Collateral Shocks Research Articles

What drives liquidity in the Chinese credit bond markets?

We study the drivers and pricing of liquidity in the Chinese credit bond markets. We document that the liquidity and liquidity effects priced into yield spreads differ significantly across the four major credit bond categories and the two parallel trading venues: the interbank over-the-counter and exchange markets. We analyze the levels of liquidity and the pricing of liquidity effects into credit bond yield spreads using three counterfactuals: a collateral shock to repo eligibility, a crackdown on agent-holding activities, and four liberalization shocks on foreign investment. We identify the bond risk and macroeconomic channels as significant influences on liquidity effects but not the information channel. Our empirical findings are robust to a battery of tests.

Collateral shocks and M&A decisions

We find that positive collateral shocks caused by increases in local real estate prices increase firms' propensities to undertake mergers and acquisitions (M&As). This effect is more pronounced for financially constrained and bank-dependent firms. After collateral value appreciation, acquirers issue more bank debt, secured debt, and lines of credit to finance acquisitions and show a preference for cash offer over equity offer to finance M&As. M&As driven by positive collateral shocks create value for acquiring shareholders in the long-run by avoiding overpayments, and generating synergies. Overall, our findings highlight the importance of the collateral channel in affecting the propensity and performance of M&A deals.

Collateral Shocks and Corporate Financialization: Evidence from China

Collateral Shocks and Corporate Financialization: Evidence from China

The unintended consequence of collateral-based financing: Evidence from corporate cost behavior

This paper examines how real estate appreciation correspondingly changes collateral value, which affects debt structure choices and consequent operating decisions. Specifically, we explore whether collateral-based financing provides a link between real estate values and corporate cost behavior. Our baseline results show that an appreciation of a firm’s real estate assets alleviates its cost stickiness. A further analysis shows that this influence is stronger for firms with less prior bank debt, less dependence on external financing, and a lower leverage ratio. We also observe that the impact of collateral shocks on cost stickiness is more pronounced when selling, general and administrative (SG&A) costs create less future value for mature firms and for firms with weaker external governance. Collectively, our results support the argument that an increase in bank debt arising from collateral value appreciation mitigates agency problems and thus lessens cost stickiness.

Collateral Shocks

We estimate a macroeconomic model on US data where banks lend to households and businesses and simultaneously adjust lending requirements on the two types of loans. We find that the collateral shock, a change in the ability of the financial sector to redeploy collateral, is the most important force driving the business cycle. Hit by this unique disturbance, our model quantitatively replicates the joint dynamics of output, consumption, investment, employment, and both household and business credit quantities and spreads. The estimated collateral shock generates accurate movements in lending standards and tracks measures of market sentiment. (JEL E21, E23, E24, E32, E44, G21)

Collateral Shock and Access to Credit: Evidence from Loan Application Data

Collateral Shock and Access to Credit: Evidence from Loan Application Data

Policy Interventions and Liquidity in Segmented Chinese Credit Bond Markets

This paper documents the pricing of liquidity and identifies its drivers in the four main segments of the interbank and exchange credit bond markets in China. First, we find that liquidity effects are priced in credit bond yield spreads, and differ significantly across these four segments. Second, we identify several channels through which liquidity may affect the pricing of credit bonds. We find that the risk-sharing channel and the macroeconomic channel have significantly influenced liquidity effects, while the information channel does not seem to have had any such clear impact. Third, we analyze the impact of two types of policy shocks, including one collateral shock on repo-eligibility in the exchange market and four liberalization shocks on foreign investment in the interbank market, on the levels of liquidity and the pricing of liquidity effects in the Chinese credit bond markets. We identify the most important of the four policy shocks on interbank liberalization to be the policy on the Bond Connect program linking Chinese and overseas markets.

Financial Drivers of the Euro Area Business Cycle: A Dsge-Based Approach

We estimate a modified version of the “Financial Business Cycles” model originally developed by Iacoviello (2015) in order to investigate the role played by financial factors in driving the business cycle in the euro area. In the model, financial shocks such as borrower defaults, collateral shocks and credit supply effects amplify economic downturns by reducing the flow of credit from banks to the real sector. In this novel application to the euro area, we introduce capital reallocation inefficiency, an innovation to the original set-up which allows for more realistic effects of entrepreneur defaults on economic activity. Our results suggest that financial factors, as captured by this model, played a smaller role in the euro area throughout the double-dip recession than in the United States during the 2008-09 global financial crisis. In a scenario on second-round effects implied by potential NFC loan losses due to the COVID-19 pandemic, we find large financial amplification risks to real economic activity.

