Determinants of the cat bond spread at issuance

The contribution at hand is a short summary of a working paper presented by Alexander Braun at the annual meeting of the German Insurance Science Association (DVfVW) in Hannover in March 2012. This working paper contains empirical evidence from the primary market for cat bonds, which provides new insights concerning the prevailing pricing practice of these instruments. For this purpose, transactional information from a multitude of sources has been collected and cross-checked in order to compile a data set comprising virtually all cat bond tranches that were issued between 1997 and 2011. In order to identify the main determinants of the cat bond spread at issuance, a series of OLS regressions with robust standard errors is run. The respective results indicate that, apart from the expected loss, the covered territory, the sponsor, the reinsurance cycle, and the spreads on comparably rated corporate bonds exhibit a significant impact. Based on these findings, a multifactor pricing model for cat bonds in the primary market is then proposed. This model is applicable across all considered territories and perils, exhibits a stable fit with regard to different subsamples used for calibration, and achieves a higher in-sample and out-of-sample accuracy than several competing specifications that have been introduced in earlier work.     

The evolution of emissions trading in the European Union – The role of policy networks,knowledge and policy entrepreneurs

This paper starts with a recapitulation of how emissions trading became a cornerstone of the European Union’s climate policy. While a whole bouquet of reasons can be identified the major reasons why the EU Commission decided to pursue the establishment of an emissions trading scheme within the EU are: (1) the integration of international emissions trading into the Kyoto Protocol; (2) the failure of the 6th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) and the withdrawal of the United States from the Kyoto Protocol negotiations; and (3) the unsuccessful attempt to introduce an EU-wide CO₂-tax. Other reasons were the fact that emissions trading did not need unanimity in the European Council like the CO₂-tax; the economic efficiency of emissions trading which appealed not only to the Commission but also to industry and Member States; the danger of a fragmented carbon market as the United Kingdom and Denmark had already set up domestic emissions trading schemes that were incompatible; the incentive a European emissions trading scheme would be for the formation of a global carbon market; and the possibility to influence investment strategies of power companies towards a sustainable modernisation of the EU’s power generation infrastructure.Drawing upon these preconditions, this paper analyses the development of the European Union Emissions Trading Scheme (EU ETS). Based on the fact that the EU is embedded in a multi-level policy-making architecture which encourages the emergence of policy networks it is argued that the EU ETS has been shaped by an (informal) issue-specific policy network established by some staff members from DG Environment, including individuals knowledgeable on emissions trading – such as experts from consultancies, environmental NGOs and the business sector. It is argued that within this European policy network on emissions trading the European Emissions Trading Directive – as adopted on 13 October 2003 – has been negotiated and developed. It is concluded that the sharing of knowledge about this relatively new and largely unknown regulatory instrument and about design options for a potential European emissions trading scheme was the key momentum for the establishment and continuity of this policy network and that the ability of managing knowledge generation processes was the main factor to allow for a few staff members from DG Environment to play a dominant role as policy entrepreneurs in developing the European Emissions Trading Directive, even beyond their formal role of proposing the scheme as representatives from the EU Commission.     

Assessing the efficiency of travel agencies with a stochastic cost frontier: a Portuguese case study

This paper uses an econometric frontier model to evaluate the technical efficiency of a sample of Portuguese travel agencies. The model encompasses a Cobb–Douglas cost frontier approach, with data running from 2000 to 2004, and makes use of financial variables to generate the travel agencies' efficiency scores. We conclude that the efficiency scores are, at best, mixed. A policy is then derived for guiding management teams, as far as this specific sector is concerned. Copyright © 2006 John Wiley & Sons, Ltd.     

Justifications Offered,Questions Asked,and Linguistic Patterns in Deceptive and Truthful Monetary Interactions

In this study, we investigate verbal production in people playing a monetary negotiation game who freely chose to lie or tell the truth. Participants were randomly assigned to the role of allocator or recipient; the allocator divided a small amount of money and was tasked with convincing the recipient to accept their share. Allocators were free to lie, and 30 % did. Our goal is to investigate the use of justifications, questions, and linguistics to assess if these factors differ between those telling the truth, lying by omission, and lying by commission. We find that liars were more likely to use some types of justifications, while truth-tellers were more likely to assert that their offer was fair. Recipient questions were unrelated to successful detection of deception, and linguistic patterns were largely non-significant, with the exception of liars using more negations. We also find no connection between emotions felt by allocators (more guilt for liars) and linguistic patterns, replicating past results. We discuss how these results mesh with past findings, offer discussion about what this means for the field, and consider where research on linguistic differences between liars and truth-tellers should go next.     

Macroeconomic relevance of credit channels: Evidence from an emerging economy under inflation targeting

This article presents a contribution to the empirical literature concerning credit channels in emerging economies. Based on data from 2002 to 2009, three sets of GMM models are considered in this article for analyzing the macroeconomic relevance of the credit channels in Brazil: (i) the first set analyzes the effects of shocks on economic variables which are essential for credit supply; (ii) the second set considers the effects of the same variables used in the previous case on credit spread; and (iii) the third set takes into account the effects of changes in the credit market conditions on the product. In addition, with the intention of showing the effects of shocks on the variables which are relevant in the GMM models for credit supply, spread, and product, a VAR analysis is made. Finally, with the objective of testing the results, a GMM system model is built. The findings denote that the effects of economic shocks on credit supply and on credit spread are in accordance with the credit channel theory. In particular, it is observed that shocks on the interest rate are not transmitted directly to the economy but through the credit channels.     

Value creation and pricing in buyouts: Empirical evidence from Europe and North America

Using a unique proprietary data set of 1980 realized and unrealized buyouts completed between 1986 and 2010, we examine entry and exit pricing in buyouts and its influence on private equity (PE) sponsors' returns. We find that besides leverage and operational improvements, EBITDA multiple expansion (i.e. the difference between entry and exit pricing) is a fundamental factor in explaining equity returns and the result of skill rather than pure luck. We also provide evidence that more experienced PE sponsors use more debt to finance a PE transaction and debt is positively related to entry buyout pricing. However, for a transaction with a given leverage level, more experienced PE sponsors are able to negotiate lower prices. In addition, our results show that deals conducted by first time funds which are realized in a later stage of a fund's life cycle are associated with lower exit prices which can be explained by the increased exit pressure for the PE sponsor.