12:00-12:45: Rob Sperna Weiland ((University of Amsterdam))
Feedback Between Credit and Liquidity Risk in the US Corporate Bond Market
In this paper, we analyze the dynamic interactions between credit and liquidity risk and their impact on bond prices and risk in the US corporate bond market. We propose a novel way of modeling credit-liquidity interactions by using mutually exciting processes and develop a corresponding Bayesian estimation procedure. We show, using data on Ford Motor Company, that there is evidence of asymmetric feedback between credit and liquidity risk. Our model allows us to decompose bond yield spreads into pure credit, pure liquidity, credit-induced liquidity, and liquidity-induced credit components, and we find that the credit-induced liquidity component can account for up to 25% of total yield spreads. Our decomposition reveals that the widening of yield spreads during the financial crisis can mainly be attributed to a decrease in market liquidity, which, in turn, is for a substantial part caused by deteriorating credit conditions. We show that credit-liquidity interactions are responsible for about 50% of Value-at-Risk bond capital requirements and that ignoring them may result in a severe underestimation of required capital, especially in distressed periods.
12:45 – 13:45: Gabriele Ciminelli (University of Amsterdam)
A New Database of Employment Protection Legislation
Decreasing the level of employment protection is often seen as growth-friendly since it is thought to increase firms’ hiring incentives. However, too little is known about the potentially different effects of different aspects of employment protection. We contribute to the literature by building a comprehensive database of employment termination legislation. Our database covers an unbalanced sample of 96 high-, middle- and low-income countries from 1900 to 2015. We consider legislation applying to large as well as small firms, junior as well as senior and blue as well as white collar workers. We focus on procedural burdens, monetary costs, and redress measures following an unfair dismissal. We find that employment protection is negatively correlated with labor force participation and the employment rate, but only in advanced economies. Moreover, distinguish among different components of employment protection matters. Redress measures correlate the most with labor force participation, employment and income inequality (negatively). On the other hand, they correlate the least with the level of GDP, suggesting that they may be more the result of societal preferences rather than of economic development. Moreover, countries protecting senior more than junior workers tend to have substantially higher (lower) participation and employment rates of the old (young). (joint with Davide Furceri)