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Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.

This paper analyzes the Eurozone financial crisis through the lens of sovereign bond liquidity. Using novel data, I show that repo haircuts on peripheral government bonds sharply increased during the crisis, reducing their liquidity and amplifying the rise in their yields. I study the impact of this liquidity shock on asset prices and macroeconomic variables in a general equilibrium model with financial frictions calibrated for Ireland. The model confirms the rise in the required returns of illiquid government bonds and predicts a substantial drop in economic activity and deflation. Unconventional policy alleviates the effect of the liquidity shock. The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

Summary. The purpose of the study is to analyse the rituals and actions performed by the Hutsuls to manifest the changes in age or social status of a male, to describe the structure and age sequence of the rituals and to identify the main ritual elements related to the changes of male’s status. The research is conducted on the basis of available sources. The research methodology is based on principles of systematicity and objectivity, as well as on comparative-historical method, structural-semantic and typological analysis and the field research method. The term «initiation» refers solely to the rites of male’s transition from an infant to an adolescent and from an adolescent to an adult. The scientific novelty of the research is establishing the correlation between different initiation practices and age and social markers. The structure of the initiation practices as well as their influence on the appearance of a person, his/her place in the community, social rights and responsibilities has been described. Conclusions. The initiations Hutsuls performed were meant to empower a new member of the community with rights and responsibilities, and more importantly, to extend his lifespan. Several rituals were important to young men in different periods of their life as they had initiation significance. According to the typical scheme of transition by A. van Gennep, we can distinguish two main groups of initiations – those that contain the liminal phase and those that do not.The main markers of status change for men (in the studied rituals and ceremonies) are the change of hairstyle (cutting hair), «misbehaving» within the fellow community, showing required physical qualities and military service.Meanwhile, we must admit the lack of solid source base for this study. Therefore the structure, the nature and the significance of Hutsulʼs masculine initiation practices cannot be fully revealed. The way of gaining special statuses by Hutsul males requires further scientific research., Анотація. Мета дослідження – на основі доступних джерел проаналізувати ритуали та обрядодії, що здійснювалися гуцулами задля утвердження зміни вікового чи соціального статусу хлопця, встановити структуру і вікову послідовність проходження ритуалів, визначити основні обрядові елементи здійснення зміни статусу юнака. Методологія дослідження спирається на принципи системності та об’єктивності, на порівняльно-історичний метод, структурно-семантичний і типологічний аналіз, а також на метод польових досліджень. У розвідці термін «ініціація» стосується винятково обрядів переходу особи з дитячої у юнацьку та з юнацької у дорослу вікові групи. Наукова новизна полягає у тому, що встановлено відповідність різних ініціаційних практик тим чи тим віковим і соціальним маркерам, виділено їх структуру, вплив на зовнішній вигляд індивідуума, його місце в громаді, соціальні права та обов’язки. Висновки. Ініціації гуцулів мали на меті наділити нового члена громади певними правами та обов’язками, а що важливіше – продовжити життєвий цикл індивідуума. Для юнаків у різні хронологічні відтинки ініціаційне значення мали кілька ритуалів. За типовою схемою здійснення переходу А. ван Геннепа ми можемо виділити дві основні групи ініціацій – ті, що містять у собі лімінальну фазу, і ті, які її не мають. Основними маркерами зміни статусу хлопця (у досліджуваних ритуалах та обрядодіях) є зміна зачіски (обрубування волосся), «антиповедінка» в рамках парубоцької громади, демонстрування необхідних фізичних якостей юнака та несення військової повинності. Попри те, мусимо констатувати відсутність широкої джерельної бази щодо вивчення цього питання, що наразі не дає змоги повною мірою дослідити структуру, зміст і значення маскулінних ініціаційних практик гуцула. Подальших наукових студій потребує встановлення статусу «легіня» як особливого прошарку парубків у гуцульському соціумі.

