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Working Papers

  • [1801]

    Gerard Llobet, Jorge Padilla

    Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry


    This paper examines the optimal capacity choices of conventional power generators after the introduction of renewable production. We start with a basic and generally accepted model of the liberalized wholesale electricity market in which firms have insufficient incentives to invest and we illustrate how the entry of renewable generation tends to aggravate that problem. We show that the incentives to invest in firm capacity (e.g. conventional thermal plants) may be restored by means of a capacity auction mechanism. That mechanism is vulnerable and, hence, may prove ineffective unless governments can credibly commit not to sponsor the entry of new capacity outside the auction mechanism. We explain that such commitment may be particularly difficult in the current political context where energy policy is conditioned by environmental and industrial-policy goals. We finally propose a way to enhance the credibility of capacity auctions by committing to optimally retire idle (conventional) power plants in response to entry outside the auction.

  • [1802]

    Gabriele Fiorentini, Enrique Sentana

    Consistent Non-Gaussian Pseudo Maximum Likelihood Estimators


    We characterise the mean and variance parameters that distributionally misspecified maximum likelihood estimators can consistently estimate in multivariate conditionally heteroskedastic dynamic regression models. We also provide simple closed-form consistent estimators for the rest. The inclusion of means and the explicit coverage of multivariate models make our procedures useful not only for GARCH models but also in many empirically relevant macro and finance applications involving VARs and multivariate regressions. We study the statistical properties of our proposed consistent estimators, as well as their efficiency relative to Gaussian pseudo maximum likelihood procedures. Finally, we provide finite sample results through Monte Carlo simulations.

  • [1803]

    Enrique Sentana

    Volatility, Diversification and Contagion


    In this paper I describe in detail the concepts of volatility, diversification and contagion, three basic keys to understand the seemingly whimsical behaviour of financial markets. The presentation is deliberately non-technical and largely self-contained, with most required concepts defined along the way. Nevertheless, the analysis is mostly empirically oriented, with an emphasis on the methods that have been proposed to measure those concepts and a discussion of the stylised facts that the resulting measures imply. I also use those measures to study the effects of the financial crisis of 2007-2008 and the euro sovereign debt crisis of 2010-2012 on Spain.

  • [1804]

    Gabriele Fiorentini, Enrique Sentana

    Specification Tests for Non-Gaussian Maximum Likelihood Estimators


    We propose generalised DWH specification tests which simultaneously compare three or more likelihood-based estimators of conditional mean and variance parameters in multivariate conditionally heteroskedastic dynamic regression models. Our tests are useful for GARCH models and in many empirically relevant macro and finance applications involving VARs and multivariate regressions. To design powerful and reliable tests, we determine the rank deficiencies of the differences between the estimators' asymptotic covariance matrices under the null of correct specification, and take into account that some parameters remain consistently estimated under the alternative of distributional misspecification. Finally, we provide finite sample results through Monte Carlo simulations.

  • [1805]

    Gabriele Fiorentini, Alessandro Galesi, Gabriel Pérez-Quirós , Enrique Sentana

    The Rise and Fall of the Natural Interest Rate


    We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.

  • [1806]

    Jorge Abad, Javier Suarez

    The Procyclicality of Expected Credit Loss Provisions


    The Great Recession has pushed accounting standards for banks' loan loss provisioning to shift from an incurred loss approach to an expected credit loss approach. IFRS 9 and the incoming update of US GAAP imply a more timely recognition of credit losses but also greater responsiveness to changes in aggregate conditions, which raises procyclicality concerns. This paper develops and calibrates a recursive ratings-migration model to assess the impact of different provisioning approaches on the cyclicality of banks' profits and regulatory capital. The model is used to analyze the effectiveness of potential policy responses to the procyclicality problem.

  • [1807]

    Caterina Mendicino, Kalin Nikolov, Javier Suarez, Dominik Supera

    Bank Capital in the Short and in the Long Run


    How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.

  • [1808]

    Alvaro Remesal

    Clawback Provisions, Executive Pay, and Accounting Manipulation


    Clawback provisions allow shareholders to recover previously-awarded compensation from managers involved in accounting manipulation or misconduct. I assess theoretically and empirically the effects of clawback provisions on the structure of managerial compensation and the frequency of accounting manipulation. In a principal-agent model I show how, in the presence of clawback enforcement frictions, clawback adoption can tilt the optimal compensation schedule towards the long-term. I test the empirical relevance of the theoretical implication using data from U.S. public firms in the 2002-2016 period. The identification deals with the endogenous timing of adoption and measurement error by exploiting variation in clawback adoption across a firm's board interlock. I find that, in those firms with fewer pre-adoption independent directors, clawback adoption increases the wealthperformance sensitivity of unvested (long-term) compensation, while reduces the frequency of earnings manipulation. The results suggest that enforcement frictions are relevant, particularly for firms where managers face weak monitoring by shareholders.