What Can Fifty-Two Collateralizable Wealth Measures Tell Us About Future Housing Market Returns? Evidence from U.S. State-Level Data

We use a novel U.S. state-level database to evaluate the role of housing wealth as a provider of collateral services. First, we estimate the cointegrating relationship between housing wealth and labour income for all 50 states, as well as the District of Columbia (D.C.), and overall U.S. Then, we assess the predictive ability of the housing wealth-to-income ratios (labelled by hwy) for state-level future real housing returns. We uncover: (i) positive estimates for the elasticity of housing wealth with respect to labour income, which are also largely heterogeneous across U.S. states; and (ii) a negative link between the housing wealth-to-income ratios and future housing returns, albeit the forecasting power of hwy also varies considerably across states. We conclude that country-level regressions typically "mask" this diversity of features surrounding the usefulness of housing in collateral provision and unfavourable labour income shock smoothing that state-level frameworks are able to recover.

The Effect of Collateral Shocks in the Context of Labor Market Frictions

The recent financial crisis was associated with a large and prolonged deterioration to the collateral value and to the collateral-based credit supply. I calibrate a model to explore the impact of collateral shocks on real firm behavior. I discover that: (i) a negative shock to the collateral value depresses the business activities by tightening the borrowing capacity. Such adverse impact is alleviated (worsened) by a lower (higher) productivity-driven credit demand; (ii) following a negative collateral shock, the reduction of labor adjustment costs causes the firms to decrease their activities to a less extent, and such positive effects of labor adjustment flexibility are more pronounced for firms facing a high level of productivity (demand). Empirically, I find that a lower labor unionization rate can mitigate the negative impact of supply shocks on the high-demand firms during the crisis.

Collateral Shocks and Corporate Employment*

We analyze how firm-level shocks to collateral values influence employment outcomes among US corporations. Using comprehensive employment data from the US Census Bureau, we estimate that employment expenditures increase by $0.10 per $1 increase in firms’ real estate collateral values. These effects are stronger among financially constrained firms, and additional hiring is funded through debt issuance, consistent with a collateral channel. This relation holds among firms in tradable goods sectors, alleviating concerns about local demand shocks. Thus, through a collateral lending channel, fluctuations in the US commercial real estate market are an important driver of corporate labor demand.

Import Competition and the Decline in U.S. Entrepreneurship

We theoretically and empirically analyze whether the rise in globalization and trade integration of product markets have contributed to the observed decline in US entrepreneurship. Using a unique panel dataset of US households and a difference-in-differences identification strategy, our study is unique in theoretically predicting and empirically documenting asymmetric inter-industry shifts in entrepreneurial activity across different sectors in response to increased competition from lower-cost imports. Greater import competition reduces entry in exposed industries by individuals with low occupational skills (those in routine task-intensive service occupations or exhibiting high occupational mobility), but it increases entry by highly educated individuals in high-skill non-exposed industries. The results are robust to secular trends, labor market specialization, local collateral and credit shocks, and long-run bank distress.

Housing Collateral and Entrepreneurship

ABSTRACTWe show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.

Housing Collateral and Entrepreneurship

This paper shows that collateral constraints restrict firm entry and post-entry growth, even in the long-run. We use French administrative data and exploit cross-sectional variation in local house-price appreciation as shocks to the value of collateral available to homeowners. We control for local demand shocks by comparing homeowners to two control groups that live in the same region but do not experience collateral shocks: (i) renters and (ii) homeowners with a mortgage outstanding, who - in France - cannot take out a second mortgage on their house. In both comparisons, we find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral use more debt, start larger firms, and remain significantly larger even six years after creation.

Financial integration, housing, and economic volatility

The Great Recession illustrates the sensitivity of the economy to housing. This paper shows that financial integration, fostered by securitization and nationwide branching, amplified the positive effect of housing price shocks on the economy during the 1994–2006 period. We exploit variation in credit supply subsidies across local markets from government-sponsored enterprises to measure housing price changes unrelated to fundamentals. Using this instrument, we find that house price shocks spur economic growth. The effect is larger in localities more financially integrated, through both secondary loan market and bank branch networks. Financial integration thus raised the effect of collateral shocks on local economies, increasing economic volatility.

