit and demand shocks: A focus on emerging Europe

In this paper, we examine the international effects of contractions in loan supply, loan demand and aggregate demand in the euro area and the USA. All three shocks have been at the forefront in spreading stress during the period of the global financial crisis and in particular so to countries that are strongly integrated with the euro area. We find that these shocks decrease international output and total credit to a varying degree. Loan demand and aggregate demand shocks in the euro area trigger significant negative spillovers on output in most other regions. Evidence for global negative output effects of euro area loan supply shocks is fraught with considerable estimation uncertainty. When these three types of shocks emanate from the USA, we find significant negative spillovers on output also for loan supply shocks. In general, international effects on total credit are an order of magnitude larger than those on output, with again more evidence that is significant for US than euro area shocks. Last, and taking a regional stance, our results indicate that economies from emerging Europe are most vulnerable to all shocks considered. Through their strong economic integration with the euro area, these economies are likewise exposed to euro area and US shocks, and spillover effects are often larger than the domestic response in the country of shock-origin.     

Asian financial integration: Global or regional? Evidence from money and bond markets

This paper investigates the degree of global versus regional financial integration in Southeast Asia during the period 2004–2012. We examine integration in the money and bond markets in Asia by employing a covered-interest-parity-based measure of financial integration. The impact of the 2008 financial crisis as well as the recent regional bond initiatives on the integration process of Asian money and bond markets respectively are specifically investigated. Empirically, we adopt the Phillips and Sul (2007) convergence methodology that has not been previously employed to examine the integration process in Asian money and bond markets. We find evidence of both global and regional integration in the money market pre 2008 but once the crisis hit, the process of global integration comes to an abrupt halt. However, regional integration, albeit at a slower pace, is still clearly evident in the post-crisis period. As for the Asian bond market, evidence of both global and regional integration is found but, in comparison, the latter is more convergent post 2008. Regional integration is stronger when interest rates with longer maturity are considered. In addition, we identify some convergent subgroups of countries and this suggests that a multi-tiered style of convergence is present.     

Sovereign risk premiums in the European government bond market

This paper provides a study of bond yield differentials among EU government bonds on the basis of a unique data set of issue spreads in the US and DM (Euro) bond market between 1993 and 2009. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer’s relative bond market size. The start of the European Monetary Union has shifted market attention to deficit and debt service payments as key measures of fiscal soundness and eliminated liquidity premiums in the euro area. With the financial crisis, the cost of loose fiscal policy has increased considerably.     

Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market

This paper investigates the effects of underwriter reputation on initial public offering (IPO) underpricing in the Chinese Growth Enterprise Market, in light of the conflicting evidence in the literature on IPO underpricing. Using data during the post global financial crisis period, we find that IPO firms with prestigious underwriters have lower market-adjusted initial returns on average. We further find that prestigious underwriters reduce IPO underpricing by minimizing the time gap between the offering and listing, choosing high-quality firms to underwrite, and reducing information asymmetry between issuers and investors. In the presence of institutional investors, however, we find that more underpricing occurs, as these investors tend to obtain access to IPO shares at a higher price discount via private placements. This new finding suggests that the institutional investors have a role to play in the case of high under-pricing, which partly gets corrected via underwriter reputation.     

Euro money market spreads during the 2007–? financial crisis

In the paper we investigate the empirical features of euro area money market turbulence during the recent financial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Autoregressive model, we find evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and Lehman Brothers (16 September 2008) “shocks”, and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors, respectively. The unfolding of the crisis yields a significant increase in their persistence and volatility. We also find evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB liquidity policies.     

Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?

This paper explores the dynamics of national inflation expectations within the euro area during the recent crisis. Using the European Commission's Consumer Survey, we find that the strong anchoring of area-wide inflation expectations, which is typically found in the literature, does not extend to individual member states. We also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations. This suggests that consumers expect their country to adjust through a process of internal devaluation. In contrast, we find no evidence that tensions in the sovereign bond markets increase national inflation expectations, as one would be expect under an exit or breakup scenario.     

Does the euro dominate Central and Eastern European money markets?

The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this “Euro Dominance Hypothesis (EDH)” in a novel way using a global vector autoregressive (GVAR) approach that combines country-specific error correction models in a global system. We find that euro area monetary policies are transmitted into CEE money market rates, providing evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide at least tentative empirical evidence regarding the effects of the recent financial crisis on monetary integration in Europe.     

Post‐financial crisis changes in financial system structure: An examination of the J.P. Morgan & Co. Syndicates after the 1907 Panic

In the post‐2008 crisis period, policy makers debate the implications of banking system concentration. To shed light on this debate, we study a postcrisis period in which less banking regulation existed than in the present period, reasoning that an examination of a less regulated market might reveal useful insights about present day market agents' postcrisis actions. The years immediately following the Panic of 1907 merit study because the period shares important features with the post‐2008 crisis financial system: increasing interconnectedness, the growing complexity accompanying the rise of new industries, the rapid deployment of new communications technologies, and substantial innovation in financial instruments. Because the 1907 crisis preceded the Clayton Anti‐Trust Act of 1914, it also provides a window into studying market agents' behavior before legislation was enacted to discourage banking system concentration. We find evidence that the market share of corporate bond underwritings at J.P. Morgan & Co. increased in the post‐1907 crisis period. We suggest a mechanism by which market share increased: a more concentrated configuration of corporate bond underwriting syndicates. We also indicate that Morgan's increased share may have been a proxy for increased certification value of underwriter reputation because of systemic knowledge Morgan gained during the resolution of the Panic of 1907 rather than for increasing bargaining power. We do not find evidence that Morgan used market power to extract rents from issuers despite increased market share and more concentrated syndicate organization. While our results must be interpreted cautiously due to data limitations, possible lessons for present‐day policy makers are that consolidations in the financial system after a financial crisis are complex. Some consolidations may come about from information and reputational gains produced during the crisis. Others may be moves by some firms to concentrate market power and still others from efforts to improve efficiencies in intermediation.     

Financing the green projects: Market efficiency and volatility persistence of green versus conventional bonds,and the comparative effects of health and financial crises

The establishment of the green bond market is an attempt to attain environmental sustainability from the finance perspective. One of the factors that could either hinder or promote this course is the degree of market efficiency of the market. Against this background, this study comparatively examines the market efficiency of the U.S. green and conventional bonds. In addition, the performance of both markets is investigated during global health and financial crises. Applying the fractional integration technique, we find that the overall green and conventional bonds markets are still inefficient, indicating that green and conventional investors can make excess gains by predicting the future trends of bond prices. There is also evidence that the green bond market exhibits higher volatility persistence during the global health crisis than during the global financial crisis. These findings are corroborated by the GARCH-based models, whose results show that volatility shocks are more persistent in the green bond market during the health crisis than during the financial crisis. However, the conventional bond market observes persistence in volatility shocks during both events. Towards sustainable environment goals, these results have relevant implications for green investors and policy makers.     

New measures of monetary policy surprises and jumps in interest rates

We propose new surprise measures to characterise two important dimensions of monetary policy. Our measures outperform the traditional monetary shocks in explaining variation of interest rates in the event-study framework. We also study the extent to which the ECB caused jumps in euro area interest rates. The new surprises still prevail upon the traditional ones. Jumps play a great role in the variation of interest rates and the ECB induced several jumps with its decisions, but its predictability has improved over time. We find that, although the surprise measures become somewhat distorted due to money market tensions during the financial turmoil, our model still provides an interesting insight into interest rate behaviour throughout the crisis.