Approaching rainfall-based weather derivatives pricing and operational challenges

Review of Derivatives Research - This article approaches some of the current rainfall derivatives pricing and operational challenges through an empirical application to Comunidad Valenciana, Spain....     

Supervisors as information producers: Do stress tests reduce bank opaqueness?

Supervisory stress tests assess the impact of an adverse macroeconomic scenario on the profitability and capitalisation of a large number of banks. The results of such stress test exercises have recently been disclosed to the public in an attempt to restore confidence and to curb bank opaqueness by helping investors distinguish between sound and fragile institutions. In an unprecedented effort for transparency, the 2011 European Union stress test lead to the release of some 3400 data points for each of the 90 participating banks. This makes it an ideal setting to investigate a number of hypotheses on the information role of the stress tests.     

Do banks price discriminate spatially? Evidence from small business lending in local credit markets

In this paper we explore the effects of bank–borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank–borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank–borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.     

Insider employee stock option trading and stock prices

The question of which factors determine corporate bonds pricing is investigated by analysing the spreads of eurobonds issued by major G-10 companies during the 1991–2001 period. Three main results emerge from the analysis. First, bond ratings appear as the most important determinant of yield spreads, with investors’ reliance on rating agencies judgments increasing over time. Second, the primary market efficiency and the expected secondary market liquidity are not relevant explanatory factors of spreads cross-sectional variability. Finally, rating agencies adopt a different, ‘through the cycle’, evaluation criteria of default risk with respect to the forward looking one adopted by bond investors.     

Orchestrating corporate social responsibility in the multinational enterprise

Research Summary: Multinational enterprises (MNEs) invest significant resources in corporate social responsibility (CSR), but their attempts to build a global “social brand” may clash with the execution of operational strategies at a subsidiary level. Using a game-theoretic model, this research addresses the complex interplay of different contingencies that shape the coordination and control challenges facing MNEs when they implement global CSR strategies, including brand spillovers, the risk of public scandals caused by irresponsible behavior, the size of the MNE network, as well as the roles played by nongovernmental organizations and altruistic managers. Challenging the view of CSR as insurance against lapses of responsible conduct, our model shows that investment in social brands helps avoid irresponsible practices across the MNE network, thereby inducing subsidiaries to “walk the talk.” Managerial Summary: Global social brands are increasingly valuable to multinational enterprises (MNEs), which makes the control and coordination of responsible behavior across their network of foreign subsidiaries a relevant managerial challenge. Indeed, lapses of responsible conduct at the subsidiary level often generate reputational damage at the multinational level. This research explores several mechanisms that help MNEs manage this coordination and control challenge. First, it shows under what conditions MNEs can leverage their investments in social brands to induce responsible practices across their global network. Second, it illustrates how MNEs can exploit collaborations with nongovernmental organizations to reduce the costs of coordinating and controlling their subsidiaries. Finally, it identifies conditions under which MNEs benefit from hiring altruistic managers to run their subsidiaries.     

Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data

In this paper, we study the relationships among financial market sub-segments as a way to identify potential financial distress through increased co-movements among them. To study how sub-markets are mutually co-dependent, we combine granular data on over-the-counter derivatives by trade repositories and the joint probability of distress (JPoD) approach introduced by the International Monetary Fund. We define an indicator that combines several distress drivers and observe that results on co-dependencies are similar to those that would be expected: similarities between financial and contractual terms seem to be responsible for stronger co-movements among sub-markets. However, high values for JPoD even in correspondence of quite dissimilar sub-markets suggest the presence of other drivers that should be investigated in future research. To the best of our knowledge, this is the first empirical study on systemic risk assessment based on micro-founded trade repositories’ data on interest rate swaps.     

How Would David Ricardo Have Taught the Principle of Comparative Advantage?

If David Ricardo had lived beyond the age of 51, how might he have delivered a lecture on comparative advantage? I argue that Ricardo infers the direction of comparative advantage and the size of the gains from trade by interpreting the four numbers in his Principles of Political Economy and Taxation for cloth and wine traded between England and Portugal as amounts of labor embodied in the quantities actually traded. He illustrates diagrammatically the gains from trade as the overall labor that England would save if it were to liberalize wheat imports by repealing the Corn Laws. Postulating a concave production function for wheat, Ricardo also depicts the concomitant rise in the profit rate, describing it as an equally important contemporary gain from trade for England. His interpretation differs radically from the textbook versions of the “Ricardian trade model,” and suggests a more authentic way of presenting the principle of comparative advantage.