Contralateral needling at unblocked collaterals for hemiplegia following acute ischemic stroke.

Hemiplegia caused by stroke indicates dysfunction of the network between the brain and limbs, namely collateral shock in the brain. Contralateral needling is the insertion of needles into acupoints on the relative healthy side of the body to treat diseases such as apoplexy. However, there is little well-designed and controlled clinical evidence for this practice. This study investigated whether contralateral needling could treat hemiplegia after acute ischemic stroke in 106 randomly selected patients with acute ischemic stroke. These patients were randomly assigned to three groups: 45 in the contralateral needling group, receiving acupuncture on the unaffected limbs; 45 in the tional acupuncture group, receiving acupuncture on the hemiplegic limbs; and 16 in the control group, receiving routine treatments without acupuncture. Acupuncture at acupoints Chize (LU5) in the upper limb and Jianliao (TE14) in the lower limb was performed for 45 minutes daily for 30 consecutive days. The therapeutic effective rate, Neurological Deficit Score, Modified Barthel Index and Fugl-Meyer Assessment were evaluated. The therapeutic effective rate of contralateral needling was higher than that of conventional acupuncture (46.67% vs. 31.11%, P < 0.05). The neurological deficit score of contralateral needling was significantly decreased compared with conventional acupuncture (P < 0.01). The Modified Barthel Index and Fugl-Meyer Assessment score of contralateral needling increased more significantly than those of conventional acupuncture (both P < 0.01). The present findings suggest that contralateral needling unblocks collaterals and might be more effective than conventional acupuncture in the treatment of hemiplegia following acute ischemic stroke.

Housing Collateral and Entrepreneurship

This paper shows that collateral constraints restrict firm entry and post-entry growth, even in the long-run. We use French administrative data and exploit cross-sectional variation in local house-price appreciation as shocks to the value of collateral available to homeowners. We control for local demand shocks by comparing homeowners to two control groups that live in the same region but do not experience collateral shocks: (i) renters and (ii) homeowners with a mortgage outstanding, who - in France - cannot take out a second mortgage on their house. In both comparisons, we find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral use more debt, start larger firms, and remain significantly larger even six years after creation.

Financial Integration, Housing and Economic Volatility

The Financial Crisis and the Great Recession that followed illustrate the sensitivity of the economy to a housing bust. This paper shows that financial integration both amplified the volatility of housing prices and economic sensitivity to housing-price shocks. We exploit variation credit-supply subsidies across local markets from the Government-Sponsored Enterprises to construct an instrument for housing price changes unrelated to fundamentals. Using this instrument, we find that a 1% rise in housing prices causes a 0.25% increase in economic growth. This effect is larger in localities more financially integrated with other markets through bank ownership ties. Financial integration thus raised the effect of collateral shocks on the economy, thereby increasing economic volatility.

Aggregate Restructuring and the Credit Market

We investigate the role of the credit market in an economy where firms can implement a mature technology or restructure their activity and adopt a new technology. We show that firms' collateral and credit relationships ease firms' access to credit and investment but can also inhibit firms' restructuring. When this occurs, a negative collateral shock squeezes collateral-poor firms out of the credit market but fosters the restructuring of collateral-rich firms, possibly through the breakdown of their credit relationships. We characterize conditions under which, through their effect on the price of collateral assets, the credit rationing of collateral-poor firms and the restructuring of collateral-rich firms reinforce or conflict with each other.

Bank Integration and State Business Cycles

Interstate banking has ambiguous theoretical effects on state business volatility, but the (net) empirical effect has been stabilizing. In theory, bank diversification across states diminishes the impact of bank capital shocks on state activity, but amplifies the impact of firm collateral shocks. Empirically, we find that year-to-year employment growth fluctuations within states fall as banks in that state integrate (via holding companies) with banks in other states. The magnitudes are large. Bank integration matters most significantly in states with very undiversified economies. Consistent with our model, we also find that integration also weakens the correlation between bank capital growth and growth in state employment and bank lending but strengthens the correlation between changes in housing prices and employment and lending.