The euro exchange rate during the European sovereign debt crisis – Dancing to its own tune?

This paper studies the determinants of the euro exchange rate volatility during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility increased in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions.     

Is M&A different during a crisis? Evidence from the European banking sector

The financial crisis has affected the landscape of the banking sector around the world. We use a sample of transactions carried out by European acquirers in 2007–2010 to study the acquirer’s stock price market reaction to both announcements and completions of acquisitions. At the aggregate level, we find that there are no significant abnormal returns around the announcement of an acquisition while there are positive abnormal returns at completions. We study the cross-sectional determinants of abnormal returns and find that announcement returns are mainly explained by the acquirer bank characteristics, while completion returns mainly depend on opacity of the target and on the drop in idiosyncratic volatility associated with a reduction of uncertainty.     

Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis?

This paper assesses the potential influence of the growing CDS market on the borrowing cost of sovereign states during the European sovereign crisis. We analyze the sovereign debt market to ascertain the pattern of information transmission between the CDS and corresponding bond markets. Our methodological innovation is the use of a non-linear specification rather than the linear VECM specification customarily employed. Using a panel smooth transition model during the 2008–2010 period, we find that: 1) linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the CDS markets; 2) market distress alters the mutual influence and 3) the higher the distress the more the CDS market dominates the information transmission between CDS and bond markets.     

Insurance companies’ trading behaviour during the European sovereign debt crisis: Flight home or flight to quality?

This paper empirically investigates if insurers exhibited a flight home or flight to quality during the European sovereign debt crisis and other stages of the financial crisis. Our dataset consists of over sixty insurance companies, for which we separately observe trading behaviour and portfolio revaluations at a quarterly frequency during 2006–2013. When explaining insurers’ trading behaviour we explicitly control for country risk and momentum strategies. The results show that insurers exhibited a flight to quality during the European sovereign debt crisis, while we find no evidence of a flight home. The flight to quality was not present before the European sovereign debt crisis and disappeared after ECB chairman Draghi's speech mid-2012. Interestingly, supervisory data suggests that the observed flight to quality was not driven by regulatory solvency constraints.     

Investor induced contagion during the banking and European sovereign debt crisis of 2007–2012: Wealth effect or portfolio rebalancing?

This study investigates the way a crisis spreads within a country and across borders by testing the investor induced contagion hypothesis through the liquidity channel on stock-bond relationships of the US and five European countries before and during the global banking and European sovereign debt crisis of 2007–2012. We provide evidence consistent with the wealth effect as a source of contagion for the majority of countries. Nevertheless, we uncover evidence of investor induced contagion sourced by the portfolio rebalancing effect for correlations involving Spanish and Italian bonds during the debt crisis. Further, we find that tight (narrow) credit spreads reduce (magnify) the wealth and portfolio rebalancing effects, which are offset by the opposite effects of risk aversion amongst investors, a dynamic that is not restricted to crisis periods.     

The cost of firms’ debt financing and the global financial crisis

We provide an assessment of the determinants of the risk premium paid by non-financial corporations on long-term bonds. By looking at 5500 issues over the period 2005–2012, we find that in recent years the sovereign debt market turbulence has been a major driver of corporate risk. Compared with the three-year period 2005–2007 before the global financial crisis, in the years 2010–2012 Italian, Spanish and Portuguese firms paid on average between 70 and 120 basis points of additional premium due to the negative spillovers from the sovereign debt crisis, while German firms received a discount of 40 basis points.     

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.     

Is ex-post credit risk affected by the cycles? The case of Italian banks

The objective of this research is to empirically examine if both credit and business cycle affect the ex-post credit risk (i.e. non-performing loans) in the banking system of Italy for the period 1995Q1–2014Q1. The increase in NPLs post-2008 has put into question the robustness of many European banks and the stability of the whole sector. It still remains a serious challenge, especially in Italy which is one of the countries that hit by the financial crisis. By employing fixed and random effects and a dynamic GMM estimation as econometric methodologies I find results that underline common causes for NPLs. Higher NPLs in Italy are mostly due to worse macroeconomic conditions (i.e. bad phase of business cycle) and due to excess credit. Through a Granger causality test, my arguments found even more support. Such findings can be helpful when designing macro-prudential as well as NPL resolution policies.     

