Peer Reviewed Publications
The Credit Suisse CoCo Wipeout: Facts, Misperceptions, and Lessons for Financial Regulation, with Patrick Bolton and Wei Jiang, Journal of Applied Corporate Finance 2023, 35(2): 66-74. ECGI Blog “Banks should issuer more CoCos and their design needs to be further refined”, 05 April 2023; Finanz und Wirtschaft, Warum Banken mehr CoCo ausgeben sollten, 18 April 2023.
Insurers as Asset Managers and Systemic Risk, with Andrew Ellul, Pab Jotikasthira, Christian Lundblad and Wolf Wagner, forthcoming Review of Financial Studies (special issue on financial economics of insurance); ESRB Working paper no. 75; CEPR Working paper no. DP12849.
Financial intermediaries often provide guarantees exposing them to tail risk. Using the U.S. life insurance industry as a laboratory, we present a model in which variable annuity (VA) guarantees and associated hedging operate within the regulatory capital framework to create incentives for insurers to overweight illiquid bonds (“reach-for-yield”). We then calibrate the model to insurer-level data and show that the VA-writing insurers’ collective allocation to illiquid bonds exacerbates system-wide fire sales in the event of negative asset shocks, plausibly erasing up to 20-70% of insurers’ equity capital.
Insurability of Pandemic Risks, with Helmut Gründl, Danjela Guxha and Hato Schmeiser, Journal of Risk and Insurance 2021, 88: 863-902 (special issue on COVID-19 and insurance).
The paper assesses the capacity of the private market for pandemic-related business interruption insurance. We explain theoretically how the pricing of catastrophe insurance depends on fat-tailed loss distributions. Then using high-frequency data on the economic impact of the COVID-19 pandemic in the US, we calibrate the price markup of a hypothetical pandemic insurance contract and compare it to the actual markups of other types of catastrophe insurance. We also discuss the scope for the risk transfer to the financial market and the role of the government.
CoCo Bonds Issuance and Bank Fragility, with Stefan Avdjiev, Patrick Bolton, Wei Jiang and Bilyana Bogdanova, Journal of Financial Economics 2020, 138(3): 593-613; NBER working paper no. 23999, BIS working paper no. 678.
We undertake the first comprehensive empirical analysis of bank contingent convertible capital securities (CoCos) issues. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCos generate risk-reduction benefits and lower costs of debt; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.
CoCos: A Primer, with Stefan Avdjiev and Bilyana Bogdanova, BIS Quarterly Review, September 2013, 43-56.
Contingent convertible capital instruments (CoCos) are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level. In this article we analyze the structure of CoCos, trace the evolution of their issuance and examine their pricing in primary and secondary markets. We also identify some issues in CoCo design that can undermine their ability to improve banks’ resilience in the crisis.
Information Effect of Entry into Credit Ratings Market: The Case of Insurers’ Ratings, with Neil Doherty and Richard D. Phillips, Journal of Financial Economics 2012, 106(2): 308-330.
The paper explores the effect of competition between credit rating agencies on the quality of ratings using a natural experiment of the S&P entry to the insurance market previously exclusively rated by a monopolist A.M. Best. We show that credit ratings agencies create demand for multiple ratings by differentiating their rating scales and that competition between A.M. Best and S&P improved the overall precision of information on the financial strength of insurers.
Design of Investment Promotion Policies, International Journal of Industrial Organization 2012, 30: 127-136.
The paper analyzes how the government agency should structure the investment promotion policy targeted for private financing of infrastructure. I derive the optimal policy in a sequential contracting model between the government, investors and infrastructure providers. The policy leaves investors uncertain about the project type and prescribes different levels of government support, in the form of tax or price distortions.
Who Monitors Financial Institutions? Evidence from Catastrophe Risks in Insurance, with Christoph Basten, 2023.
Structure and Complexity of Global Insurance Groups, with Artur Dobysh, 2023.
Supply of Cyber Risk Insurance, with Martin Eling and Dingchen Ning, 2023.
Scope and Design of Pandemic Risk Insurance in Switzerland, 2023.
Precision of Ratings, with Bilge Yilmaz, 2020; revise and resubmit, Journal of Financial Intermediation.
Building on the idea that precision of credit ratings matters for the efficiency of investors’ portfolio decisions, the paper analyzes the equilibrium precision of ratings. Our analysis explains why ratings are noisy, exhibit rating inflation and vary across asset classes and over the economic cycle. It also reveals that a laissez-faire credit rating agency (CRA) provides socially inefficient rating precision and that the CRA’s response to some but not all post-crisis regulations can further reduce market efficiency.
