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2008 Lamfalussy Fellows
The 2008 Lamfalussy fellows are: - Daniel Dorn, Assistant Professor, Drexel University
Research project: Do Retail Investors Need 100,000 Options? Bank-issued Options Markets in Europe
The purpose of the project is to study the large market for retail investments embedding options as offered by banks (also known as covered warrants). This market is particularly interesting because of the growing volume of options traded (for comparison, 100,000 of those were traded in 2007 at the European Warrant Exchange (EuWax), compared to 5,000 equity options listed at the European Exchange (EuRex)), and because, relative to other tradeable financial assets, their features are at the discretion of the issuing bank. This results in extreme product differentiation in that about 95% of the products offered are unique. The project uses transaction records on bank-issued options by a large German broker in order to study 1) whether increased choice of products results in inefficient decisions by investors (buying options that are more expensive), and 2) how banks select the combination of features for the options they issue. The project relates to the Network's priority 'Integration and development of retail financial services and the promotion of innovative firms'.
- Nuno Fernandes, Associate Professor, Universidade Catolica Portuguesa Research project: The Evolution of Foreign Listings and Exchanges Competitiveness The project will study the outcomes of the unprecedented level of competition among stock exchanges in recent years, as well as the determinants behind the success of some countries and cities in becoming major financial centers in the global economy. The author will use a sample of 5,000 firms from 50 countries that have cross-listed in the 15 major stock exchanges since the early 1980s. It will attempt to empirically answer the questions, 1) how the macroeconomic conditions in a country affect the propensity to list in that particular stock exchange, 2) to what extent changes in regulation, investor protection, and listing costs can explain sudden waves of listings and de-listings, and 3) to what extent the characteristics of the firms that need to raise capital can explain exchanges’ competitiveness. The project falls under ECB-CFS Network Priority 'Financial modernisation, governance and the integration of the European financial system in global capital markets'.
- Lev Ratnovski, PhD student, University of Amsterdam
Research project: The Risk of Wholesale Bank Funding
The underlying question of this project is how the fact that commercial banks in Europe are increasingly reliant on wholesale funding rather than traditional retail deposits affects the banking sector’s efficiency and liquidity. In particular, the literature has so far taken a positive view of wholesale funding, ignoring the risks of compromised credit quality and of inefficient liquidations, triggered by sudden withdrawals upon negative news. The project will develop a theoretical model in order to study the incentives of wholesale financiers to become informed, the consequences of being uninformed, and banks’ strategy of whether to rely on wholesale funding in the first place. It is expected to shed light on one of the mechanisms helping to transmit the ongoing credit market turmoil, namely funding liquidity risk, and as such falls under ECB-CFS Network Priority 'Financial systems as risk managers and risk distributors'.
- Lucy White, Assistant Professor, Harvard Business School
Research project: Reputation as a Conduit for Financial Contagion
The project will study a new channel for banking contagion, which is related to the experiences with the Northern Rock case. The two channels for contagion spreading studied by the literature so far are similar asset bases by banks and interbank lending. White’s project introduces the reputation of the regulator as another important conduit of financial contagion. It will analyse theoretically that even with uncorrelated assets and no interbank lending, the failure of one bank may cause a widespread bank-run if it undermines depositors’ confidence in the ability of the regulator to identify early warning signs of bank failures. The project will also address the point that secret forbearance may be more desirable than public support, if the failure of a bank will severely impair the regulator’s reputation. It also falls under ECB-CFS Network Priority 'Financial systems as risk managers and risk distributors'.
- Vivian Yue, Assistant Professor, New York University
Research project: Interest Rate Swaps and Corporate Default
The project will study the impact of interest rate swaps on corporate default, as well as on the aggregate economy in the context of a dynamic stochastic general equilibrium (DSGE) model with financial markets. In particular, it will study what firm-specific and economy-wide characteristics determine the use of interest rate swaps by firms, how firms’ optimal investment choices change conditional on using swaps as a risk management tool, and how their use affects aggregate output and consumption. The project falls under ECB-CFS Network Priority 'Financial systems as risk managers and risk distributors'.
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