Do banks appraise internal capital markets during credit shocks? Evidence from the Greek crisis

Using data of bank loans to Greek firms during the Greek crisis we provide evidence that affiliated firms, having access to the internal capital markets of their associated group, are less likely to default on their loans. Furthermore, banks require lower loan collateral coverage from affiliated firms and are less likely to downgrade the affiliates’ credit profile. Finally, banks are more likely to show forbearance to affiliated firms with non-performing loans. The results are consistent with the view that banks manage their relationships with firms in a business group jointly, as opposed to viewing each firm as an independent entity. Our findings also suggest that the value of risk sharing through internal capital markets increases when external financing is scarce.     

The European Central Bank and green finance: How would the green quantitative easing affect the investors' behavior during times of crisis?

In July 2021, the European central bank (ECB) announced the application of new environmental criteria to purchase private assets as part of its Quantitative Easing (QE) program. Using a Bayesian VAR model with time varying parameters and stochastic volatility (TVP-BVAR-SV), we investigate the transmission of Green bond shocks to the stock market during the pre-and-post COVID-19 pandemic. We document a nonlinear relation between the green bonds and the green equities. Our findings suggest that the ECB's Green QE can drive investors towards green investment in the stock market through the green bond market during the non-crisis period. However, we show that the proper transmission of Green QE shocks to the stock market depends on the economic conditions and could not be effective during the crisis period. Our results also support previous findings that state the growing demand for sustainable investing after COVID-19. These findings have important implications for investment professionals, policymakers, and environmentally concerned actors.     

Did the rating standard for banks change after the crisis?

Review of Quantitative Finance and Accounting - Did rating agencies tighten their rating standard after the overwhelming critique on their generous ratings before 2008? This study aims to examine...     

The credit crisis around the globe: Why did some banks perform better?

Though overall bank performance from July 2007 to December 2008 was the worst since the Great Depression, there is significant variation in the cross-section of stock returns of large banks across the world during that period. We use this variation to evaluate the importance of factors that have been put forth as having contributed to the poor performance of banks during the credit crisis. The evidence is supportive of theories that emphasize the fragility of banks financed with short-term capital market funding. The better-performing banks had less leverage and lower returns immediately before the crisis. Differences in banking regulations across countries are generally uncorrelated with the performance of banks during the crisis, except that large banks from countries with more restrictions on bank activities performed better and decreased loans less. Our evidence poses a substantial challenge to those who argue that poor bank governance was a major cause of the crisis because we find that banks with more shareholder-friendly boards performed significantly worse during the crisis than other banks, were not less risky before the crisis, and reduced loans more during the crisis.     

Small is beautiful? Financial efficiency of small fundraising charities

The study analyses potential scale efficiencies of 1196 Dutch fundraising charities for 2005–2009. The data set includes a unique group of small charities (reporting an income of less than €1 million). The study articulates and tests differences in financial efficiency between smaller and larger charities, specifically concerning program expenditure, administrative expenditure, and fundraising expenditure. The study finds that reported levels of program-spending efficiency and administrative efficiency are similar across small and large charities, with no economies of scale. In addition, the study finds that smaller charities report considerably better fundraising efficiency ratios, with the smallest charities reporting an average spend of €8 to raise €100 and the largest charities reporting an average spend of €15. The paper discusses why larger charities appear to experience scale inefficiencies in fundraising and provides directions for further research.     

Is the realized volatility good for option pricing during the recent financial crisis?

The contributions of this paper are threefold. The first contribution is the proposed logarithmic HAR (log-HAR) option-pricing model, which is more convenient compared with other option pricing models associated with realized volatility in terms of simpler estimation procedure. The second contribution is the test of the empirical implications of heterogeneous autoregressive model of the realized volatility (HAR)-type models in the S&P 500 index options market with comparison of the non-linear asymmetric GARCH option-pricing model, which is the best model in pricing options among generalized autoregressive conditional heteroskedastic-type models. The third contribution is the empirical analysis based on options traded from July 3, 2007 to December 31, 2008, a period covering a recent financial crisis. Overall, the HAR-type models successfully predict out-of-sample option prices because they are based on realized volatilities, which are closer to the expected volatility in financial markets. However, mixed results exist between the log-HAR and the heterogeneous auto-regressive gamma models in pricing options because the former is better than the latter in times of turmoil, whereas it is worse during the rather stable periods.     

