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Research Projects in Financial Economics Research Projects in Financial Economics FI supports and promotes promising research projects in selected subject areas through funding received from the State Secretariat for Education, Research and Innovation (SERI). The research funds are awarded on a strictly S competitive basis to researchers based in Switzerland under the supervision of the SFI Project Evaluation Committee. This has led to funding 21 projects across eight Swiss Universities (EPFL, ETHZ, UNIBE, UNIGE, UNIL, UNISG, USI, and UZH). The research projects focus on the banking, asset pricing and asset allocation, behavioral and experimental finance, corporate finance, financial markets, and international finance expertise areas. “WHY” RESEARCH: • Improve the understanding of security pricing and risk evolution in security markets by revising the The goal of this fundamental research is to expectations and decisions of investors, regulations, better understand the mechanisms at work in and risk managers. (Project Barone-Adesi). financial economics. Industry-relevant findings help the financial industry make • Determine when M&As can be beneficial for both better decisions. shareholders and the economy in general. (Project Dimopoulos). • Analyze how the tone managers use during corporate conference calls can affect stock prices. FIRST TAKE-AWAYS Experienced analysts respond appropriately in revising their forecasts; inexperienced analysts • Develop a benchmark model to improve the overreact to unexpected tone. (Project Wagner). understanding of co-movements of bonds and stock markets across the business cycle. (Project Berrada). • Better inform market participants and policy makers on the trade-offs between existing market Geneva Zurich • Outline how savings, work decisions, and health structures and optimal financial market design, Bd. du Pont d’Arve 42 Walchestrasse 9 expenditure influence being insured or not at and increase know-how for designing and 1211 Geneva 4 8006 Zurich a given point in life, and consequently quantify implementing financial market regulation. Switzerland Switzerland the welfare associated with alternative insurance (Project Schürhoff). schemes. (Project Hugonnier). T +41 22 379 84 71 T +41 44 254 30 80 • Improve our understanding of the economic F +41 22 379 82 77 F +41 44 254 30 85 • Obtain a correct understanding of the relevant determinants of sovereign bond markets’ [email protected] [email protected] risk-returns in financial sectors such as the hedge integration with implications for funding costs; [email protected] fund industry during economic and financial develop an international asset pricing model that crises, and quantify the impact of opaque financial prices liquidity risk for partially segmented markets; markets and heterogeneous market views when and offer a tool to evaluate liquidity-risk exposure www.SwissFinanceInstitute.ch pricing assets. (Project Trojani). of emerging market equity. (Project Chaieb). PROJECT SUMMARIES contributions include a class of general trading The End of Germany Incorporated – This project analyzes the interactions between strategies for replicating and hedging the distinct Project leader: Prof. Rüdiger Fahlenbrach leverage, liquidity, and asymmetric information ASSET PRICING AND ASSET ALLOCATION characteristics of market uncertainty, as well as multi- (Ecole Polytechnique Fédérale de Lausanne and SFI) and their feedback effects on the real side of the factor parametric models able to describe the joint – This research studies the effects of a major tax reform economy. New theoretical models developed in Asset Pricing with Regime Dependent dynamics of the term structure of volatility risks, on corporate ownership and the consequences of this project provide new results for understanding Preferences and Learning volatility risk premia, and option returns. ownership changes for firms’ investment decisions amplification mechanisms through which financial Project leader: Prof. Tony Berrada (University of Geneva and SFI) and performance. The repeal of a capital gains tax shocks propagate in financial and real sectors. – This project studies the impact of regime dependent on minority holdings led to a dramatic reduction of These results have important implications for preferences on equilibrium asset prices when cross-holdings among companies and was beneficial institutional investors. information pertaining to the state of the economy BEHAVIORAL AND EXPERIMENTAL FINANCE for shareholders and firms. is incomplete. The key insight is that the marginal Nonlinear Effects in Financial Markets utility of the representative agent is influenced Contagious Defaults in Credit Markets - an Merger Activity in Industry Equilibrium Project leader: Prof. Martin Schweizer (ETH