"Experience and Brokerage in Asset Markets: Evidence from Art Auctions" (with B. Bruno and E. Garcia-Appendini). Financial Management, 47(4): 833-861, 2018 [Best Poster, 9th CEPR Swiss Winter Conference for Financial Intermediation] [Abstract] [Paper] [Link to article]
Focusing on the art market, where auction houses act as brokers between art sellers and buyers, we investigate whether more experienced brokers achieve better performance as information providers and matchmakers. We use a unique data set of auctions of Italian paintings in various houses around the world, and we measure experience as the number of times an auction house has auctioned the artworks of a certain artist in a given location. We find that more experienced brokers (i) are more likely to achieve a sale and (ii) provide more precise pre-sale estimates. These findings suggest that experience plays an important role for brokers to reduce illiquidity and opacity in markets with asymmetric information, above and beyond the role played by reputation and market share.
"A Multivariate Model of Strategic Asset Allocation with Longevity Risk" (with E. Bisetti, C.A. Favero and C. Tebaldi). Journal of Financial and Quantitative Analysis, forthcoming [Abstract] [Paper] [Appendix]
Population-wide increase in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate it. This paper extends the standard Campbell and Viceira (2005) strategic asset allocation model by including a longevity-linked investment possibility. Model estimation, based on prices for standardized annuities publicly offered by United States insurance companies, shows that aggregate shocks to survival probabilities are predictors for long-term returns of the longevity-linked securities, and reveals an unexpected predictability pattern. Valuation of longevity risk premium confirms that longevity-linked securities offer inexpensive funding opportunities to asset managers.
Using data on more than 5,000 mutual funds domiciled in four European countries in 2006, we investigate whether distribution costs embedded into the expense ratio can be held responsible for the differences of expense ratios of mutual funds in different countries. We confirm the existence of relevant country effects in the pricing of mutual fund management services. Comparing load and no-load funds and using survey data on fee retrocession to the distribution channel, we provide evidence that these effects are heavily influenced by the cost of the distribution embedded in the expense ratio.
We use cross-country data on a sample of large European banks to evaluate the impact of government ownership on bank risk. We distinguish between default risk (likelihood of creditors' losses) and operating risk (likelihood of negative equity). Our analysis is based on the joint use of issuer ratings, a synthetic measure of a bank's probability of default, and individual ratings, which omit the influence of any external support and focus on a bank's operating risk. We report two main results. First, government-owned banks (GOBs) have lower default risk but higher operating risk than private banks, indicating the presence of governmental protection that induces higher risk taking. Second, GOBs' operating risk and governmental protection tend to increase in election years. These results are consistent with the idea that GOBs pursue political goals and have important policy implications for recently nationalized European banks.
We investigate how the credit cycle affects the link between bond spreads and credit ratings. Using a simple model of the credit assessment process, we show that when the debt market is more opaque, the information content of ratings deteriorates, creating an incentive for investors to increase the amount spent on private information. We test this hypothesis empirically. Results show that when market opaqueness (proxied by the spread between Aaa- and Baa-rated bonds) increases, the explanatory power of ratings and other control variables deteriorates as investors increasingly price in non-public information.
"Ownership Structure, Risk and Performance in the European Banking Industry" (with G. Iannotta and A. Sironi). Journal of Banking and Finance, 31(7): 2127-2149, 2007 [Abstract] [Paper] [Link to article]
We compare the performance and risk of a sample of 181 large banks from 15 European countries over the 1999-2004 period and evaluate the impact of alternative ownership models, together with the degree of ownership concentration, on their profitability, cost efficiency and risk. Three main results emerge. First, after controlling for bank characteristics, country and time effects, mutual banks and government-owned banks exhibit a lower profitability than privately-owned banks, in spite of their lower costs. Second, public sector banks have poorer loan quality and higher insolvency risk than other types of banks while mutual banks have better loan quality and lower asset risk than both private and public sector banks. Finally, while ownership concentration does not significantly affect a bank's profitability, a higher ownership concentration is associated with better loan quality, lower asset risk and lower insolvency risk. These differences, along with differences in asset composition and funding mix, indicate a different financial intermediation model for the different ownership forms.
Our hand-collected sample of 298 U.S. SPACs reveals that the modal SPAC CEO is a 50-year-old male MBA graduate with substantial financial expertise. In accordance with signaling theory, greater reputation gained through prior CEO experience in public companies is linked to larger SPACs. As the IPO process continues, the CEO's financial expertise becomes important in raising external capital.
Based on a sample of large European banks, we test whether the usage of internal rating models for regulatory purposes affects bank opacity. We find that a more intensive use of advanced internal rating models is associated with lower forecast error and disagreement across analysts on bank earnings per share. We also find that these models alleviate the negative effect of non-performing loans on bank transparency.
Theories suggest that asset encumbrance, the ring-fencing of certain assets for protected debtholders, can affect banks' risk taking and lead to funding instability. We test these hypotheses using a unique, hand-collected dataset on outstanding covered bonds issued by a sample of listed European banks. Our results suggest that the effect of asset encumbrance on risk depends on the proportion of debtholders exerting market discipline and on the bank's liquidity buffers. We deal with concerns regarding omitted variables and reverse causality using several fixed effects estimations and an instrumental variables approach.
Supranational institutions, academics and market analysts have increasingly questioned the reliability of bank risk-weighted assets (RWAs), a cornerstone of the system of minimum capital ratios designed by the Basel Committee on Banking Supervision. In fact, significant differences can be found in the banks' average risk weights, both over time and across countries. Such differences can be explained by several factors, some of which may reflect the actual risk content of bank's assets, while others may conceal distortions due to "RWA tweaking" and supervisory segmentations. We analyze a sample of 50 large European banks between 2008 and 2012 and document several meaningful findings. First, risk weights are affected by the banks' size, business model and asset mix. Second, the adoption of internal ratings based (IRB) approaches is (as expected) a powerful driver of bank risk-weighted assets. Third, lower risk weights are positively linked to the banks' capital cushion. Fourth, IRB adoption is more widespread in countries where supervisory capture is potentially stronger, due to a banking industry that is both larger (compared to GDP) and concentrated. Fifth, regulatory risk weights are not disconnected from market-based measures of bank risk.
Work in Progress
"Does Organization Design Affect Delegated Investment Performance?" (with L. Spotorno)
"Does stricter supervision reduce bank opacity?" (with B. Bruno and I. Marino)
"Collective Supply Chain Responsibility: The Effect of Suppliers' CSR Behaviour on Shareholder Value" (temporary) (with M. Giannakis)