Oscar Arce

Credit-Risk Valuation in the Sovereign CDS and Bonds Markets: Evidence from the Euro Area Crisis

Este articulo analiza hasta que punto los diferenciales de los mercados de credit default swap (CDS) y bonos reflejan la misma informacion sobre el riesgo de credito subyacente, en el contexto de la Union Monetaria Europea. En primer lugar, se analiza la existencia de desviaciones persistentes entre los dos diferenciales y se encuentra evidencia que revela desviaciones sistematicas entre ambos durante el periodo de la crisis pero no antes de la misma. Estas desviaciones estan relacionadas con algunas fricciones de mercado, tales como riesgo de contraparte, el grado de liquidez del mercado y los costes de financiacion. Por ultimo se muestra que el proceso de formacion de precios (price discovery) varia a lo largo del tiempo. En concreto, los niveles de riesgo de contraparte, riesgo global, costes de financiacion, liquidez del mercado, el volumen de deuda soberana comprada por el Banco Central Europeo en el mercado secundario y el anuncio de los bancos privados para aceptar perdidas en sus tenencias de bonos griegos son factores que tienen un efecto significativo sobre el papel relativo de cada mercado en el proceso de formacion de precios

Banking Competition, Collateral Constraints and Optimal Monetary Policy

We analyze optimal monetary policy in a model with two distinct financial frictions. First, borrowing is subject to collateral constraints. Second, credit flows are intermediated by monopolistically competitive banks, thus giving rise to endogenous lending spreads. We show that, up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: inflation, output gap, the consumption gap between constrained and unconstrained agents, and the distribution of the collateralizable asset between both groups. Following both financial and non-financial shocks, the optimal monetary policy commitment implies a short-run trade-off between stabilization goals. Such policy tradeoffs become amplified as banking competition increases, due to the fall in lending spreads and the resulting increase in financial leveraging.

Speculative Hyperinflations: when Can We Rule Them Out?

Motivated by a strong degree of hysteresis in the stock of monetization observed after the end of hyperinflations, I provide a cash-and-credit model in which the use of money exhibits some persistence because individuals can establish long-lasting credit relationships. This feature helps to account for the main stylized facts of extreme hyperinflations and reconcile some conflicting views on their causes, development and end without departing from rational expectations. Unlike the existing literature, I show that when hysteresis is possible, an orthodox fiscal-monetary reform that successfully stops a speculative hyperinflation may not be sufficient to prevent it.

Price Determinacy under Non-Ricardian Fiscal Strategies

This paper shows that there exist fiscal strategies that deliver equilibrium uniqueness in a monetary economy in which the central bank follows an interest rate peg. In contrast to the fiscal theory of the price level (FTPL), such strategies always satisfy a government intertemporal budget constraint. The government is able to rule out most prices using strategically its fiscal instruments, undercutting the private-market price whenever it is inconsistent with the fiscal targets. In the spirit of the FTPL, along the fiscal strategies of this paper the government does not follow a rule that mechanically links the fiscal surplus to the real value of its outstanding nominal debt. Like in the monetarist paradigm, the fiscal authority is forced to blink in face of an independent monetary policy, although in equilibrium the former achieves its own targets.

House Prices, Rents and Interest Rates under Collateral Constraints

We develop an OLG model aimed at explaining the joint determination of housing prices, rents, and interest rates, in an environment featuring a positive home ownership bias and individual borrowing limits that generate a mismatch between desired and available funds to finance housing purchases. Individual heterogeneity on this mismatch gives rise to three different types of households: renters, landlords (i.e. buy-to-let investors, who provide the stock of houses for rent) and home buyers who do not participate in the rental market. We investigate the conditions under which two alternative stationary equilibria may coexist: (i) a low valuation equilibrium (LVE) in which landlords do not exhaust their borrowing limits; and (ii) a high valuation one (HVE) where every household is financially constrained at the time of purchasing its housing stock. In a HVE (relative to the LVE) the volume of buy-to-let investment, the price-to-rent ratio and the housing price are higher while the interest rate is lower. Due to binding borrowing constraints, in a HVE further reductions in the interest rate only bear a positive networth effect through a reduction of the cost of repaying outstanding mortgaged debt, which fuels future availability of funds, thus sustaining the higher demand for credit. More generally, coexistence of both types of equilibria provides a rationale for the existence of speculative paths from a LVE to a HVE.

Short-Sale Constraints and Financial Stability: Evidence from the Spanish Market

We examine the effect of the short-selling ban in 2011 on Spanish stocks on the level of risk in the banking sector. Before the ban, short positions were found to be positive and significantly related to the creditworthiness of medium-sized banks, these being generally less internationally diversified and more reliant on official support. We show that the ban helped stabilise the credit risk of medium-sized banks, especially those more exposed to short-sellers’ activity, but not that of large banks and non-financial corporations. This stabilising effect came at the cost of a significantly sharp decline in liquidity, trading and price efficiency of medium-sized banks’ stocks relative to other stocks.

Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE

We analyse how the European Central Bank’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish nonfinancial firms. Our results show that the announcement of the CSPP in March 2016 significantly raised firms’ propensity to issue CSPP-eligible bonds. The flipside was a drop in the demand for bank loans by these firms. This drop in the demand for credit by bondissuers, which are usually large corporations, unchained a positive and significant side effect on the flow of new loans extended to – typically smaller – firms that do not issue bonds. Specifically, we find that around 78% of the drop in loans previously given to bond issuers was redirected to other companies, which led them to raise investment. This reallocation of credit was amplified by the ECB’s Targeted Longer Term Refinancing Operations (TLTRO).

When Fiscal Consolidation Meets Private Deleveraging

We analyze the interaction between fiscal consolidation and private-sector deleveraging in an economy within a monetary union. Pre-existing long term collateralized private debt – a core ingredient of the deleveraging process – plays a critical role in shaping fiscal multipliers. By buffering the short-run fall in debtors’ spending capacity, long-run private debt reduces the short-run multipliers of aggressive (large and/or fast) consolidations. However, absent credibility concerns, aggressive consolidations raise the intensity and length of private deleveraging, causing higher output losses over the medium run. In terms of discounted output losses and welfare, this latter effect dominates, so that larger and faster consolidations are relatively costlier than smaller and more gradual ones. Also, in this environment, alternative budgetary instruments generate sizable differences in terms of their incidence on private deleveraging dynamics and, hence, on the overall output costs of fiscal consolidations.

The Impact of the 2011 Short-Sale Ban on Financial Stability: Evidence from the Spanish Stock Market

We examine the effect of the 2011 short‐selling ban on Spanish stocks on the financial sectors risk level. Before the ban, short positions were positive and significantly related to several indicators of bank default risk. Subsequently, the ban moderated the risk of banking institutions, especially those more exposed to short‐seller activity, which, on average, showed higher levels of maturity mismatch, uncertainty about their fundamentals, and exposure to sovereign risk. The ban also caused a side effect on non‐financial firms, since it led to an increase in their exposure to short sales, reflecting the existence of a common aggregate risk factor.