After 2008, the Southern European economies suffered a strong and persistent increase in unemployment. Rising government bond spreads necessitated the implementation of austerity policies. Austerity however, may increase unemployment. If workers lose human capital during unemployment spells, the economy's future production potential and thus the fiscal capacities to serve public debt will decline, aggravating a sovereign debt crisis. Debt renegotiations can help to avoid the costs of austerity. I develop a dynamic stochastic model of sovereign debt with long-term debt, endogenous haircuts and skill loss during unemployment to study optimal fiscal policy in sovereign debt crises. In a quantitative exercise, I find that with higher intensity of the skill loss, ex ante, the government issues less debt and the pro-cyclicality of fiscal policy declines. For Portugal, the model predicts debt renegotiations as optimal fiscal response in 2011 with a medium-run unemployment reduction of up to 3.63 percentage points. November 3, 2019

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Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to pursue e.g. risk-shifting or liquidity hoarding. We identify the bank lending and risk-taking channels by exploiting – Italian’s unique – credit and security registers. In crisis times, with softer ECB’s monetary policy conditions, less capitalized banks increase securities over credit supply, with associated firm-level real effects. However, less capitalized banks buy securities with lower yield (haircuts), even within securities with identical regulatory risk weights, thus reaching-for-safety/liquidity. Results are only present in marked-to-market portfolios. The evidence suggests that liquidity and risk-bearing capacity – rather than riskshifting or regulatory arbitrage – are key drivers of banks’ behavior. Differently, in pre-crisis times, securities do not crowd-out loan application granting by less capitalized banks. Peydró acknowledges financial support from the Spanish Ministry of Science, Innovation and Universities (Grant No. ECO2015-68182-P and through the Severo Ochoa Programme for Centres of Excellence in R&D, SEV-2015-0563) and from the European Research Council Grant (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant No. 648398).

Corporate disclosure is the most important source of information about the firm for the outside investors. While some disclosure of public firms is mandated by regulation, firm managers can provide extra information at their discretion by making voluntary disclosures. On the other hand, even the reports required by regulation can be disclosed untruthfully. This thesis is structured in three chapters, each addressing a specific issue in voluntary disclosure and misreporting. In the first chapter, titled ``Voluntary Disclosure and Informed Trading'', I study the impact of informed trading on voluntary corporate disclosure in the presence of two frictions: cost of disclosure and value of manager's information. In the absence of both frictions, informed trading has no impact on disclosure even when traders are not certain whether the manager has information. If disclosure is costly, then informed trading reduces disclosure. Since traders can discover favorable information about the firm, additional disclosure of the information is not necessary. If manager's information is valuable for the firm, then informed trading increases disclosure. Since traders can discover unfavorable information about the firm, the manager with such information has less incentives to pool with uninformed managers and discloses to show that he is informed. I also show that informed trading can have both a positive and a negative real effect on the firm value by crowding in or crowding out information production in the firm. These results hold for general information structures and are robust if traders can choose how much information to acquire. The second chapter, titled ``Misreporting and Feedback Effect'' and co-authored with Prof. Hui Chen of the University of Zurich, studies the incentives of firms to misreport information in the presence of feedback effect from financial markets. Stock price often provides firms with new information, which can be used in the firms' subsequent real decisions. We examine how this informational feedback from the financial market affects a myopic firm manager's incentive to misreport, and how the misreporting further affects the firm's price and value. We find that the manager overstates his report more in the presence of feedback, but this misreporting brings forth both positive price and real effects for the firm. Intuitively, overstating the report encourages information production in the market because (a) it renders accounting reports less reliable as a source of information, and (b) investors expect higher trading profits from larger capital investment. The new incremental information improves investment efficiency when it is revealed to the firm manager through trading and used in the firm's subsequent investment decisions. As a consequence, the capital investment is higher when there is feedback effect. In the third chapter, titled ``Voluntary Disclosure and Margin Constraints'', I develop a dynamic model of voluntary corporate disclosure that explains clustering of negative announcements observed in practice. A manager may receive a signal about the firm's asset value and can disclose it to traders with margin constraints. I show that the manager postpones delivery of a negative signal until the margin constraints tighten. In contrast to previous studies, the clustering of announcements happens even if there are no negative updates in traders' beliefs about the firm value.