Is there a bright side to government banks? Evidence from the global financial crisis

Using a sample of banks from 56 countries, this paper investigates the lending behavior of government banks during the crisis of 2008, and its association with bank performance and the economy. Contrary to the traditional wisdom, we find that government banks can play a beneficial role under certain circumstances. Government banks have higher loan growth rates than private banks during the crisis. In countries with low corruption, the increased lending by government banks is associated with better bank performance and more favorable GDP and employment growth in the crisis period. In contrast, the results for countries with high corruption are more consistent with the political view: the increased lending by government banks is associated with underperformance relative to private banks, and creates no beneficial effects on either GDP growth or employment.     

Heterogeneous effects of credit constraints on SMEs’ employment: Evidence from the European sovereign debt crisis

This paper takes advantage of access to detailed matched bank-firm data to investigate whether and how employment decisions of SMEs have been affected by credit constraints during the European sovereign debt crisis. Variability in banks’ financial health following the 2008 crisis is used as an exogenous determinant of firms’ access to credit. Findings, relative to the Belgian economy, clearly highlight that credit matters. They show that SMEs borrowing money from pre-crisis financially less healthy banks were significantly more likely to be affected by a credit constraint and, in turn, to adjust their labour input downwards than pre-crisis clients of more healthy banks. These results are robust across types of loan applications that were denied credit, i.e. applications to finance working capital, debt or new investments. Yet, estimates also show that credit constraints have been essentially detrimental for employment among SMEs experiencing a negative demand shock or facing strong product market competition. In terms of human resources management, credit constraints are not only found to foster employment adjustment at the extensive margin but also to increase the use of temporary layoff allowances for economic reasons. This outcome supports the hypothesis that short-time compensation programmes contribute to save jobs during recessions.     

Euro area government bonds – Fragmentation and contagion during the sovereign debt crisis

The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank's (ECB's) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. This suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement.     

Does the equity premium puzzle persist during financial crisis? The case of the French equity market

This paper examines the effects of the financial crisis that began in 2008 on the equity premium of 6 French sector indices. Since the systematic risk coefficient beta remains the most common explanatory element of risk premium in most asset pricing models, we investigate the impact of the crisis on the time-varying beta of the six sector indices cited. We selected daily data from January 2003 to December 2012 and we applied the bivariate MA-GARCH model (BEKK) to estimate time-varying betas for the sector indices. The crisis was marked by increased volatility of the sector indices and the market. This rise in volatility led to an increase in the systematic risk coefficient during the crisis and first post-crisis period for all the major indices. The results are intuitive and corroborate findings in the empirical literature. The increase of the time-varying beta is considered by investors as an additional risk. Therefore, as expected, investors tend to increase their equity premiums to b ear the impact of financial crisis.     

Is the diversification discount caused by the book value bias of debt?

We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk. Thus, measures of firm value based on book values of debt undervalue diversified firms relative to focused firms. Our paper complements recent literature which uses market values to test the risk reduction hypothesis for a subsample of firms for which debt is traded. Alternatively, we employ market value of debt estimates for the whole firm universe. Consistent with the above hypothesis, we show that the use of book values of debt underestimates the value of diversified firms. There is no discount for mainly equity financed firms and lower distress risk and equity volatility for diversified firms. More concentrated ownership increases firm valuation.     

Should banks be geographically diversified? Empirical evidence from cross-country diversification of European banks

Using a sample of European bank, this paper investigates the impact of banks' geographic diversification on their cost of equity capital. Examining the geographic diversification of European banks gives an insight on the value of cross-border banking. To measure diversification between major geographic areas in which the bank operates, the Herfindahl–Hirschman Index, based on revenues generated at home and abroad is constructed for each bank. To address the problem of endogeneity, system generalized method of moments estimator is used. The main finding of the analysis is that, other things equal, more geographic diversified banks have higher cost of equity capital than geographically focused ones. This result implies that the adverse market valuation effect of geographic diversification (increase in agency problem) dominates the positive ones (increase in efficiency and reduction in risk).