Research projects 2011

Finance, banking, and the macroeconomy 

Efficiency of financial markets 

Corporate governance

Finance, banking, and the macroeconomy

The effect of foreign debt on financial constraints in the Russian banking sector (Vladimir Sokolov)

I trace the impact of liquidity infusions made by the Russian Central Bank (CBR) following the Lehman Brothers collapse. I look at Russian banks with a history of borrowing in foreign capital markets and compare banks that were directly affected by the crisis to those that were not affected by it. First, I find that CBR assistance primarily went to affected banks. Among these banks, holdings of markets securities also increased significantly more than among unaffected banks, suggesting that such securities were used as collateral for CBR credit. Second, I find no significant difference in the pattern of lending to corporate borrowers among affected and unaffected banks. At the same time, lending to private borrowers with weaker banking relationships, such as individuals and entrepreneurs, decreased significantly more among affected banks. Finally, all banks that previously were net borrowers with respect to non-resident banks accumulated substantial foreign currency during the year after the sudden stop. 

Keywords: foreign debt, banking sector, securities

The impact of social structure on bank-runs (Roman Chuhay, co-author Huber Janos Kiss)

Empirical evidence suggest that bank runs may not be driven merely by the deterioration of fundamental variables that affect the bank. Depositors may just decide to rush to the bank to withdraw their funds due to panic. The workhorse model of coordination problem among depositors is Diamond and Dybvig (1983). They show in a simultaneous setup the possibility of multiple equilibria, one of which involves depositors running the bank. However, description of bank runs and empirical evidence suggest that decisions to withdraw the money are not simultaneous. Many depositors have information about what other depositors have done. For example, Starr and Yilmaz (2007) analyze a bank-run episode, which affected Turkey's Islamic financial houses in 2001. They show that the behavior of depositor groups of different sizes was responsive to actions of their peers and to the observable behavior of depositors of other groups. Iyer and Puri (2008) examine depositor level data for a bank that faced a run in India in 2001. The main conclusion of the paper is that social network effects are important regarding the decision-making of depositors.

Contribution of our work to the bank-run literature is twofold. First, we explicitly specify who can observe whom by considering underlying network of social contacts. This brings structure to the problem and allows us to study the impact of such network theory concepts as degree distribution and clustering coefficient. Second, we allow depositors to re-diced upon observing actions of their neighbors and effectively study multistage game.

The aim of the paper is to identify ultimate proportion of depositors who withdraw the money depending on the proportion of impatient depositors in the population. We also plan to study comparative statics and consider how connectivity, variance of degree distribution and clustering coefficient affect probability of the bank run. In addition our formulation brings dynamic aspects to the problem allowing us to relate the shape of withdrawal curve to the underlying social structure.

Keywords: social structure, bank-runs, depositors

Regional Patterns of House Prices in Russia and their Determinants (Carsten Sprenger, Branko Urosevic)

In many emerging market countries, house prices have shown a considerable increase over the last decade. In Russia, the ratio of square meter prices to GDP per capita is now one of the highest in the world. These developments have been accompanied by fundamental changes in the regulation and institutions of real estate markets and markets for housing finance. In many countries of Central and Eastern Europe, these markets were inexistent still 20 years ago. In addition, there is a huge regional variation in Russian house prices.

In this project, we want to identify and quantify the driving forces, both of the increase over time and of the regional variation of house prices in Russia. We consider standard factors such as per capita income, demographic factors and construction costs, among others. Particular attention is dedicated to the contribution from financial factors, such as the general development of the banking system, credit expansion, the availability of mortgage loans and interest rates. The available data allows estimating a dynamic panel model for at least four years of quarterly data, for about 60 regions of Russia. The model will help to answer the question whether there has been a house price bubble in some regions of Russia.

Keywords: regional patterns, house prices

Efficiency of financial markets 

Transaction costs, liquidity, and asset pricing in emerging markets – the case of Russia (Sergey Gelman)

Bekaert, Harvey и Lundblad (2007) revealed dynamic interdependence between liquidity and returns for several emerging markets. Furthermore, they could explain cross-country differeces in expected returns by transaction costs and covariance of returns and liquidity. The goal of the current study is to uncover similar relationships for individual assets on a single emerging market.

Literature review, formal theoretic framework and primary data collection is planned for 2011. 

