Dpto. Economía y Empresa

The relevance of risk aversion as the key factor explaining the fluctuations of the economy is receiving increasing attention since the Great Recession. The role of financial shocks in the economic fluctuations and their associated amplifying effects are crucial aspects in the monetary policies followed by central banks around the world. The underlying mechanism behind these effects is directly linked to the time-varying behavior of risk aversion, especially during recessions. The reason is that risk aversion is strongly related to the behavior of the expected market risk premium, which is a fundamental input in the cost of capital and investment decisions of firms through the business cycle. In this research, we present an analysis of the interplay between the expected market risk premium, time-varying risk aversion, and economic uncertainty for the Spanish economy. We estimate risk aversion from aggregate consumption of Spanish households, while the expected market risk premium is extracted from options traded on the IBEX-35 index. Note that we put together variables from the real economy and financial markets. We show that both variables are positive and significantly related, clarifying the important connection between the real and financial sectors of the Spanish economy. More precisely, we show that both risk aversion and the expected market risk premia at alternative horizons are counter-cyclical, and that the slope of the term structure of the expected market risk premium is steeply downward sloping during recessions. Moreover, we find that risk aversion significantly amplifies the effects of adverse economic uncertainty shocks on the expected market risk premium. Therefore, it should not be surprising the collapse of financial prices when there is shock in uncertainty amplified by the increase in risk aversion. The corresponding rise in the expected market risk premium explains the drop in equity prices during bad economic times. The persistence of these effects depends on the nature of the economic crisis. In this framework, we understand both the initial dramatic drop in asset prices provoked by the exogenous COVID-19 crises, and the subsequent recuperation. To conclude, the positive association between uncertainty shocks, risk aversion and the expected market risk premium has extremely important consequences for the investment and output growth fluctuations of the Spanish economy.

This analysis addressed the potential systemic effects of guarantee requirements by central counterparties. Using data from the Spanish BME and German Eurex central clearing counterparties and controlling for tail risk and monetary and real activity variables, we found a significant, positive, and robust relationship between the guarantees required and the spillover or total connectedness effects among nine financial assets in the Spanish, United States, and German capital markets. Bad economic times also had a significant incremental effect on the relationship between guarantees and connectedness. These findings are robust across central clearing corporations and futures contracts in the IBEX 35, DAX 30, and EURO STOXX 50. In addition, an event study indicated that global spillover effects tend to increase before central counterparty institutions raise their guarantees. The implication of the findings is that European clearing institutions react to rather than cause bad economic times.

Macro-finance asset pricing models provide a rationale for connectedness dynamics between equity and Treasury risk-neutral volatilities. In this paper, we study the total and directional connectedness, in the sense of spillover effects, between risk-neutral volatilities from the equity and Treasurymarkets. In addition, we analyze the economic and monetary drivers of connectedness dynamics. Most of the time, but especially during bad economic times, we find significant net spillovers from Treasury to equity risk-neutral volatility. The spillover channel between risk-neutral volatilities arises mainly through the government fixed income market.

After the financial crisis of 2007–2008, some bank performance dimensions have been the subject of debate, two of which are bank efficiency, and bank risk-taking behavior. The literature on bank efficiency and productivity has grown considerably over the last three decades, and has gained momentum in the aftermath of the financial crisis. Interest in bank risk-taking behavior, usually focusing on its links to monetary policy, has been relatively low, but has also increased exponentially in more recent years. This paper combines these two streams of research. Specifically, we test whether more inefficient banks take greater risks when selecting borrowers, charging interests and requiring collateral, and whether these links between inefficiency and risk change according to the type of bank. Our analysis centers on the Spanish banking system, which has been severely affected by the burst of the housing bubble and has undergone substantial restructuring. To test our hypotheses, we created a database with information on banks and savings banks, their borrowers (non-financial firms), and the links between them. The study also contributes to the literature by considering a novel profit frontier approach. Our results suggest that more inefficient banks take greater risks in selecting their borrowers, and that this high-taking behavior is not offset by higher interest rates.

This paper analyzes the factor structure and cross-sectional variability of a set of expected excess returns extracted from option prices and a non-parametric and out-of-sample stochastic discount factor. We argue that the existing potential segmentation between the equity and option markets makes advisable to avoid using only option prices to extract expected equity risk premia. This set of expected risk premia forecast significantly future realized returns, and the first two principal components explain 94.1% of the variability of expected returns. A multi-factor model with the market, quality, funding illiquidity, the default premium and the market-wide variance risk premium as factors explain significantly the cross-sectional variability of expected excess returns. The (asymptotically) different from zero adjusted cross-sectional R-squared statistic is 83.6%.

This paper studies the joint behavior of equity (VIX) and Treasury (MOVE) risk-neutral volatilities to understand the total and directional connectedness between both option-based implied volatilities, as well as their economic and monetary drivers. Moreover, we analyze whether risk aversion and financial, macroeconomic and policy uncertainty affect connectedness dynamics. Most of the time, but especially during bad economic times, we find significant net spillovers from Treasury to equity risk-neutral volatility. Future and contemporaneous good times increase the spillovers from VIX to MOVE, while bad economic times increase the directional connectedness from MOVE to VIX.