We develop a model for defaultable bonds incorporating both uncertainty about corporate earnings and uncertainty due to climate-related risks, which determine downward jumps in the firm value. In particular, we study how bond pricing is affected by transition risks, such as those coming from an abrupt change of climate policies. We show how the issuer’s credit quality changes as a result of its engagement

This paper investigates the nexus between climate-related variables, commodity price co-movements and financial stability. First, we project the commodity price time series onto a multilayer network. Centrality measures computed on the network are used to detect the existence of common trends between the series and to characterize the role of different nodes during phases of market downturns and upturns

This paper investigates whether the takeover market has been affected by heightened macroeconomic uncertainty, following President Trump’s Election, both in the US and globally. We have based our analysis on a four-year period around the 2016 US elections, and as such we have observed an increase in M&A deals and associated valuations, after the election; this was especially true for cross-border deals

A successful low-carbon transition requires the introduction of policies aimed at aligning investments to the climate and sustainability targets. In this regard, a global Carbon Tax (CT) and a revision of the microprudential banking framework via a Green Supporting Factor (GSF) have been advocated but two main knowledge gaps remain. First, the understanding of the conditions under which the CT or the

Using an ecological macrofinancial model, we explore the potential impact of the ’green supporting factor’ (GSF) and the ’dirty penalising factor’ (DPF) on climate-related financial risks. We identify the transmission channels by which these green differentiated capital requirements (GDCRs) can affect credit provision and loan spreads, and we analyse these channels within a dynamic framework in which

Which policies can increase the resilience of the financial system to climate risks? Recent evidence on the significant impacts of climate change and natural disasters on firms, banks and other financial institutions call for a prompt policy response. In this paper, we employ a macro-financial agent-based model to study the interaction between climate change, credit and economic dynamics and test a

This study provides evidence on the existence of a negative greenium, i.e. a risk premium related to the greenness of a firm, based on European individual stock returns. We define a priced ‘greenness and transparency’ factor based on companies’ greenhouse gas emissions and the quality of their environmental disclosures, and show that what is priced by the market is the combination of environmental

The financial system plays a major role in the transition to a low-carbon economy. We investigate this issue analyzing the recent developments and challenges in the bond and debt markets. First, we study the pricing of green bonds at issuance. We find a premium when green bonds are issued by supranational institutions and corporates while there is no effect for financial institutions. We also document

We analyze the effects on financial stability of the interplay between climate transition risk and market conditions, such as recovery rate and asset price volatility. To this end, we extend the framework of the climate stress-test of the financial system by including an ex-ante network valuation of financial assets which accounts for asset price volatility as well as for endogenous recovery rate on

The paper focuses on the role of climate and weather derivatives (CDs/WDs for short) as instruments to hedge climate risk. The aim of this paper is twofold: (i) we introduce a copula-based pricing methodology for multivariate CDs/WDs, whose flexible theoretical framework allows to be suited to any pricing application and possible structure of multivariate products, and (ii) we discuss the impact of

Climate change has been recently recognised as a new source of risk for the financial system. Over the last years, several central banks and financial supervisors have recommended that investors and financial institutions need to assess their exposure to climate-related financial risks. Central banks and financial supervisors have also started designing climate stress tests that can assess how vulnerable

Policymakers have put forward proposals to ensure that banks do not underestimate long-term risks from climate change. To examine how lenders account for extreme weather, we compare matched repeat mortgage and property transactions around a severe flood event in England in 2013-14. First, lender valuations do not “mark-to-market” against local price declines. As a result valuations are biased upwards

Using a sample of almost 300 European banks, we show that the concentration of ownership leads to larger capital buffers, consistent with theories of interest alignment and the charter value theory. Mixed empirical findings of previous literature suggest that external factors may affect the disciplinary role of controlling owners. In this paper, we demonstrate that the stabilizing impact of concentrated

Until the 1970s, both banks and nonfinancial corporations relied on performance targets linked to their earnings per share (EPS). Over the next few decades, banks rapidly changed to emphasize return on equity (ROE) as a performance target. Investors seem aware of this change because ROE growth (EPS growth) better explains banks’ (nonfinancials’) stock market values. Also, manager compensation linked

This paper studies how the COVID-19 shock affects the CDS spread changes and abnormal stock returns of U.S. firms with different levels of debt rollover risk. We use the COVID-19 crisis as a quasi-natural experiment of adverse cash flow shock that increases the default risk of firms facing an immediate liquidity shortfall. We find that the COVID-19 shock significantly increased the CDS spread and decreased