This paper examines the role of collateral in the financial system, with special emphasis on the implications for financial stability and the conduct of monetary policy. First, we review what drives the demand and supply for both real and financial collateral assets. Then we examine financial stability issues and the case for regulating the use of collateral. We discuss the role and design of market infrastructures such as central clearing counterparties (CCPs). Finally, we examine the interaction of standard and non-standard monetary policy and the functioning of private collateralised markets. We show that the use of collateral is neither a sufficient nor a necessary condition for financial stability. To ensure the stability of collateralised markets a mix of micro- and macro-prudential regulation, as well as a sufficient supply of safe public assets that can be used as collateral, are needed.

We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a "collateral multiplier" effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.

timesisreckonedagoodsecurity—onwhatisthencommonlypledgedandeasily convertible—the alarm of the solvent merchants and bankers will be stayed. —Walter Bagehot (1873, 198) Financial institutions play a key role as credit providers in the economy, and liquidity crises arise when they become credit constrained themselves. In such liquidity crises, financial institutions’ ability to borrow against their securities plays a key role, as Bagehot points out. In the private markets, it can become virtually impossible to borrow against certain illiquid securities, and, more broadly, the “haircuts” (also called margin requirements) on many securities increase in crises. 1 Furthermore,securitypricesmaydropsignificantly,especiallyforsecuritieswith high haircuts. To alleviate the financial institutions’ funding problems, and their repercussions on the real economy, central banks have a numberof monetarypolicytools available, such asinterest ratecuts andlending facilities with low haircuts. This paper studies the links between haircuts, required returns, and real activity, and evaluates the different monetary policy tools theoretically and empirically. In a production economy with multiple sectors financed by agents facing margin constraints, we show that binding constraints increase required returns and propagate business cycles. The central bank policy of reducing the interest rate decreases the required returns of low-haircut assets but may increase those of high-haircut assets, since it may increase the shadow cost of capital for constrained agents. A reduction in the haircut of an asset unambiguously lowers its required return and can ease the funding constraints on all assets.

This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these systems, central bank money, is injected into the economy on terms, not defined in a market, but by the collateral frameworks and interest rate policies of central banks. Using the collateral framework of the Eurosystem as a basis of illustration and case study, the paper brings to light the functioning, reach, and impact of collateral frameworks. A theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy. They can, for example, bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability. Evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and, more generally, impairs market forces and discipline. The paper also emphasizes the important role of ratings and government guarantees in the Eurosystem’s collateral framework.

Does demand for safety create instability ? Secured (repo) funding can be made so safe that it never runs, but shifts risk to unsecured creditors. We show that this triggers more frequent runs by unsecured creditors, even in the absence of fundamental risk. This effect is separate from the liquidation externality caused by fire sales of seized collateral upon default. As more secured debt causes larger fire sales, it leads to higher haircuts which further increase the frequency of runs. While secured funding combined with high yield unsecured debt may reduce instability, the private choice of repo funding always increases it. Regulators need to contain its reinforcing effect on liquidity risk, trading off its role in expanding funding by creating a safe asset.

This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are completely insulated from a dealer’s default. In addition, collateral providers’ repo terms are sensitive to changes in a dealer’s de- fault probability and its correlation with the collateral’s outcome, whereas cash lenders’ repo terms are unaffected by these changes. This paper rationalizes the difference in haircuts observed in bilateral and tri-party repo markets, reconciles the partial evidence of the run on repo during the recent financial crisis, and presents new empirical evidence to support the model’s main prediction on haircut sensitivities.

