Three essays in financial markets

A PhD Dissertation, presented as part of the requirements for the Degree of Doctor of Philosophy from the NOVA - School of Business and Economics

Macroeconomic impacts of politics and policy: Applications to financial and real markets

A PhD Dissertation, presented as part of the requirements for the Degree of Doctor of Philosophy from the NOVA - School of Business and Economics

Noise traders, rational traders, and the rest: A new approach to efficient financial markets

A PhD Dissertation, presented as part of the requirements for the Degree of Doctor of Philosophy from the NOVA - School of Business and Economics

Corporate finance in general equilibrium models with incomplete markets: A survey

A Masters Thesis, presented as part of the requirements for the award of a Research Masters Degree in Economics from NOVA – School of Business and Economics

Financial depth, stock markets and economic growth in the EU-15 countries

The aim of this paper is to assess the impact of financial depth on economic growth in the EU-15 countries from 1970 until 2012, using the two-step System GMM estimator. Even though it might be expected a positive impact, the results show it is negative and sometimes even negative and statistically significant. Among the reasons presented for this, the existence of banking crises seems to better explain these results. In tranquil periods, financial deepening appears to have a positive impact, whereas in banking crises it is persistently negative and statistically significant. Also, after an assessment of the impact of stock markets on economic growth, it appears that more developed countries in the EU-15 have an economy more reliant on this segment of the financial system rather than in bank intermediation.

Trading the differences in expectations between the CDS and bond markets

This paper uses the framework developed by Vrugt (2010) to extract the recovery rate and term-structure of risk-neutral default probabilities implied in the cross-section of Portuguese sovereign bonds outstanding between March and August 2011. During this period the expectations on the recovery rate remain firmly anchored around 50 percent while the instantaneous default probability increases steadily from 6 to above 30 percent. These parameters are then used to calculate the fair-value of a 5-year and 10- year CDS contract. A credit-risk-neutral strategy is developed from the difference between the market price of a CDS of the same tenors and the fair-value calculated, yielding a sharpe ratio of 3.2

The new economy: Essays in network economics and two-sided markets

Following the Introduction, which surveys existing literature on the technology advances and regulation in telecommunications and on two-sided markets, we address specific issues on the industries of the New Economy, featured by the existence of network effects. We seek to explore how each one of these industries work, identify potential market failures and find new solutions at the economic regulation level promoting social welfare. In Chapter 1 we analyze a regulatory issue on access prices and investments in the telecommunications market. The existing literature on access prices and investment has pointed out that networks underinvest under a regime of mandatory access provision with a fixed access price per end-user. We propose a new access pricing rule, the indexation approach, i.e., the access price, per end-user, that network i pays to network j is function of the investment levels set by both networks. We show that the indexation can enhance economic efficiency beyond what is achieved with a fixed access price. In particular, access price indexation can simultaneously induce lower retail prices and higher investment and social welfare as compared to a fixed access pricing or a regulatory holidays regime. Furthermore, we provide sufficient conditions under which the indexation can implement the socially optimal investment or the Ramsey solution, which would be impossible to obtain under fixed access pricing. Our results contradict the notion that investment efficiency must be sacrificed for gains in pricing efficiency. In Chapter 2 we investigate the effect of regulations that limit advertising airtime on advertising quality and on social welfare. We show, first, that advertising time regulation may reduce the average quality of advertising broadcast on TV networks. Second, an advertising cap may reduce media platforms and firms' profits, while the net effect on viewers (subscribers) welfare is ambiguous because the ad quality reduction resulting from a regulatory cap o¤sets the subscribers direct gain from watching fewer ads. We find that if subscribers are sufficiently sensitive to ad quality, i.e., the ad quality reduction outweighs the direct effect of the cap, a cap may reduce social welfare. The welfare results suggest that a regulatory authority that is trying to increase welfare via regulation of the volume of advertising on TV might necessitate to also regulate advertising quality or, if regulating quality proves impractical, take the effect of advertising quality into consideration. 3 In Chapter 3 we investigate the rules that govern Electronic Payment Networks (EPNs). In EPNs the No-Surcharge Rule (NSR) requires that merchants charge at most the same amount for a payment card transaction as for cash. In this chapter, we analyze a three- party model (consumers, merchants, and a proprietary EPN) with endogenous transaction volumes and heterogenous merchants' transactional benefits of accepting cards to assess the welfare impacts of the NSR. We show that, if merchants are local monopolists and the network externalities from merchants to cardholders are sufficiently strong, with the exception of the EPN, all agents will be worse o¤ with the NSR, and therefore the NSR is socially undesirable. The positive role of the NSR in terms of improvement of retail price efficiency for cardholders is also highlighted.

