REM - REM Working Papers Series
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- “Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effectsPublication . Afonso, António; Arghyrou, Michael G.; Gadea, María Dolores; Kontonikas, AlexandrosThis paper investigates the role of unconventional monetary policy as a source of timevariation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
- Decentralized matching markets with(out) frictions : a laboratory experimentPublication . Pais, Joana; Pintér, Ágnes; Veszteg, Róbert F.In a series of laboratory experiments, we explore the impact of different market features (the level of information, search costs, and the level of commitment) on agents’ behaviour and on the outcome of decentralized matching markets. In our experiments, subjects on each side of the market actively search for a partner, make proposals, and are free to accept or reject any proposal received at any time throughout the game. Our results suggest that a low information level boosts market activity but does not affect stability or efficiency of the final outcome, unless coupled with search costs. Search costs have a significant negative impact on market activity, and on both stability and efficiency. Finally, commitment harms stability slightly but acts as a disciplinary device to market activity and is associated with higher efficiency levels of the final outcome.
- Static versus dynamic deferred acceptance in school choice : theory and experimentPublication . Klijn, Flip; Pais, Joana; Vorsatz, MarcIn the context of school choice, we experimentally study how behavior and outcomes are affected when, instead of submitting rankings in the student proposing or receiving deferred acceptance (DA) mechanism, participants make decisions dynamically, going through the steps of the underlying algorithms. Our main results show that, contrary to theory, (a) in the dynamic student proposing DA mechanism, participants propose to schools respecting the order of their true preferences slightly more often than in its static version while, (b) in the dynamic student receiving DA mechanism, participants react to proposals by always respecting the order and not accepting schools in the tail of their true preferences more often than in the corresponding static version. As a consequence, for most problems we test, no significant differences exist between the two versions of the student proposing DA mechanisms in what stability and average payoffs are concerned, but the dynamic version of the student receiving DA mechanism delivers a clear improvement over its static counterpart in both dimensions. In fact, in the aggregate, the dynamic school proposing DA mechanism is the best performing mechanism.
- Assessing the sustainability of external imbalances in the European UnionPublication . Afonso, António; Huart, Florence; Jalles, João Tovar; Stanek, PiotrWe assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of EU countries using two complementary approaches. First, we employ both time-series and panel-data stationarity tests of current account balance-to-GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilizes the NIIP and the NED. We find that there is sustainability of the CA balance mainly in a few surplus countries whereas there is more concern about the sustainability of the NIIP or NED in countries with a credit position than in countries with a debit position. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of important structural breaks, and valuation effects via the exchange rate.
- Transport-Induced agglomeration effects : evidence for US metropolitan areasPublication . Melo, Patricia C.; Graham, Daniel J.While the interaction between transport and agglomeration economies is widely accepted, there is insufficient research attempting at a direct empirical quantification. Using a balanced panel dataset for US metropolitan areas, we estimate a system of simultaneous equations to measure the indirect effect of urban agglomeration economies which arises through transport provision. Our findings suggest that public transit reinforces the effect of urban agglomeration, whereas road lane miles appear to weaken it. The results highlight the importance of public transit in supporting positive urban agglomeration externalities.
- The inversion of the spatial lag operator in binary choice models : fast computation and a closed formula approximationPublication . Santos, Luís Silveira; Proença, IsabelThis paper presents a new method to approximate the inverse of the spatial lag operator matrix, used in the estimation of a spatial lag model with a binary dependent variable. The method is based on an approximation of the high order terms of the inverse series expansion. The proposed method is also applied to approximate other complex matrix operations and closed formulas for the elements of the approximated matrices are deduced. The approximated matrices are used in the gradients of a variant of Klier and McMillen's full GMM estimator, allowing to reduce the overall computational complexity of the estimation procedure. Monte Carlo experiments show that the new estimator performs well in terms of bias and root mean square error and exhibits a minimum trade-off between time and unbiasedness within a class of spatial GMM estimators. The new estimator is also applied to the analysis of competitiveness in the Metropolitan Statistical Areas of the United States of America. A new de_nition of binary competitiveness is proposed. Estimation of the spatial dependence parameter and the environmental effects are addressed as central issues.
- How biased is the behavior of the individual investor in warrants?Publication . Abreu, MargaridaBased on the actual trading behavior of individual investors in the Portuguese financial market during almost ten years this paper examines the socio-demographic characteristics of retail investors in warrants, and discusses the hypothesis that some behavioral biases do have an impact on the investors’ predisposition to invest and trade in warrants, a complex financial instrument. One finds that there is a profile of investors in warrants: younger and less educated men are more likely to invest in warrants and that overconfident, disposition-prone and investors exhibiting a gambling attitude are more likely to invest and trade in warrants. Secondly, the gambling motive seems to be a distinguishing characteristic of investors in warrants. In other words, when investors are driven to trade in financial markets for pleasure/fun they tend to trade complex products more and to trade simple and easier to understand financial instruments less. Finally, the higher the intensity of trading the more relevant are the disposition and the gambler’s biases.
- Financial crisis, banking sector performance and economic growth in the European UnionPublication . Ferreira, CândidaThis paper uses static and dynamic panel estimates in a sample including all 28 European Union countries during the last decade and provides empirical evidence on the important role that well-functioning EU banking institutions can play in promoting economic growth. The banking sector performance is proxied by the evolution of some relevant financial ratios and economic growth is represented by the annual Gross Domestic Product growth rate. In order to analyse the possible differences arising after the outbreak of the recent international financial crisis, the estimations consider two panels: one for the time period 1998–2012 and another for the subinterval 2007–2012. The results obtained allow us to draw conclusions not only on the importance of the variation of the different operational, capital, liquidity and assets quality financial ratios to economic growth but also on some differences evidenced in the two considered panels, reflecting the consequences of the recent financial crisis and the correspondent reactions of the European banking institutions.
- Renormalization of Gevrey vector fields with a Brjuno type arithmetical conditionPublication . Dias, João Lopes; Gaivão, José PedroWe show that in the Gevrey topology,a d-torus flow close enough to linear with a unique rotation vector w is linearizable as long as w satisfies a novel Brjuno type Diophantine condition. The proof is based on the fast convergence under renormalization of the associated Gevrey vector field. It requires a multidimensional continued fractions expansion of w, and the corresponding characterization of the Brjuno type vectors.This demonstrates that renormalization methods deal very naturally with Gevrey regularity expressed in the decay of Fourier coefficients. In particular, they provide new linearization results including frequencies beyond Diophantine in non-analytic topologies.
- Leverage and risk weighted capital requirementsPublication . Gambacorta, Leonardo; Karmakar, SudiptoThe global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios.