Dealing with Dealers: Sovereign CDS Comovements

I test the predictions from Duca, Montero, Riggi and Zizza (2017), who develop a customermarket model with consumer switching costs and capital-market imperfections in which price-cost markups behave countercyclically, with a subsample of European fi rms participating in the Wage Dynamics Network 2014 survey. I use a novel empirical approach developed by Aakvik, Heckman and Vytlacil (2005) for estimating discrete choice models with binary endogenous regressors that allows for selection on unobservables. Results show that fi rms subject to fi nancial constraints had a signifi cantly higher probability of raising markups than in a counterfactual scenario without such constraints. Moreover, the estimated partial effects for the main variables are in overall accordance with the predictions from the theoretical model.Keywords: markups, fi nancial frictions, customer market, discrete-choice models.JEL classifi cation: C25, C26, D22, L11. ResumenEn este trabajo se contrastan las predicciones teóricas del modelo elaborado por Duca, Montero, Riggi y Zizza (2017). Este es un modelo de mercados de clientes (customer markets) con costes de cambio de proveedor (switching costs) e imperfecciones en los mercados de capitales, en el cual los márgenes precio-coste se comportan de manera contracíclica (es decir, aumentan durante las recesiones). Para el análisis empírico se utiliza una submuestra de empresas europeas participantes en la edición de 2014 de la encuesta de la Wage Dynamics Network. Además, se emplea una metodología empírica novedosa desarrollada en Aakvik, Heckman y Vytlacil (2005) que permite la estimación de modelos de elección discreta con variables binarias endógenas y controlar por la posible presencia de sesgos de selección por factores inobservables. Los resultados muestran que las empresas europeas que estuvieron sometidas a restricciones fi nancieras tuvieron una mayor probabilidad de elevar sus márgenes que en un escenario contrafactual sin tales restricciones. Además, en general el efecto estimado de los principales determinantes de la probabilidad de aumentar los márgenes tiende a coincidir con las predicciones del modelo teórico.Palabras clave: márgenes precio-coste, fricciones fi nancieras, mercados de clientes, modelos de elección discreta. Códigos JEL: C25, C26, D22, L11. BANCO DE ESPAÑA 7 DOCUMENTO DE TRABAJO N.º 1724

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Leverage and Deepening Business Cycle Skewness

Jensen¹,

Petrella

Ravn³

et al. 2017

SSRN Journal

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We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This …nding can be explained by the concurrent increase in the …nancial leverage of households and …rms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further ampli…ed due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, …nancially-driven expansions lead to deeper contractions, as compared with equally-sized non-…nancial expansions.

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Dealing with Dealers: Sovereign CDS Comovements

Cited by 17 publications

References 57 publications

Interconnectedness and Systemic Risk

Interconnectedness and Systemic Risk

Pricing Decisions under Financial Frictions: Evidence from the WDN Survey

Leverage and Deepening Business Cycle Skewness

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