Price discovery of credit spreads in tranquil and crisis periods

In this paper we investigate the price discovery process in single-name credit spreads obtained from bond, credit default swap (CDS), equity and equity option prices. We analyse short term price discovery by modelling daily changes in credit spreads in the four markets with a vector autoregressive model (VAR). We also look at price discovery in the long run with a vector error correction model (VECM). We find that in the short term the option market clearly leads the other markets in the sub-prime crisis (2007-2009). During the less severe sovereign debt crisis (2009-2012) and the pre-crisis period, options are still important but CDSs become more prominent. In the long run, deviations from the equilibrium relationship with the option market still lead to adjustments in the credit spreads observed or implied from other markets. However, options no longer dominate price discovery in any of the periods considered. Our findings have implications for traders, credit risk managers and financial regulators.

Haircut undone? The Greek drama and prospects for investment arbitration

As a result of the sovereign debt crisis that engulfed Europe in 2010, investors are much more likely to pursue dispute resolution options when faced with losses. This paper seeks to examine the position of investors who suffered losses in the Greek haircut of 2012 in the context of investment treaty arbitration. The paper evaluates arguments that investments in Greek sovereign bonds have been expropriated by the introduction of retrofit CACs and that compensation is payable as a result of the protections offered by BITs. The paper investigates whether sovereign bonds come within the definition of protected investment in BITs, assesses the degree to which CACs act as a jurisdictional bar to investor-state claims and attempts an evaluation of whether claims could be successful. The analysis uses as an illustration recent cases brought against Greece at ICSID. The paper concludes by considering whether the Greek haircut was expropriatory and reflects on the possible outcome of current arbitrations.

A model intervenes: the many faces of moral hazard

This article builds on advances in social ontology to develop a new understanding of how mainstream economic modelling affects reality. We propose a new framework for analysing and describing how models intervene in the social sphere. This framework allows us to identify and articulate three key epistemic features of models as interventions: specificity, portability and formal precision. The second part of the article uses our framework to demonstrate how specificity, portability and formal precision explain the use of moral hazard models in a variety of different policy contexts, including worker compensation schemes, bank regulation and the euro-sovereign debt crisis.

The rise of the far right in debtor and creditor European countries: the case of European Parliament elections

While the 2014 European Parliament elections were marked by the rise of far right-wing parties, the different patterns of support that we observe across Europe and across time are not directly related to the economic crisis. Indeed, economic hardship seems neither sufficient nor necessary for the rise of such parties to occur. Using the cross-national results for the 2004, 2009 and 2014 EP elections in order to capture time and country variations, we posit the economy affects the rise of far right-wing parties in more complex ways. Specifically, we compare the experience of high debt countries (the ‘debtors’) and the others (the ‘creditors’) and explore the relationship between far right-wing party success on the one hand, and unemployment, inequality, immigration, globalization and the welfare state on the other hand. Our discussion suggests there might be a trade off between budgetary stability and far right-wing party support, but the choice between Charybdis and Scylla may be avoided if policy makers carefully choose which policies should bear the brunt of the fiscal adjustment.

Risks, costs and labour markets: explaining cross-national patterns of far right party success in European Parliament elections

What is the impact of the economy on cross national variation in far right-wing party support? This paper tests several hypotheses from existing literature on the results of the last three EP elections in all EU member states. We conceptualise the economy affects support because unemployment heightens the risks and costs that the population faces, but this is crucially mediated by labour market institutions. Findings from multiple regression analyses indicate that unemployment, real GDP growth, debt and deficits have no statistically significant effect on far right-wing party support at the national level. By contrast, labour markets influence costs and risks: where unemployment benefits and dismissal regulations are high, unemployment has no effect, but where either one of them is low, unemployment leads to higher far right-wing party support. This explains why unemployment has not led to far right-wing party support in some European countries that experienced the 2008 Eurozone crisis.