Using data for 6740 U.S. banks from 1996 to 2016, we consider whether mortgage loan demand is a key determinant of banks’ cost efficiency and management quality. We estimate mortgage loan demand from loan-level applications at individual banks, and we estimate bank efficiency and management quality score from banks’ structural models. In line with theoretical considerations around economies of scale

We examine the influence of both organizational and geographical religiosity, as important ethical parameters moderating a bank’s decision to securitize their assets. The study employs a unique database of banks located within countries marked by high (low) religious adherence. Our results provide evidence that different measures of religiosity affect a bank’s decision to securitize their assets: Banks

Employing a dataset of 1,160 Indian firms, we study the impact of global financing conditions on firms’ borrowings abroad across different phases of global credit. While the abundant credit in the post global financial crisis period allowed firms to take advantage of relatively cheap financing abroad, we show that firms’ access to external finance has declined since 2013. We find that since 2013, lenders

We estimate the causal effect of natural catastrophes on financial depth. We focus on largest catastrophes in 1960–2016, employ synthetic control method to compute the counterfactual and use the private credit to GDP ratio as the measure of financial deepening. Our estimates show that the effects of natural catastrophes are sizable, statistically significant and long-lasting. We find that a decade

Using unique micro data compiled from the real estate registry in Japan, we examine more than 400,000 loan-to-value (LTV) business loan ratios to draw implications for caps on LTV ratios as a macroprudential policy measure. We find that the LTV ratio exhibits counter-cyclicality, behavior that would have severely impeded the efficacy of a simple LTV cap had it been imposed. We also find that borrowers

The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal

We study the effects of technological change on financial intermediation, distinguishing between innovations in information (data collection and processing) and communication (relationships and distribution). Both follow historical trends towards an increased use of hard information and less in-person interaction, which are accelerating rapidly. We evaluate more recent innovations, such as the combination

This study examines the interplay between political influence and regulatory decision-making. Political influence is captured based on whether a bank is headquartered in a state where an elected official holds a chair position on a congressional committee related to the banking and financial services industry. Using data of US commercial banks over the period 2000–2015, we show that our measure of

We study an equilibrium risk and return model to explore the effects of the coronavirus crisis and associated skewness on the market price of risk. We derive the moment and equilibrium equations, specifying skewness price of risk as an additive component of the effect of variance on mean expected return. We estimate our model using the flexible skewed generalized error distribution, for which we derive

Economic policy uncertainty (EPU) increases the cost of raising equity capital, especially when the economy is weak. A one standard deviation increase in the EPU index developed by Baker, Bloom, and Davis (2016) is associated with a 43 basis point increase in the price discount of seasoned equity offerings (SEOs) during the 2000−2014 period. The cross-sectional analysis shows that the EPU effect on

We empirically test competing theoretical arguments about the impact of common ownership on bank stability: the common ownership hypothesis, where banks decrease risk-taking by internalizing risk externalities on commonly held banks, and the diversification hypothesis, where banks increase risk-taking influenced by common owners who hold diversified portfolios and are less risk averse. Using data from

The seeds of financial imbalances are sown in times of buoyant economic growth. We study the link between macroeconomic performance and financial imbalances, focusing on the experience of the United States since the 1960s. We first follow a narrative approach to review historical episodes of significant financial imbalances and find that the onset of financial disturbances typically occurs when the

Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheet items of euro area financial institutions, we analyse cross-border spillovers from prudential regulation for 248 banks from 16 euro-area countries over the period 2007Q3–2014Q4. We find that foreign branches increase lending following the tightening of sector-specific capital buffers

This study disentangles a measure of implied skewness that is related to downward movements in the U.S. equity index from the corresponding implied skewness that is associated with upward movements. A positive SKEW index is constructed from S&P 500 call options, whereas a negative SKEW index is constructed from the S&P 500 put options. We show that the positive SKEW is linked to market sentiment, whereas

This paper investigates the effects of stock exchange consolidation on foreign portfolio holdings. Sharing a common stock exchange platform enhances cross-border investments, and the consolidation effect is particularly pronounced among member countries that are smaller in size and closer in geographical, cultural and economic terms. These findings survive different econometric specifications and outlier

Using account level data from a credit bureau, we study the role that social capital plays in consumer default decisions. We find that borrowers in communities with greater social capital are significantly less likely to default on loans, even after adjusting for different levels of income and other characteristics such as credit scores. The results are strongest for potentially strategic defaults

Utilizing a hand-collected comprehensive dataset covering U.S. public traded firms from 2006 to 2014, we present descriptive evidence regarding insider pledging behavior in the U.S. and study its determinants. We find an insider’s propensity to pledge company stock is positively associated with her risk exposure and pledgeability of company stock, and negatively with the company’s corporate governance