Keywords: transaction costs, liquidity, asset pricing, emerging markets

Optimal Capital Allocation: VaR, C-VaR, Spectral Measures and Beyond in Russian Markets (Dean Fantazzini)

Since the earlier work on expected utility, the axiomatic approach to risk theory has expanded dramatically beyond the classical mean-variance framework, as illustrated by Artzner et al. (1999), De Giorgi (2005), Embrechts et al. (2005) and by Denuit et al. (2006). In this project we study the robustness of portfolio allocation with respect to different choices of risk measure, such as spectral and distortion risk measures.

This research project aims at extending and implementing advanced portfolio management techniques with Russian financial assets, and verify by using extensive out-of-sample analysis which approach proves best for the extremely volatile Russian markets. Moreover, it wants to verify whether an investor implementing a volatility-timing strategy with

Russian stocks would be willing to pay to switch from a daily-returns-based estimator of the conditional variance (or a constant volatility model) to an estimator based on intraday data.

Keywords: optimal capital allocation, russian markets, management technique 

Corporate governance

А Calibrated Model of Executive Pay (Stanimir Morfov)

Since the seminal article of Jensen and Murphy (1990), executive compensation has been the center of a hot debate in both academic and media circles. While observed payment schemes may be a product of rent-extraction that hurts individual investors and needs to be corrected through improved corporate governance or government regulation, they may also result from optimal contracting. Therefore, it is very important that we try to relate current payment practices to existing microeconomic model of asymmetric information. Such attempts include Haubrich (1994), Haubrich and Popova (1998), Margiotta and Miller (2000), Aseff and Santos (2005). None of this works pays attention to the possibility that aggregate shocks affect not only firm’s profits, but also managerial outside options. The latter effect may significantly alter the optimal compensation scheme and relate to the relative performance evaluation puzzle (see, for example,  Morfov (2010). The current research aims at filling this gap by calibrating a version of the model of optimal contracting under limited commitment and history dependent reservation utilities that has been presented by the author in the framework of the Laboratory of Financial Economics in 2010. 

Keywords:calibrated model, executive pay

Investment and Financing Decisions of an Intrinsically Motivated Entrepreneur (Carsten Sprenger, Branko Urosevic)

There is empirical evidence that intrinsic motivation is highly relevant in entrepreneurial decisionmaking. Murdock (2002, Benabou and Tirole (2003) and Prendergast (2008) have investigated the role of intrinsic motivation in employment contracts. The goal in this project is to investigate its role for investment and financing decisions of entrepreneurs. To this end we will build a theoretical model of an entrepreneur making investment and financial decisions, and characterize the role of motivational factors. Predictions of this model are going to be confronted with survey data for US entrepreneurs. 

Keywords: investment, financial decisions, intrinsically motivated enterpreneurs

Performance of domestic and cross-border acquisitions: Empirical evidence from Russian Acquirers (Marie-Ann Betschinger, co-author: Olivier Bertrand)

This paper investigates the impact of domestic and international acquisitions initiated by Russian firms on their operating performance. In general, acquisitions can be associated with synergy gains, internalization advantages, and higher market power. However, acquisitions may also give rise to agency problems as well as new integration and organizational costs, leading to an ambiguous overall impact on the performance of acquirers. Based on a sample of more than 600 acquirers we show that both domestic and international acquisitions tend to reduce the performance of acquirers compared to non-acquiring firms. Examining how different deal, firm and industry level characteristics moderate the value destroying effects of acquisitions, our results suggest that Russian acquirers suffer from the inability to leverage value due to low M&A experience and capability especially when making international acquisitions. 

Keywords: domestic and cross-border acquisitions, operating performance

Premiums and long-term performance of emerging market M&As (M.-A. Betschinger and Alex Settles)

Overbidding by buyers can be responsible for long-run underperformance. However, empirical evidence based on samples of domestic M&A show that the opposite seems to be true: Merger premiums are positively linked with long-term performance (e.g. Antoniou & Arbour 2008). The paper adds to the existing literature by analyzing if this empirical relationship also holds in cross-border deals for acquirers from emerging economies. Hence, we explore the size of merger premiums paid and the relationship with long-run deal performance focusing on particularities of emerging market acquirers as compared to acquirers from developed markets. We include both domestic and cross-border deals in the set-up which allows us to distinguish particularities of cross-border deals.

Keywords: premiums, unnderperformance, emerging market