Zurich and SFI) by the probability of hidden states and in particular Experimental Analysis Project leader: Prof. Theodosios Dimopoulos – This project studies the effects of nonlinearities in by its volatility. This additional source of risk is Project leader: Prof. Martin Brown (University of St. Gallen) (University of Lausanne and SFI) imperfect financial markets by concentrating on priced and allows the model to address a number – This project helps better understand, through – This project characterizes the interactions across the combined issues of transaction costs and price of empirical asset pricing puzzles. experimental evidence, whether mortgage defaults the business cycle between merger activity, on the impact, transaction costs and dividends, and financial are predominantly driven by inability to repay or by one hand, and firms’ entry, exit, and investment bubbles as a possible manifestation of nonlinearities. CDS Market Liquidity strategic behavior. It also incorporates the role of decisions, on the other. The model developed Project leader: Prof. Anders Trolle social norms in containing strategic default. shows that merger activity does not just reduce Opacity in Financial Markets (Ecole Polytechnique Fédérale de Lausanne and SFI) the number of existing firms in a sector, but Project leader: Prof. Yuki Sato (University of Lausanne and SFI) – With liquidity effects in the credit default swap Sentiment and Risk in Financial Markets interestingly encourages the entry of new firms. – This study investigates how opacity of investment (CDS) market in mind, this study constructs a new Project leader: Prof. Giovanni Barone Adesi companies and of financial products affects investor measure of market-wide CDS illiquidity and assesses (University of Lugano and SFI) Words and Deeds: Communication in Capital Markets behavior, asset prices, and social welfare. Opacity the impact of liquidity risk on expected returns – This project measures investor sentiment – Project leader: Prof. Alexander Wagner occurs at both the fund level (e.g. mutual vs. of CDS contracts. The advantage of the illiquidity optimism and overconfidence in particular – and (University of Zurich and SFI) hedge) and at the asset level (e.g. plain-vanilla vs. measure developed within this project is that it models its evolution through time. It also studies – This project advances knowledge on the reasons structured), and investors observe neither opaque captures the many dimensions of illiquidity in the the implications of investor sentiment on asset behind the variation in style of managerial funds’ nor assets’ payoffs. The model shows that CDS market and that its innovations can be closely management. Findings show that early identification communication, what investors can learn from opaque funds take on excessive leverage, causing tracked by a tradable liquidity factor. of mispricing can help revise the expectations and implicit facets of communication, and how firms overpricing of opaque assets. decisions of investors, regulators, and risk managers. achieve credible communication. Data reveals that Financial and Health-Related Allocations over the Life Cycle the understanding of communication in capital Over-the-Counter Financial Markets Project leader: Prof. Julien Hugonnier markets is still largely limited. Project leader: Prof. Norman Schürhoff (Ecole Polytechnique Fédérale de Lausanne and SFI) (University of Lausanne and SFI) – This project develops a tractable dynamic framework CORPORATE FINANCE – In view of recent regulatory initiatives regarding capable of modeling the joint determination of a over-the-counter markets in Europe and the US, this household’s financial and health-related decisions The Corporate Aging Phenomenon FINANCIAL MARKETS project studies the interrelation between financial over its life cycle. The project focuses on the Project leader: Prof. Claudio Loderer (University of Bern and SFI) market structure, liquidity, and asset price formation. implications for health and financial allocations as – This project documents and explains the aging Analyzing Microfinance Markets This research is particularly relevant for policy makers retirement plans are shifting from a defined benefit of companies. To focus on their core competences, Project leader: Prof. Urs Birchler (University of Zurich) and the general public in light of the recent financial scheme to a defined contribution one. firms choose organizational structures, incentives, – Using worldwide data on microfinance markets, this and economic crisis and various regulatory initiatives and processes that make them, on average, project analyzes differences in the development of in Europe (MiFID I & II) and the U.S. (Dodd-Frank). The Role of Betas versus Characteristics in increasingly
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