  • [1809]

    Alvaro Remesal

    How Important are Dismissals in CEO Incentives? Evidence from a Dynamic Agency Model


    I estimate a dynamic agency model to quantify the importance of dismissals in CEO incentives vis-à-vis pecuniary compensation. The model features endogenous dynamics in deferred and ow compensation, as well as exogenous departures, and endogenous dismissals after poor firm performance. Thus, the model functions as a classification device for CEO turnover events that exploits information from all the departures in the data. I estimate the model via the Simulated Method of Moments, using data for CEOs in U.S. public firms appointed from 1993 to 2013. The estimated CEO dismissal rate is 1.2 percent, and the CEO replacement cost represents 3.4 percent of firm assets, 64 million in 2015 U.S. dollars for the median firm. Poor governance, proxied by director independence, increases the replacement costs in big firms. The relationship reverses in small firms, so board independence must also capture better hiring policies or career concerns of directors. The results confirm that CEO dismissals are infrequent. However, changes in the cost of replacements that generate small increases in the underlying dismissal rate lead to substantial reductions in the size of incentive compensation.

  • [1810]

    Radim Bohácek, Jesús Bueren, Laura Crespo, Pedro Mira, Josep Pijoan-Mas

    Inequality in Life Expectancies across Europe


    We use harmonized household panel data from 10 European countries (SHARE) plus US (HRS) and England (ELSA) to provide novel and comparable measurements of education and gender differences in life expectancy and disability-free life expectancy, as well as in the underlying multi-state life tables. Common across countries we find significant interactions between socio-economic status and gender: (a) the education advantage in life expectancy is larger for males, (b) the female advantage in life expectancy is larger among the low educated, (c) education reduces disability years and this added advantage is larger for females, and (d) females suffer more disability years but this disadvantage is hardly present for the high educated. Common across countries we also find that the education advantage in disability years is due to better health transitions by the highly-educated, and that the female disadvantage in disability years is due to better survival in ill-health by females. Looking at the differences across countries, we find that inequalities are largest in Eastern Europe, lowest in Scandinavia, and that the education gradient in life expectancy for males correlates positively with income inequality and negatively with public health spending across countries.

  • [1811]

    David Martinez-Miera, Rafael Repullo

    Markets, Banks, and Shadow Banks


    We analyze the effect of bank capital requirements on the structure and risk of a financial system where markets, regulated banks, and shadow banks coexist. Banks face a moral hazard problem in screening entrepreneurs' projects, and they choose whether to be regulated or not. If regulated, a supervisor certifies their capital; if not, they have to rely on more expensive private certification. Under both risk-insensitive and risk-sensitive requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from banks. But risk-insensitive (sensitive) requirements are especially costly for relatively safe (risky) entrepreneurs, which may shift from regulated to shadow banks.

  • [1812]

    Gabriel Jiménez, José-Luis Peydró, Rafael Repullo, Jesús Saurina

    Burning Money? Government Lending in a Credit Crunch


    We analyze a small, new credit facility of a Spanish state-owned-bank during the crisis, using its continuous credit scoring system, firm-level scores, and credit register data. Compared to privately-owned banks, the state-owned bank faces worse applicants, softens (tightens) its credit supply to unobserved (observable) riskier firms, and has much higher defaults. In a regression discontinuity design, the supply of public credit causes: large positive real effects to financially-constrained firms (whose relationship banks reduced substantially credit supply); crowding-in of new private-bank credit; and positive spillovers to other firms. Private returns of the credit facility are negative, while social returns are positive.

  • [1813]

    Julio Gálvez, Javier Mencía

    Conditional Return Asymmetries in the Sovereign-Bank Nexus


    We estimate the time-varying skewness of European banks' stock and sovereign bond returns using quantile methods. We obtain a negative relationship between sovereigns' and banks' return asymmetries, which we relate to the safe haven features of sovereign debt. However, this feature reverses for peripheral European countries (GIIPS). Furthermore, although better capitalized and less risky banks tend to offer less negatively skewed stock returns, these benefits do not reach similarly strong GIIPS-headquartered banks. Finally, we identify a risk premium related to sovereign negative skewness for both large financial and non-financial European firms, which is stronger for firms headquartered in GIIPS.

  • [1814]

    Gabriele Fiorentini, Enrique Sentana

    New Testing Approaches for Mean-Variance Predictability


    We propose tests for smooth but persistent serial correlation in risk premia and volatilities that exploit the non-normality of financial returns. Our parametric tests are robust to distributional misspecification, while our semiparametric tests are as powerful as if we knew the true return distribution. Local power analyses confirm their gains over existing methods, while Monte Carlo exercises assess their finite sample reliability. We apply our tests to quarterly returns on the five Fama-French factors for international stocks, whose distributions are mostly symmetric and fat-tailed. Our results highlight noticeable differences across regions and factors and confirm the fragility of Gaussian tests.


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