Does demand for safety create instability ? Secured (repo) funding can be made so safe that it never runs, but shifts risk to unsecured creditors. We show that this triggers more frequent runs by unsecured creditors, even in the absence of fundamental risk. This effect is separate from the liquidation externality caused by fire sales of seized collateral upon default. As more secured debt causes larger fire sales, it leads to higher haircuts which further increase the frequency of runs. While secured funding combined with high yield unsecured debt may reduce instability, the private choice of repo funding always increases it. Regulators need to contain its reinforcing effect on liquidity risk, trading off its role in expanding funding by creating a safe asset. Key words

What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly – they lent with much higher haircuts. The rest continued largely as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.

This paper seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses, should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, while regulators in other “safe” countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.

This study seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, whereas regulators in other ‘safe’ countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.

In this paper we set up a New-Keynesian model that features an interbank market. The introduction of an interbank market is important to analyze liquidity problems among heterogenous agents within the financial sector. First, because this allows for a situation where increased liquidity supply by the central bank is only partially passed on to the interbank market. Second, this framework allows us to analyze one additional policy measure besides the common interest rate policy undertaken by central banks to alleviate the liquidity shortage on the interbank market. Namely haircuts on eligible assets in repurchase agreements (“Repos”). By varying haircuts applied to securities that serve as collateral in repurchase agreements the stress on the interbank market can be mitigated by bringing down the interest rate charged among banks. Furthermore an exogenous bubble process is modeled which enables us to examine the effects of a deviation of the market price of capital from its fundamental price. This leads to a discussion whether central banks should ”lean against the wind”, i.e. react to deviations of asset prices in the setting of their policy instrument. Finally, this paper tries to shed some light on the “exit strategy” that a central bank should follow after the asset price bubble bursted and the interbank market begins to work properly again.

The ECB has accepted increasing amounts of rubbish collateral since the crisis started leading to exposure to serious private sector credit risk (i.e. default risk) on its collateralised lending and reverse operations ('repo'). This has led some commentators to argue that the ECB needs 'fiscal back-up' to cover any potential losses to be able to continue pursuing price stability. This Brief argues that fiscal backing is not necessary for the ECB for three reasons. Firstly, the ECB balance sheet risk is small compared to the FED and BoE as it neither increased its quasi-fi scal operations as much as the Fed or the BoE nor did it engage to a very large extent in outright bond purchases during the financial crisis. Secondly, the ECB's specific accounting principles of repo operations provide for more clarity and earlier recognition of losses. Thirdly, the ECB can draw on substantial reserves of the euro area national banks. Die EZB hat seit dem Beginn der Krise immer größere Mengen an toxischen Wertpapieren als Sicherheiten akzeptiert, womit sie sich einem ernsten Kreditrisiko (d.h. Ausfallrisiko) des privaten Sektors auf ihre besicherten Darlehen und ihre Repo-Geschäfte ausgesetzt hat. Aufgrund dessen argumentieren einige Beobachter, dass die EZB ein 'fiskalisches back-up' benötigt um eventuelle Verluste abzudecken und somit weiter im Stande ist, die Wahrung der Preisstabilität zu verfolgen. In diesem Überblick wird argumentiert, dass für die EZB eine fiskalische Rückendeckung aus den drei folgenden Gründen nicht notwendig ist. Erstens ist das Risiko, das die EZB in ihren Bilanzen hält im Vergleich zur Fed oder BoE gering, da sie weder vermehrt in quasi-fiskalische Aktionen engagiert war noch kaufte sie während der Finanzkrise Bonds in großem Maße direkt auf. Zweitens schafft die EZB durch ihre spezifischen Buchführungsgrundsätze von Repo-Geschäften mehr Klarheit und eine Früherkennung von Verlusten. Drittens kann die EZB beachtliche Reserven der nationalen Zentralbanken des Euroraums in Anspruch nehmen.

A standard repurchase agreement between two counterparties is considered to examine the endogenous choice of collateral assets, the feasibility of secured lending, and welfare implications of the central bank’s collateral framework. As an important innovation, we allow for two-sided counterparty risk. Our findings relate to empirical characteristics of repo transactions and have an immediate bearing on market developments since August 2007.

We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality," and (v) co-moves with the market. The model provides new testable predictions, including that speculators' capital is a driver of market liquidity and risk premiums. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.