CCPs and network stability in OTC derivatives markets

Among the reforms to OTC derivative markets since the global financial crisis is a commitment to collateralize counterparty exposures and to clear standardized contracts via central counterparties (CCPs). The reforms aim to reduce interconnectedness and improve counterparty risk management in these important markets. At the same time, however, the reforms necessarily concentrate risk in one or a few nodes in the financial network and also increase institutions’ demand for high-quality assets to meet collateral requirements. This paper looks more closely at the implications of increased CCP clearing for both the topology and stability of the financial network. Building on Heath et al. (2013) and Markose (2012), the analysis supports the view that the concentration of risk in CCPs could generate instability if not appropriately managed. Nevertheless, maintaining CCP prefunded financial resources in accordance with international standards and dispersing any unfunded losses widely through the system can limit the potential for a CCP to transmit stress even in very extreme market conditions. The analysis uses the Bank for International Settlements Macroeconomic Assessment Group on Derivatives (MAGD) data set on the derivatives positions of the 41 largest bank participants in global OTC derivative markets in 2012

Estimating and Forecasting Asset Volatility and Its Volatility: A Markov-Switching Range Model

This paper proposes a new model for modeling and forecasting the volatility of asset markets. We suggest to use the log range defined as the natural logarithm of the difference of the maximum and the minimum price observed for an asset within a certain period of time, i.e. one trading week. There is clear evidence for a regime-switching behavior of the volatility of the S&P500 stock market index in the period from 1962 until 2007. A Markov-switching model is found to fit the data significantly better than a linear model, clearly distinguishing periods of high and low volatility. A forecasting exercise leads to promising results by showing that some specifications of the model are able to clearly decrease forecasting errors with respect to the linear model in an absolute and mean square sense

Evaluating the German Bank Merger Wave

German banks experienced a merger wave throughout the 1990’s. However,the success of bank mergers remains a continuous matter of debate.In this paper we suggest a taxonomy as how to evaluate post-merger performanceon the basis of cost efficiency (CE). We categorise mergers a successthat fulfill simultaneously two criteria. First, merged institutes must exhibitCE levels above the average of non-merging banks. Second, banks mustexhibit CE changes between merger and evaluation year above efficiencychanges of non-merging banks. We employ this taxonomy to characterise(successful) mergers in terms of various key-performance and structural indicatorsand investigate the implications for four prominent policy issuesparticular to German banking. Our main conclusions are threefold. First,roughly every second merger is a success. Second, the margin of success isnarrow, as the CE difference amounts to approximately 1 percentage point.Third, it takes around seven years after a transaction until maximum meanCE differentials materialise

Financial Stability in European Banking: The Role of Common Factors

In this paper, I investigate the development and determinants of CDS spreads for 18 major European banks between December 2001 and January 2004 applying factor analysis to daily data. Two clear-cut conclusions can be drawn. First, the dominating first common factor that explains 88 percent of all variation in the system, impacts on all banks in a similar direction. This suggests a strong market integration. However the size of the response of each bank’s CDS spread to the first common factor differs substantially, probably reflecting differences in individual bank’s exposure and riskiness. Second, the first common factor appears significantly related to the European P/E ratio and the European-wide 2-year nominal interest rate. This finding suggests that the common factor may be interpreted as a general indicator of market conditions

Empowerment of Whom and for What? Financial Literacy Education and the New Regulation of Consumer Financial Services

Financial regulators in many states recently have obtained statuory mandates to enhance consumer financial literacy. This paper investicages the development of policy pursuant to such mandates in the UK and Canada to identify how national regulators in both countries represent financial market place. It finds that regulators in both countries represent financial education as empowerment and responsible consumer behaviour. The paper rekates the tension between empowerment and responsibilization aspects of literacy enhancement to policy goals of expectations of protection. It raises questions about regulators' use of consumer education to responsiblize consumption of financial products and calls for further research on the international growth of financial literacy education as a regulatory project

Epigenetic aging biomarkers and occupational exposure to benzene, trichloroethylene and formaldehyde

Epigenetic aging biomarkers are associated with increased morbidity and mortality. We evaluated if occupational exposure to three established chemical carcinogens is associated with acceleration of epigenetic aging. We studied workers in China occupationally exposed to benzene, trichloroethylene (TCE) or formaldehyde by measuring personal air exposures prior to blood collection. Unexposed controls matched by age and sex were selected from nearby factories. We measured leukocyte DNA methylation (DNAm) in peripheral white blood cells using the Infinium HumanMethylation450 BeadChip to calculate five epigenetic aging clocks and DNAmTL, a biomarker associated with leukocyte telomere length and cell replication. We tested associations between exposure intensity and epigenetic age acceleration (EAA), defined as the residuals of regressing the DNAm aging biomarker on chronological age, matching factors and potential confounders. Median differences in EAA between exposure groups were tested using a permutation test with exact p-values. Epigenetic clocks were strongly correlated with age (Spearman r > 0.8) in all three occupational studies. There was a positive exposure-response relationship between benzene and the Skin-Blood Clock EAA biomarker: median EAA was −0.91 years in controls (n = 44), 0.78 years in workers exposed to <10 ppm (n = 41; mean benzene = 1.35 ppm; p = 0.034 vs. controls), and 2.10 years in workers exposed to ≥10 ppm (n = 9; mean benzene = 27.3 ppm; p = 0.019 vs. controls; ptrend = 0.0021). In the TCE study, control workers had a median Skin-Blood Clock EAA of −0.54 years (n = 71) compared to 1.63 years among workers exposed to <10 ppm of TCE (n = 27; mean TCE = 4.22 ppm; p = 0.035). We observed no evidence of EAA associations with formaldehyde exposure (39 controls, 31 exposed). Occupational benzene and TCE exposure were associated with increased epigenetic age acceleration measured by the Skin-Blood Clock. For TCE, there was some evidence of epigenetic age acceleration for lower exposures compared to controls. Our results suggest that some chemical carcinogens may accelerate epigenetic aging

The regulator's conundrum. How market reflexivity limits fundamental financial reform

Financial firms’ valuation approaches are key to financial market functioning. The financial crisis exposed fundamental faults in pre-crisis practices and the regulations that bolstered them. Critics pointed to reflexivity: financial markets have no solid anchor outside of market participants’ assessments, which makes them inherently unstable. Reflexivity implies valuation techniques are performative: they shape rather than reflect risks. Critics thus called for root and branch reform: regulators needed to regain control over these valuation practices. In spite of a flurry of changes, progress on the reforms has been limited in precisely those domains where it seemed most necessary. We argue that this lack of progress does not persist in spite of market reflexivity, but because of it. Public prescriptiveness might mandate widespread use of deficient valuation routines, exacerbating their deleterious performative effects and implicating public authorities in future financial crises. In the regulator's conundrum, neither a hands-off approach to valuation approaches, nor an interventionist stance promises to be effective. Empirically, we show how reflexivity has obstructed fundamental reforms in the European Union in three key domains: credit ratings, liquidity regulation, and accounting standards. Market reflexivity itself is, therefore, crucial to understanding the limited regulatory reforms we have witnessed since the crisis