European CMBS pricing: bond, mortgage and real estate characteristics

The recent global economic crisis is often associated with the development and pricing of mortgage-backed securities (i.e. MBSs) and underlying products (i.e. sub-prime mortgages). This work uses a rich database of MBS issues and represents the first attempt to price commercial MBSs (i.e. CMBSs) in the European market. Our results are consistent with research carried out in the US market and we find that bond-, mortgage-, real estate-related and multinational characteristics show different degrees of significance in explaining European CMBS spreads at issuance. Multiple linear regression analysis using a databank of CMBSs issued between 1997 and 2007 indicates a strong relationship with bond-related factors, followed by real estate and mortgage market conditions. We also find that multinational factors are significant, with country of issuance, collateral location and access to more liquid markets all being important in explaining the cost of secured funding for real estate companies. As floater coupon tranches tend to be riskier and exhibit higher spreads, we also estimate a model using this sub-set of data and results hold, hence reinforcing our findings. Finally, we estimate our model for both tranches A and B and find that real estate factors become relatively more important for the riskier investment products.

e-Government as a regulatory response to the financial crisis: the case of the UK

This paper seeks to discuss EU policies relating to securities markets, created in the wake of the financial crisis and how ICT and specifically e-Government can be utilised within this context. This study utilises the UK as a basis for our discussion. The recent financial crisis has caused a change of perspective in relation to government services and polices. The regulation of the financial sector has been heavily criticised and so is undergoing radical change in the UK and the rest of Europe. New regulatory bodies are being defined with more focus on taking a risk-based system-wide approach to regulating the financial sector. This approach aims to prevent financial institutions becoming too big to fail and thus require massive government bail outs. In addition, a new wave of EU regulation is in the wind to update risk management practices and to further protect investors. This paper discusses the reasons for the financial crisis and the UK’s past and future regulatory landscape. The current and future approach and strategies adopted by the UK’s financial regulators are reviewed as is the lifecycle of EU Directives. The regulatory responses to the crisis are discussed and upcoming regulatory hotspots identified. Discussion of these issues provides the context for our evaluation of the role e-Government and ICT in improving the regulatory system. We identify several processes, which are elementary for regulatory compliance and discuss how ICT is elementary in their implementation. The processes considered include those required for internal control and monitoring, risk management, record keeping and disclosure to regulatory bodies. We find these processes offer an excellent opportunity to adopt an e-Government approach to improve services to both regulated businesses and individual investors through the benefits derived from a more effective and efficient regulatory system.

Support for the far right in the 2014 European Parliament Elections: a comparative perspective

The May 2014 European Parliament (EP) elections were characterised by the success of far-right Eurosceptic parties, including the French Front National, UKIP, the Danish People’s Party, the Hungarian Jobbik, the Austrian FPÖ, the True Finns and the Greek Golden Dawn. However, a closer look at the results across Europe indicates that the success of far-right parties in the EP elections is neither a linear nor a clear-cut phenomenon: (1) the far right actually declined in many European countries compared to the 2009 results; (2) some of the countries that have experienced the worst of the economic crisis, including Spain, Portugal and Ireland, did not experience a significant rise in far-right party support; and (3) ‘far right’ is too broad an umbrella term, covering parties that are too different from each other to be grouped in one single party family.

Radical left-wing Euroscepticism in the 2014 elections: a cross-European comparison

This article examines the varied performance of radical left-wing Eurosceptic parties during the 2014 EP elections. While the performance of the radical right during this 'earthquake' election has been widely discussed, little attention has been paid to the radical left. The article examines the result comparatively, and identifies that: (1) across Europe, radical left-wing euroscepticism is limited to few countries, including Greece, Cyprus, France and Portugal; (2) the countries that have experienced the worst of the economic crisis did not experience a significant rise in far right-wing party support but did experience the rise of left-wing euroscepticism; (3) from this sample only Greece experienced the rise of both the radical right and radical left.

The effects of corporate and country sustainability characteristics on the cost of debt: an international investigation

We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based in 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability, relating to both social and environmental frameworks, has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in a country's sustainability score is associated with an average decrease in the cost of debt by 64 basis points. Our international analysis shows that the environmental dimension of a country's institutional framework is approximately twice as impactful as the social dimension, when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm-level sustainability influences the interest rates charged to borrowing firms by banks. Our main findings survive a battery of robustness tests and additional analyses concerning subsamples, alternative sustainability metrics and the effects of financial crisis.

Post-crisis regulatory reforms and bank performance: lessons from Asia

Based on a large dataset from eight Asian economies, we test the impact of post-crisis regulatory reforms on the performance of depository institutions in countries at different levels of financial development. We allow for technological heterogeneity and estimate a set of country-level stochastic cost frontiers followed by a deterministic bootstrapped meta-frontier to evaluate cost efficiency and cost technology. Our results support the view that liberalization policies have a positive impact on bank performance, while the reverse is true for prudential regulation policies. The removal of activities restrictions, bank privatization and foreign bank entry have a positive and significant impact on technological progress and cost efficiency. In contrast, prudential policies, which aim to protect the banking sector from excessive risk-taking, tend to adversely affect banks cost efficiency but not cost technology.