Swiss Finance Institute Connection
In nine themed issues, 2011-2013, the Connection presents research by SFI faculty members on topics of particular interest for industry.
Focus on Risk Management
The Art of Managing Risks
- European financial institutions differ from US American institutions in many ways. This calls for a special method to measure systemic risk in Europe.
- For large corporations facing volatile input prices and holding market power in their product markets, hedging strategies necessarily interact with production plans.
- Individual investors interpret commonly-perceived information differently. The random behavior of investors’ heterogeneous beliefs affects stock returns.
- Q&A on global risks with David Cole, CRO Swiss Re.
- Interview with SFI Senior Chair Paul Embrechts, ETH Zurich
Focus on real estate
Deciphering the ups and downs of house prices
- Real estate transaction prices and appraisal values can differ notably. Their differences can reveal differences in how investors and appraisers weigh property-related information.
- Since 2007, real estate prices in Switzerland have risen dramatically. A closer analysis identifies 11 districts with strong signs of developing price bubbles.
- Real estate price indices are based on several economic variables. Only a few of these variables, though, can successfully predict which direction prices will take in the future.
- Q&A on the Swiss real estate market with Marco Salvi, Avenir Suisse.
- Interview with Donato Scognamiglio, University of Bern.
Focus on governance
The 7th SFI Annual Meeting
- Equity analysts choose to cover firms they have favorable views about. In return, firms adopt corporate policies preferred by the analysts that cover them.
- CEO turnover decisions are a credible threat capable of improving firm performance. This holds true across firms in countries with very different governance systems.
- Compensation of executive managers is a hotly debated topic in Switzerland and abroad. Ongoing SFI research provides fresh insights into this debate.
- Q&A with Sergio Ermotti, Group CEO of UBS.
Focus on trading
Buy in panic, sell in euphoria?
- Investors trade for several reasons. Knowing whether it is buyers or sellers who actively initiate trades helps identify the true motives behind trading.
- Some hedge funds manipulate reported performance by strategically timing their trading orders. This can have implications for the efficiency of financial markets.
- When investors trade stocks based on private information, prices are expected to move. The extent to which this is also true when derivatives are traded is an open research question.
- Q&A on trading structured products in Switzerland with Paolo Vanini, ZKB. Interview with Darrell Duffie, Stanford University
Focus on volatility
Reading into financial market swings
- Empirical studies reveal an ambiguous link between a firm’s equity returns and their volatility. Errors in analysts’ earnings forecasts might be part of the story.
- As high-speed trading becomes the new norm in finance, volatility modeling and forecasting techniques must account for the disturbances it causes when measuring market volatility.
- Jumps in stock returns are an even rarer event than typically thought of. Neither do the jumps seem to be caused by the release of corpo-rate or economic news.
- Q&A on modeling and trading volatility with Giovanni Barone-Adesi, University of Lugano.
- Interview with Pierre Collin-Dufresne, SFI@EPFL.
Focus on banking
The post-crisis banking landscape
- Lobbying by the US banking industry has increasingly intensified over the last decade. Yet, the bulk of the expenditures come from a few big banks with specific characteristics.
- Banks that performed poorly in the 1997 crisis performed again poorly in the recent crisis. This can be explained by a risk culture that is hard to change.
- Banks tend to lend a lot during booms and very little during recessions. This can be detrimental to society’s welfare even in the absence of a banking crisis.
- Risks in interbank lending have risen since the recent crisis. In the short term, these risks are driven by counterparty risk; on the longer term, it is liquidity risk that matters more.
- Q&A on Swiss banking with Claude-Alain Margelisch, Swiss Bankers Association.
- Interview with Andrea Tardy, J.P. Morgan Private Bank.
Focus on investments
6th Annual Meeting of the Swiss Finance Institute
- Internationally diversified equity mutual and institutional funds show little persistence in performance. Yet this does not hold their investors back from chasing returns.
- Financial crisis contagion is an elusive concept. An empirical investigation of the role of equity mutual funds in transmitting asset price shocks helps clarify the picture.
- Hedge fund return data have special, yet challenging, features. Performance evaluation tools taking these features into account reveal new insights on hedge fund investments.
- Q&A on interdisciplinary investigations of economic behavior, with Ernst Fehr, University of Zurich.
- Interview with Peter Bossaerts, Caltech and SFI@EPFL.
Focus on corporate governance
Snooping into the boardroom
- Private equity sponsors of leveraged buyout firms redesign several CEO contract characteristics. This has important implications for CEO contract design in public firms, too.
- Takeover threat affects a firm’s choice regarding the dispersion of its shareholder base. A wide shareholder base compensates for the lack of other anti-takeover measures.
- Stock prices of Swiss public firms reacted negatively to the Abzocker-Initiative. This shareholder reaction can be traced to the costs implied by the proposed reform.
- Q&A on the Swiss Code of Best Practice for Corporate Governance, with Meinrad Vetter, economiesuisse.
- Interview with Yola Biedermann, Ethos.
Focus on the financial crisis
Research insights on the 2007/8 financial crisis
- Risk panics need not necessarily be caused by fundamental changes in the economy. Investors’ perceptions of relevant economic variables also play an important role.
- Equity injections and asset buyouts are the two most common bailout methods. Which method works better may ultimately depend on the quality of the bank’s assets.
- Lehman Brothers’ default triggered a cascade of defaults among financial firms. Effective credit ratings represent an important channel of contagion between interlinked firms.
- Understanding FX liquidity risk may help policy makers assess the effectiveness of their decisions and their macroprudential tools in an appropriate and timely manner.
- Interview with Professor Jean-Charles Rochet.