Giampaolo Gabbi

Which factors affect corporate bonds pricing? Empirical evidence from eurobonds primary market spreads

The question of which factors determine corporate bonds pricing is investigated by analysing the spreads of eurobonds issued by major G-10 companies during the 1991–2001 period. Three main results emerge from the analysis. First, bond ratings appear as the most important determinant of yield spreads, with investors’ reliance on rating agencies judgments increasing over time. Second, the primary market efficiency and the expected secondary market liquidity are not relevant explanatory factors of spreads cross-sectional variability. Finally, rating agencies adopt a different, ‘through the cycle’, evaluation criteria of default risk with respect to the forward looking one adopted by bond investors.

Evolution of Controllability in Interbank Networks

The Statistical Physics of Complex Networks has recently provided new theoretical tools for policy makers. Here we extend the notion of network controllability to detect the financial institutions, i.e. the drivers, that are most crucial to the functioning of an interbank market. The system we investigate is a paradigmatic case study for complex networks since it undergoes dramatic structural changes over time and links among nodes can be observed at several time scales. We find a scale-free decay of the fraction of drivers with increasing time resolution, implying that policies have to be adjusted to the time scales in order to be effective. Moreover, drivers are often not the most highly connected “hub” institutions, nor the largest lenders, contrary to the results of other studies. Our findings contribute quantitative indicators which can support regulators in developing more effective supervision and intervention policies.

Measuring liquidity risk in a banking management framework

Stresses that recent changes in financial markets have involved the payment system and the banking processes directly devoted to short term forecasting. Proposes that financial flows control systems must be adopted that can measure performance and liquidity risks consistent with the models often used for credit and market risks.

Risk Management for Italian Non-Financial Firms: Currency and Interest Rate Exposure

This paper surveys risk management practices among Italian non‐financial firms. This papers contribution lies in investigating derivative usage particular to Italian businesses, a group whose public disclosure of derivative instruments is not routine. Italy is characterised by a high percentage of small and medium sized family run firms. The survey examines determinants of currency and interest rate derivative use with respect currency and to firm size, geographical location, rating, industry, access to capital markets and educated management. The results from the logistic regressions suggest that Italian non‐financial firms’ use of derivative contracts is strongly influenced by these characteristics.

Default and Asset Correlation: An Empirical Study for Italian SMEs

This paper addresses the estimation of confidence sets for asset correlation for credit risk assessment in the Italian market. Research on the estimation of asset correlation using endogenous default probabilities data has focused the impact of concentration risk factors, such as industry and firm size. The empirical evidence shows that assumptions underlying the Regulatory Capital formula are not substantiated and benefits receiving from the respect of the granularity could be reduced or even removed. This effect could depend on the positive relationship between asset correlation and default probability, the negative relationship between asset correlation and size, and the positive link between default correlation and default probability. The regulatory impact is that the purpose to level the playing field could be failed, setting up a regulatory arbitrage opportunity and the risk that some firms, clustered by size and industry, could suffered by the credit crunch.

Semi-correlations as a tool for geographical and sector asset allocation

Abstract Many studies show that international correlations have changed over time. This phenomenon has modified the practices of many portfolio managers, which are now preferably linked with sector behaviour. In order to prove the benefits of this management style, some new evidence is provided for correlation dynamics among geographic areas and business sectors. The concept of semi-correlation is applied to asset allocation in order to compare whether it applies efficiently to sectors and countries. The paper shows that use of semi-correlations has the potential both to improve expected return and to reduce volatility.

Climate Variables and Weather Derivatives: Gas Demand, Temperature and Seasonality Effects in the Italian Case

Weather derivatives are financial instrument that allow to hedge weather risk that is the financial gain or loss due to variability in climatic conditions. The market originated in 1998 when the US power community realised that the high volatility of revenues due to weather variability could be controlled and, since then, has grown rapidly both in terms of number of contracts concluded and notional value and in terms of variety of industry applications. The purpose of this study is to analyse the real hedging capabilities of weather derivatives on the Italian energy sector. This is achieved through the investigation of the existence of a robust statistically significant relation between energy, more specifically, gas consumption, and climate parameters. We investigate such a relation applying different models. The first is a simple regression where we estimate gas consumption, as the dependent variable, and temperature, rain, humidity and pressure as explicative variables. In the second model we introduce a derived temperature variable, the heating degree day function, in order to better capture the non linearity behaviour of gas consumption. In the third model we implement lagged, other than present, weather variables. In the fourth model we apply dummy variables in order to consider, daily, monthly and holiday patterns in gas consumption. In the fifth model, finally, we introduce an autoregressive structure in the error term. The paper is organised in five session. The first one summarises methodology and results of previous studies on this topic. Session three describes data. Session four presents methodology and results and session five reports our main conclusions.

Reduction of Systemic Risk by Means of Pigouvian Taxation.

We analyze the possibility of reduction of systemic risk in financial markets through Pigouvian taxation of financial institutions, which is used to support the rescue fund. We introduce the concept of the cascade risk with a clear operational definition as a subclass and a network related measure of the systemic risk. Using financial networks constructed from real Italian money market data and using realistic parameters, we show that the cascade risk can be substantially reduced by a small rate of taxation and by means of a simple strategy of the money transfer from the rescue fund to interbanking market subjects. Furthermore, we show that while negative effects on the return on investment (ROI) are direct and certain, an overall positive effect on risk adjusted return on investments (ROI RA) is visible. Please note that the taxation is introduced as a monetary/regulatory, not as a _scal measure, as the term could suggest. The rescue fund is implemented in a form of a common reserve fund.

Interactions between Financial and Environmental Networks in OECD Countries

We analysed a multiplex of financial and environmental networks between OECD countries from 2002 to 2010. Foreign direct investments and portfolio investment showing the flows in equity securities, short-term, long-term and total debt, these securities represent the financial layers; emissions of NO x, PM10, SO 2, CO 2 equivalent and the water footprint associated with international trade represent the environmental layers. We present a new measure of cross-layer correlations between flows in different layers based on reciprocity. For the assessment of results, we implement a null model for this measure based on the exponential random graph theory. We find that short-term financial flows are more correlated with environmental flows than long-term investments. Moreover, the correlations between reverse financial and environmental flows (i.e. the flows of different layers going in opposite directions) are generally stronger than correlations between synergic flows (flows going in the same direction). This suggests a trade-off between financial and environmental layers, where, more financialised countries display higher correlations between outgoing financial flows and incoming environmental flows than from lower financialised countries. Five countries are identified as hubs in this finance-environment multiplex: The United States, France, Germany, Belgium-Luxembourg and United Kingdom.

Market Microstructure, Banks' Behaviour, and Interbank Spreads

We present an empirical analysis of the European electronic interbank market of overnight lending (e-MID) during the years 1999–2009. The main goal of the paper is to explain the observed changes of the cross-sectional dispersion of lending/borrowing conditions before, during and after the 2007–2008 subprime crisis. Unlike previous contributions, that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads.