Adverse Macroeconomic Conditions Research Articles

Analysis of performance and risk during a period of political instability: do political connections matter

This paper examines how the political connection affects corporate risk (measured by the standard deviation of return on assets and by the standard deviation of the stock return) and performance (measured by the return on equity and the stock return) during periods of adverse macroeconomic conditions in Tunisia. This study uses a sample of 55 Tunisian listed firms during the post-revolution period (2011-2018) and a generalised least square (GLS) approach is applied to test our hypotheses. First, findings show that political connection increases risk-taking behaviour and reduces corporate performance. Secondly, findings confirm that only the relation between the political connection and market risk varies negatively with political instability. Hence, Tunisian investors are reluctant to invest in political connected firms, which lead to market undervaluation.

How do macroeconomic news surprises affect round-the-clock price discovery of gold?

We examine round-the-clock international price discovery of gold among the major gold markets—New York, London and Shanghai during news-intensive and no-news time zones using one-minute data. Using GMM based parallel price discovery measure, we find global leadership of the US as New York gold futures lead across five time zones with 56% information share. New York/London (Nylon) timezone (51%) is the most informative trading session in sequential price discovery for all markets in 24-h. Our aggregate and disaggregate news analysis reveals that the US news surprises have a substantial and positive impact on its price discovery leadership while Eurozone news surprises have a negative impact and Chinese news have negligible impact. Using least absolute shrinkage and selection operator (LASSO) regression, we find scheduled news with a large surprise index has a significant yet asymmetric impact as negative news triggers a strong reaction. The impact of news surprise is state-dependent and display sign-reversals during extreme uncertainty, adverse macroeconomic conditions and abnormal investor behaviour.

The Relationship Between Gender and Promotion Over the Business Cycle: Does Firm Size Matter?

AbstractThis paper offers a more nuanced analysis of employee promotion decisions; specifically, how they are affected by firm size, gender and stages within the business cycle. Drawing on data from Portugal, we find that during times of adverse macroeconomic conditions, promotion prospects in all firms decline. Within large firms, women are more likely to be promoted during economic downturns, reflecting the ‘glass cliff’ hypothesis. In small and medium‐sized enterprises (SMEs), overall promotion rates are less affected by adverse economic conditions, however, women are less likely to attain promotions. Our results emphasize the importance of market volatility and firm heterogeneity in promotion and importantly, reveal differing forms of gender discrimination. In large firms women are, in effect, afforded greater responsibility for the effects of market volatility whilst SMEs invest more confidence in male employees to manage during crises.

Do Macroprudential Measures Increase Inequality? Evidence from the Euro Area Household Survey

Borrower-based macroprudential (MP) policies - such as caps on loan-to-value (LTV) ratios and debt-service-to-income (DSTI) limits - contain the build-up of systemic risk by reducing the probability and conditional impact of a crisis. While LTV/DSTI limits can increase inequality at introduction, they can dampen the increase in inequality under adverse macroeconomic conditions. The relative size of these opposing effects is an empirical question. We conduct counterfactual simulations under different macroeconomic and macroprudential policy scenarios using granular income and wealth data from the Households Finance and Consumption Survey (HFCS) for Ireland, Italy, Netherlands and Portugal. Simulation results show that borrower-based measures have a moderate negative welfare impact in terms of wealth inequality and a negligible impact on income inequality. JEL Classification: G21, G28, G51

Withdrawal of Management Earnings Guidance During the COVID-19 Pandemic

The Covid-19 pandemic has produced unprecedented adverse macroeconomic conditions for many firms. It has also provoked a surge in firms withdrawing prior guidance—a corporate disclosure phenomenon that has captured the attention of media and practitioners. In this paper, we examine how firms’ vulnerability to the pandemic affects their guidance withdrawals. Our empirical analysis reveals that firms more affected by the pandemic are more likely to withdraw guidance, consistent with firms’ unwillingness to publicly commit to targets when facing macroeconomic adversity. The effect is more pronounced for firms facing higher litigation risk and product market competition, which is consistent with these conditions making the firm less willing to publicly commit to targets in the face of adversity. We also provide evidence that firms with greater exposure to the pandemic are likely to take the combined action of withdrawing prior guidance and stopping the issuance of new guidance. Moreover, we find that among firms that withdraw guidance, those whose performance subsequently improves are more likely to reinstate their guidance. Finally, we document that firms with greater exposure to the pandemic mention the pandemic less often during earnings conference calls, suggesting that the unwillingness to disclose information about the pandemic extends beyond quantitative disclosure to qualitative disclosure. Overall, our paper offers early and novel evidence on how the pandemic has affected corporate disclosure.

Experiencing Booms and Busts in the Welfare State and Support for Redistribution

We analyze how the exposure to adverse macroeconomic conditions during the impressionable years (i.e., between the age of 18 and 25), in interaction with welfare state institutions, forms political attitudes in adulthood. Based on a large panel dataset of European countries, we find that individuals who experienced high unemployment under a regime of low unemployment benefits are more in favor of redistribution later in life and state an orientation more oriented towards the left. However, negative economic shocks in an environment with a very generous unemployment insurance are related to less support of redistribution and a more rightist political attitude later on. The development of the welfare state thus seems crucial for how economic shocks affect the evolution of preferences and norms in society and thus finally feedback on institutional change.

The contribution of industry to the Greek economy: facts and prospects

The scope of the study is to examine the impact of various factors on the growth of Greek industrial firms, in order to identify those that can contribute to a gradual recovery of Industry in the coming years. In this context, we estimate a firm growth model with the Quantile Regression econometric method, using an unbalanced panel dataset of 18,143 companies that were active in Greek Industry over the period 2005-2018. The explanatory variables used are firm-, sectorand macroeconomic environment-specific. Further, we estimate the effects on firm growth from the structural reforms related to business environment and from the sector’s participation in global value chains within or beyond the EU. The estimations highlight the positive effect on firm growth from exports and the reduction in the time and cost required to export, the availability of funding from the banking sector and the stock market, as well as from the reduction in the cost and procedures to start a business. Positive effects also stem from the participation of the faster-growing Greek industrial companies in value chains mainly outside the EU. By contrast, high corporate debt to banks, adverse macroeconomic conditions, energy costs and the participation of businesses other than the faster-growing ones in value chains in EU countries have a negative impact on firm growth. The latter effect is possibly due to the strong competition that these businesses face in the European markets. Some differences appear when estimates are made for the subsamples of high and low performance industrial sectors in terms of economic activity, financial efficiency, innovativeness and extroversion. The study includes policy recommendations based on the results of the estimations, to support growth in Industry. These concern the reduction of energy costs, the change in the depreciation method for investments in machinery and equipment, as well as the financing of the sector.

Encouraged or Discouraged? The Effect of Adverse Macroeconomic Conditions on School Leaving and Reentry

Existing research generally confirms a countercyclical education enrollment, whereby youths seek shelter in the educational system to avoid hardships in the labor market: the “discouraged worker” thesis. Alternatively, the “encouraged worker” thesis predicts that economic downturns steer individuals away from education because of higher opportunity costs. This study provides a formal test of these opposing theories using data from the United States compared with similar sources from the United Kingdom, Germany, and Sweden. I investigate whether macroeconomic stimuli—including recessions and youth unemployment fluctuations—matter for enrollment decisions. Analyses rely on 10 years of detailed individual-level panel data, consisting of birth cohorts across several decades. Across data sources, results show enrollment persistence in secondary education is stronger in response to economic downturns. These patterns differ sharply for tertiary-enrolled students and those who recently left higher education. Surprisingly, U.S. youths display an increased hazard of school leaving and a decreased hazard of educational reenrollment in response to adverse conditions. In contrast, European youths tend to make enrollment decisions supportive of discouraged-worker mechanisms or insensitivity to adverse conditions. The U.S.-specific encouraged-worker mechanism might be explained by the relative importance of market forces in one’s early career and the high costs of university attendance, which induces risk aversion with regard to educational investment. The discussion addresses the consequences for educational inequality.