On the labor share the long-run equilibrium and its adjustment process

This research computes an Equilibrium Labor Share using a VECM for a panel of 19 countries, analyzes what determines the speed at which the labor share adjusts towards that equilibrium and decomposes this adjustment in terms of real wages and employment. Results suggest that the speed at which a country adjusts decreases with employment protection legislation and labor taxes. Most countries’ labor shares adjustment is made through real wages changes instead of changing employment, suggesting that wage moderation policies may play an important role on the adjustment process without harming employment. Keywords: Equilibrium

A wave of change: Labor market and social security impacts of the EU refugee inflow

The recent massive inflow of refugees to the European Union (EU) raises a number of unanswered questions on the economic impact of this phenomenon. To examine these questions, we constructed an overlapping-generations model that describes the evolution of the skill premium and of the welfare benefit level in relevant European countries, in the aftermath of an inflow of asylum-seekers. In our simulation, relative wages of skilled workers increase between 8% and 11% in the period of the inflow; their subsequent time path is dependent on the initial skill premium. The entry of migrants creates a fiscal surplus of about 8%, which can finance higher welfare benefits in the subsequent periods. These effects are weaker in a scenario where refugees do not fully integrate into the labor market.

On the labor share the long-run equilibrium and its adjustment process

This research computes an Equilibrium Labor Share using a VECM for a panel of 19 countries, analyzes what determines the speed at which the labor share adjusts towards that equilibrium and decomposes this adjustment in terms of real wages and employment. Results suggest that the speed at which a country adjusts decreases with employment protection legislation and labor taxes. Most countries’ labor shares adjustment is made through real wages changes instead of changing employment, suggesting that wage moderation policies may play an important role on the adjustment process without harming employment.

Assessing the role of social networks on migrant labor market outcomes: Evidence from a representative immigrant survey

What role do social networks play in determining migrant labor market outcomes? We examine this question using data from a random sample of 1500 immigrants living in Ireland. We propose a theoretical model formally predicting that immigrants with more contacts have additional access to job offers, and are therefore better able to become employed and choose higher paid jobs. Our empirical analysis confirms these findings, while focusing more generally on the relationship between migrants’ social networks and a variety of labor market outcomes (namely wages, employment, occupational choice and job security), contrary to the literature. We find evidence that having one more contact in the network is associated with an increase of 11pp in the probability of being employed and with an increase of about 100 euros in the average salary. However, our data is not suggestive of a network size effect on occupational choice and job security. Our findings are robust to sample selection and other endogeneity concerns.

The impact of credit conditions on market liquidity – a case for European stock markets

The recent financial crisis has drawn the attention of researchers and regulators to the importance of liquidity for stock market stability and efficiency. The ability of market-makers and investors to provide liquidity is constrained by the willingness of financial institutions to supply funding capital. This paper sheds light on the liquidity linkages between the Central Bank, Monetary Financial Institutions and market-makers as crucial elements to the well-functioning of markets. Results suggest the existence of causality between credit conditions and stock market liquidity for the Eurozone between 2003 and 2015. Similar evidence is found for the UK during the post-crisis period. Keywords: stock

Money never sleeps – overnight returns in equity markets

The present research analyses overnight returns’ outperformance in relation to daytime returns. In a first stage, it will be assessed whether these returns are robust throughout time, markets and across different scopes of analysis (e.g. weekdays, months, states of the economy). In a second stage, several hypothesis will be empirically tested, in an attempt to understand what drives non-trading period returns (e.g. liquidity, market volatility). Even though several authors have analysed overnight returns and suggested several explanatory factors, there seems to be no consensus in the literature regarding its drivers.

Trading the changes of stock market index composition: Evidence from European markets

This paper studies the changes in European stock market indexes composition from 1995 to 2015. It was found that there are mixed price effects producing abnormal returns around the effective replacement of added and deleted stocks. The price pressure hypothesis seems to hold for added stocks in some indexes but not for deleted stocks as there is not a clear inversion of behaviour after the replacement. Finally, the building and back testing of a trading strategy aiming to capture some of those abnormal returns shows it yields a Sharpe Ratio of 1.4 and generates an annualised alpha of 11%.

Sustained competitive advantage of different sized multinational corporations in rural base of the pyramid markets

This thesis explores how multinational corporations of different sizes create barriers to imitation and therefore sustain competitive advantage in rural and informal Base of the Pyramid economies. These markets require close cooperation with local partners in a dynamic environment that lacks imposable property rights and follows a different rationale than developed markets. In order to explore how competitive advantage is sustained by different sized multinational corporations at the Base of the Pyramid, the natural-resource-based view and the dynamic capabilities perspective are integrated. Based on this integration the natural-resource-based view is extended by identifying critical dynamic capabilities that are assumed to be sources of competitive advantage at the Base of the Pyramid. Further, a contrasting case study explores how the identified dynamic capabilities are protected and their competitive advantage is sustained by isolating mechanisms that create barriers to imitation for a small to medium sized and a large multinational corporation. The case study results give grounds to assume that most resource-based isolating mechanisms create barriers to imitation that are fairly high for large and established multinational corporations that operate at the rural Base of the Pyramid and have a high product and business model complexity. On the contrary, barriers to imitation were found to be lower for young and small to medium sized multinational corporations with low product and business model complexity that according to some authors represent the majority of rural Base of the Pyramid companies. Particularly for small to medium sized multinational corporations the case study finds a relationship- and transaction-based unwillingness of local partners to act opportunistically rather than a resource-based inability to imitate. By offering an explanation of sustained competitive advantage for small to medium sized multinational corporations at the rural Base of the Pyramid this thesis closes an important research gap and recommends to include institutional and transaction-based research perspectives.