Central banks

A new measure of firm-level competition: an application to euro area banks

04/12/2024 European Central Bank Central banks

This paper extends Boone (2008) by introducing a competition measure at the individual firm level rather than for an entire market segment. It is based on the elasticity between profits and efficiency and called marginal relative profitability (MRP). Its intuition is that when a small change in efficiency derived from marginal costs can cause a large change in profits, a firm exercises pressure on its peers and gains profits. The MRP is embedded in the theoretical framework of Boone and measures competition vis-à-vis other market participants.

Is home bias biased? New evidence from the investment fund sector

04/12/2024 European Central Bank Central banks

Investment funds hold a disproportionately larger fraction of domestic relative to foreign stocks. Stock market development and familiarity (language and distance) are considered key determinants for home bias. The literature neglects however that investors often invest in foreign funds domiciled in financial centers. We use a “look-through approach” to account for this misclassification. First, we find substantially smaller home bias estimates compared to those in the literature. Second, the explanatory power of plausible home bias determinants is lower than previously documented.

Main findings from the ECB’s recent contacts with non-financial companies

04/12/2024 European Central Bank Central banks

This box summarises the findings of recent contacts between ECB staff and representatives of 57 leading non-financial companies operating in the euro area. According to these exchanges, which took place between 11 and 19 March 2024, aggregate activity was subdued at the start of the year, but there were some signs of a pick-up in demand and expectations of a gradual, albeit modest, recovery in the course of the year. Growth in selling prices picked up slightly in the first months of the year, owing mainly to a slight rebound in the prices of some intermediate goods and services.

FEDS Paper: Risk Perception and Loan Underwriting in Securitized Commercial Mortgages

04/10/2024 Federal Reserve Central banks

Simon Firestone, Nathan Godin, Akos Horvath, Jacob SagiWe use model-implied volatility to proxy for property risk perceptions in the commercial real estate lending market. Although loan-to-value ratios (LTVs) unconditionally decreased following the Global Financial Crisis, LTVs conditioned on implied volatility and other theoretically motivated fundamental determinants of optimal leverage show no conclusive trend before or after the crisis.

FEDS Paper: Institution, Major, and Firm-Specific Premia: Evidence from Administrative Data

04/09/2024 Federal Reserve Central banks

Ben Ost, Weixiang Pan, and Douglas WebberWe examine how a student’s field of degree and institution attended contribute to the labor market outcomes of young graduates. Administrative panel data that combines student transcripts with matched employer-employee records allow us to provide the first decomposition of premia into individual and firm-specific components.

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