Bank performance variability and strands of inflationary conditions

PurposeThis study seeks to examine the extent to which strands of inflationary related conditions (inflation expectations, inflation uncertainty and realized inflation); macroeconomic uncertainty and the likelihood of recessionary conditions influence performance indicators in the US banking sector over a specified time period.Design/methodology/approachThe study adopts seemingly unrelated regression model (SUR) advanced by Zellner (1962) in its examination of how specific strands of inflationary conditions, and other adverse macroeconomic conditions influence performance dynamics in the US banking sector.FindingsEmpirical evidence suggest that among various adverse macroeconomic conditions examined, inflation expectations and macroeconomic uncertainty tend to have significant constraining impact on key performance indicators in the US banking sector than other conditions examined. Comparatively, this study finds that inflation expectations and macroeconomic uncertainty tend to have much more constraining impact on return on equity, than on return on assets in the US banking sector. Results further suggest that among the three bank performance indicators examined, net interest margin is the least vulnerable bank performance indicator to various adverse macroeconomic conditions examined in the study.Practical implicationsApart from the various empirical results noted above, this study's findings are projected to help inform strategic planning decisions among institutions in the banking sector. The various findings could, for instance, inform policies and operational strategies geared toward reducing vulnerability associated with specific performance indicators such as return on equity. This reduction could be achieved by critically examining how the various performance indicators react to individual adverse macroeconomic conditions examined in this study. The process could ultimately help in developing tailored measures/procedures aimed at reducing how susceptible key performance indicators are to the various adverse macroeconomic conditions. This study's findings could also provide the platform for more adaptive policies aimed at minimizing the effects of noted macroeconomic conditions on operational efficiency in the banking sector.Originality/valueThe uniqueness of this study, compared to related ones found in the literature, stems from its treatment of three variant of related strands of macroeconomic condition (different variant of inflationary conditions) in the same framework in its empirical analysis.

The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia

We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Poblacion (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted.

The Effectiveness of Borrower-Based Macroprudential Measures

We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Población (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted.

Recessions and Health: The Long-Term Health Consequences of Responses to the Coronavirus.

The lockdown measures that were implemented in the spring of 2020 to stop the spread of COVID‐19 are having a huge impact on economies in the UK and around the world. In addition to the direct impact of COVID‐19 on health, the following recession will have an impact on people's health outcomes. This paper reviews economic literature on the longer‐run health impacts of business‐cycle fluctuations and recessions. Previous studies show that an economic downturn, which affects people through increased unemployment, lower incomes and increased uncertainty, will have significant consequences on people's health outcomes both in the short and longer term. The health effects caused by these adverse macroeconomic conditions will be complex and will differ across generations, regions and socio‐economic groups. Groups that are vulnerable to poor health are likely to be hit hardest even if the crisis hit all individuals equally, and we already see that some groups such as young workers and women are worse hit by the recession than others. Government policies during and after the pandemic will play an important role in determining the eventual health consequences.

The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia

We develop a semi-structural quantitative framework that combines micro and macroeconomic data to assess the effectiveness of combinations of borrower-based macroprudential measures in Slovakia. We expand on the integrated dynamic household balance sheet model of Gross and Poblacion (2017) by introducing an endogenous loan granting feature, in turn to quantify the potential (ex-ante) impact of macroprudential measures on resilience parameters, compared with a counterfactual no-policy scenario, under adverse macroeconomic conditions. We conclude that (1) borrower-based measures can noticeably improve household and bank resilience to macroeconomic downturns, in particular when multiple measures are applied; (2) those measures tend to complement each other, as the impact of individual instruments is transmitted via different channels; and (3) the resilience benefits are more sizeable if the measures effectively limit the accumulation of risks before an economic downturn occurs, suggesting that an early, preemptive implementation of borrower-based measures is indeed warranted.

Forecasting With Dynamic Panel Data Models

This paper considers the problem of forecasting a collection of short time series using cross‐sectional information in panel data. We construct point predictors using Tweedie's formula for the posterior mean of heterogeneous coefficients under a correlated random effects distribution. This formula utilizes cross‐sectional information to transform the unit‐specific (quasi) maximum likelihood estimator into an approximation of the posterior mean under a prior distribution that equals the population distribution of the random coefficients. We show that the risk of a predictor based on a nonparametric kernel estimate of the Tweedie correction is asymptotically equivalent to the risk of a predictor that treats the correlated random effects distribution as known (ratio optimality). Our empirical Bayes predictor performs well compared to various competitors in a Monte Carlo study. In an empirical application, we use the predictor to forecast revenues for a large panel of bank holding companies and compare forecasts that condition on actual and severely adverse macroeconomic conditions.

Sovereign Risk in Macroprudential Solvency Stress Testing

This paper explains the treatment of sovereign risk in macroprudential solvency stress testing, based on the experiences in the Financial Sector Assessment Program (FSAP). We discuss four essential steps in assessing the system-wide impact of sovereign risk: scope, loss estimation, shock calibration, and capital impact calculation. Most importantly, a market-consistent valuation approach lies at the heart of assessing the resilience of the financial sector in a tail risk scenario with sovereign distress. We present a flexible, closed-form approach to calibrating haircuts based on changes in expected sovereign defaults affecting bank solvency during adverse macroeconomic conditions. This paper demonstrates the effectiveness of using extreme value theory (EVT) in this context, with empirical examples from past FSAPs.

