Ariel M. Viale

On The Structure of Financial Contagion: Econometric Tests and Mercosur Evidence

We introduce a flexible copula-based semi-parametric test of financial contagion that is capable of capturing structural shifts in the transmission channel of shocks across a network of financial markets beyond the increase in the intensity of time-varying dependence. We illustrate the capabilities of the proposed test using returns of stock, money, sovereign debt, and foreign exchange markets of seven Latin-American countries, and test for the presence of pure contagion effects for each major financial crisis that affected the Mercosur region between 1994 and 2001. Besides strong evidence in favor of time-varying market interdependence, we cannot rule out the presence of pure contagion effects in the stock market transmission channel associated with the Mexican, Asian, and Russian financial crises.

THE REGULATION OF MORTGAGE SERVICING: LESSONS FROM THE FINANCIAL CRISIS: MORTGAGE SERVICING REGULATION

Pivotal litigation against the largest subprime mortgage servicer in the United States provides lessons about the appropriate regulation of mortgage servicing and adds to research about the causes of the financial crisis. Mortgage servicing is essential to the functioning of the financial system so servicers must be held to a high standard. The litigation revealed egregious practices but was settled quickly for a nominal amount and provided the servicer a very broad release of liability, allowing it to expand without correcting serious problems, and created significant wealth gains for the parent firm. Regulatory authority should not be split between agencies. (JEL G28, G21, K40)

Target valuation complexity and takeover premiums

Firm- and deal-specific characteristics that complicate estimation of target value simultaneously increase the level and variance of takeover premiums. Specifically, the mean premium is higher and the precision of the premium as a signal is lower (i.e., the error variance higher) when targets belong to the tech industry, when target stock returns are more volatile, when the bidders are larger, and when the cost of deal advising is higher. We also find that deal characteristics that we believe reduce target valuation complexity (transactions involving private bidders or LBOs) result in a lower mean premium and dispersion of premiums. Conversely, deal characteristics that we believe increase target valuation complexity (such as tender offers and deals that take a long time to complete) result in a higher mean premium and higher dispersion of premiums. Overall, characteristics that complicate the valuation of targets feed back into the level of the premium through potential pricing errors and inflate the dispersion of premiums.

An information-based model of target stock price runup in the market for corporate control

The stock price runup of target firms in the market for corporate control has been anecdotally attributed to inside trading. Moreover, the empirical merger and acquisitions literature documents a time-varying level and duration of the stock price runup of target firms. Using a market microstructure approach, we model stock price runup as a stochastic process that shifts between a random walk without drift and a predictable process dependent on a parsimonious set of state variables. Consistent with the market microstructure literature, predictability in prices can be exploited only by the informed trader. The model is capable of explaining the complex stylized facts observed in stock price runup. It is also consistent with the merger wave literature, as we find that capital liquidity, economic growth, and market valuations drive the complex dynamics of stock price runup.

A Robust Bayesian Analysis of The Stock Market's Response to Macroeconomic News

This paper explores the quality of the information that macroeconomic news convey to the stock market as forward looking signals of future business conditions. We introduce a novel robust Bayesian semi-parametric analysis of investors’ correspondence functions (i.e., signal-to-price mappings) in the stock market and a feasible ex ante measure of the level of ambiguity in Survey responses anticipating macroeconomic announcements. Using both survey and vector autoregressive (VAR)-based data we show that macroeconomic announcements are relatively ambiguous signals of future economic fundamentals in the stock market, potentially explaining some of previous controversial results in the literature.