Sovereign Risk in Macroprudential Solvency Stress Testing

This paper explains the treatment of sovereign risk in macroprudential solvency stress testing, based on the experiences in the Financial Sector Assessment Program (FSAP). We discuss four essential steps in assessing the system-wide impact of sovereign risk: scope, loss estimation, shock calibration, and capital impact calculation. Most importantly, a market-consistent valuation approach lies at the heart of assessing the resilience of the financial sector in a tail risk scenario with sovereign distress. We present a flexible, closed-form approach to calibrating haircuts based on changes in expected sovereign defaults affecting bank solvency during adverse macroeconomic conditions. This paper demonstrates the effectiveness of using extreme value theory (EVT) in this context, with empirical examples from past FSAPs.

U.S. Banking Sector Operational Losses and the Macroeconomic Environment

AbstractUsing supervisory data from large U.S. bank holding companies (BHCs), we find that BHCs incur more operational losses in adverse macroeconomic conditions driven significantly by the higher frequency and severity of tail events. Among different operational risk types, we find that losses from BHCs' failure to meet obligations to clients or from the design of their products are particularly countercyclical. We also show that larger and more leveraged BHCs have a higher macroeconomic sensitivity of operational risk. Overall, our findings provide new evidence regarding U.S. banking organizations' exposure to macroeconomic shocks with implications for risk management practices and supervisory policy.

Corporate performance volatility and adverse macroeconomic conditions

PurposeThe purpose of this study is to empirically examine the extent to which volatility associated with corporate performance could be attributed to specific adverse macroeconomic conditions in a bivariate causality analysis.Design/methodology/approachThe study uses the Toda–Yamamoto Wald test approach to Granger causality analysis in verifying significant causal interactions if any, between corporate performance volatility and seven macroeconomic conditions or variables.FindingsThis study finds that economic policy uncertainty and macroeconomic uncertainty tend to have bidirectional causal interaction with corporate performance volatility. In addition, estimated results further suggest significant unidirectional causal interaction between corporate performance volatility and inflation expectations, exchange rate volatility, inflation and inflation uncertainty, with direction of causality running from the macroeconomic variables toward corporate performance volatility. This study, however, found no significant causal interaction between corporate performance volatility and recessionary probability or likelihood of recession.Practical implicationsThis study’s conclusions could have significant and critical policy implications for key corporate policymakers responsible for corporate performance strategy. Various causal interactions identified could inform policy framework and, subsequently, strategies geared toward minimizing volatility associated with performance during episodes of any of the various macroeconomic conditions examined in this study.Originality/valueThe uniqueness of this study stems from its focus on corporate performance volatility instead of corporate performance and potential causal interactions it might have with key adverse macroeconomic conditions, some of which have not been examined in previous studies according to reviewed literature.

Estimating the cost of capital for wind energy investments in Turkey

Wind power represents a key component of Turkey's energy strategy. Increased investment will be required to meet Turkey's wind power target and, as such, there is a need to understand the viability of wind power projects there. The cost of capital is a crucial element in wind power investment decisions owing to the high capital intensity of wind power plants. A reduction in the cost of capital through support policies can lower overall project costs and increase investment. We estimate the cost of capital for wind power projects in Turkey using data on 138 installations that participated in the Turkish feed-in tariff scheme in 2017. Our estimates indicate an upper bound of 12% for the cost of capital. This suggests the cost of capital for wind power projects in Turkey is not higher than in south-eastern European Union countries. However, because of adverse macroeconomic conditions, the cost of Turkey's main renewable support scheme increased by 46% between 2016 and 2017 in Turkish lira terms. We argue that continued commitment to the current support schemes by the Turkish authorities is crucial for the development of the Turkish wind power sector.

Subjective Well-Being and the 2008 Recession in European Regions: The Moderating Role of Quality of Governance

How can we explain why some regions experienced large decreases in subjective well-being during the 2008 recession, while in other regions, the changes were only very modest? Building on the literature on resilience in subjective well-being during periods of crisis, this article explores a related but undervalued factor that moderates the localized relationship between macroeconomic developments and life evaluation: regional quality of governance. We use individual-level data on life satisfaction and personal information taken from Eurobarometer for 89 European regions in the EU-28 for the period of 2005–2014, combined with macroeconomic variables and regional quality of governance data to test for the hypothesized moderating effect of quality of governance. The results demonstrate that increased regional unemployment and financial stress have a less aggravating effect on subjective well-being in regions characterized by a high quality of governance. These results support the capacity of quality of governance to buffer the negative effects of adverse macroeconomic conditions, most likely through generating trust and providing a safety net.