Impact of Rating Standards on Risk-Taking of Financial Institutions: Evidence from Catastrophe Risks in Insurance, with Christoph Basten and Sojung Carol Park, 2021.
The paper analyzes how the rating standards affects risk-taking behavior of rated firms. After the hurricane Katrina in 2005, the major rating agencies has strengthened the requirements to maintain the rating for insurers exposed to catastrophic risks. Using the standards change as a natural experiment, we show empirically that the change prompted the best response capital structure adjustment by insurers depending on the costs and benefits of maintaining the current rating. Some insurers reduced their capital in response to the more stringent rating standards.
Interconnectedness and Complexity of the Global Insurance Market, 2021.
The top 100 international (re)insurance groups account for 85% of the global insurance assets and thus are the driving force of global insurance supply. Yet little is known about their internal structure, business focus and the international footprint. We fill the gap by providing the first comprehensive analysis of the structure and complexity of the global insurance groups. We construct and analyze a novel dataset on the corporate structure of the top 100 global insurance groups with headquarters located in 21 countries and their 8,000 subsidiaries located in 117 countries and offshore territories.
Insurer’s Insolvency Prediction Using Random Forest Classification, with Mikhail Traskin, 2019.
The paper applies the Random Forest (RF) classification algorithm to predict insolvency of insurers. We show that RF methodology delivers higher quality of prediction compared to other methods due to its ability to handle highly unbalanced and large datasets. We obtain a ranking of the explanatory variables in the order of their ability to predict insolvency and show that many relationships between the insurer’s propensity to default and its individual characteristics are highly non-linear.
Work in Progress
CoCo Bonds: Evolution and Lessons Learned from the 2023 Banking Crises, with Patrick Bolton and Wei Jiang
Insurance Float, with Pab Jotikasthira, Christian Lundblad and Tarun Ramadorai
Did G20 post-crisis reforms reduce TFTB boon? with Steven Ongena and Shusen Qi
The global financial crisis induced international cooperation to design policies addressing too-big-to-fail (TBTF) problem. The paper analyzes of the effects of global systemically important financial institution (G-SIFIs) designations and TBTF policy measures to address TBTF across jurisdictions over the period of designation in 2011-2017.
Can private equity fix insurance? with Martin Eling and Hato Schmeiser
Low interest rates and Solvency II have prompted the transfer of legacy life insurance liabilities to large private equity firms. We develop a matching model to explain the economics of the liability transfer from insurers to private equity. Then we assess empirically the private equity differential asset management and operational efficiency skills and discuss regulatory and financial stability implications.
Idle Working Papers
Insurer’s Insolvency Prediction Using Random Forest Classification, with Mikhail Traskin, 2019
Transparency of Information Exchange in Dynamic Common Agency, 2010.
The paper studies a sequential common agency game between multiple principals and a single agent endowed with private information. The model distinguishes between two communication regimes, public communication and private communication. I show that both communication regimes lead to the same set of equilibrium allocations.
Sequential Common Agency: The Revelation Principle, 2009.
The paper extends the Revelation Principle to sequential common agency games under asymmetric information. Each period one principal contracts with a common agent and the implemented allocation is observed by other principals. I show that the dimension of the support of an equilibrium contract does not exceed the number of types that achieve this stage with a positive probability.
Postponed Implementation, 2006.
The paper analyzes the value of ex-ante non-binding agreements in a sequential common agency game between two principals contracting with a common agent privately informed about its type. I show that signing an ex-ante contract and postponing contract’s implementation increases the joint surplus of the agent and the first principal. The analysis provides an explanation for strategic delay based on a pure information externality.
Complete List of Working Papers & Publications
Funded reinsurance as a divestment tool for life insurance books with financial guarantees, I.VW Working Paper, February 2023.
A decade of low interest rates and the implementation of Solvency II prompted European life insurers to shift their business from traditional life insurance policies with minimum guarantees to capital-light, unit-linked, and protection businesses. How do life insurers divest their life insurance portfolios with guarantees? In a new paper prepared for the European Life Reinsurance Roundtable in Frankfurt in February 2023, Prof. Anastasia Kartasheva explores the supply and demand sides of the divestment market, and discusses the economic and regulatory aspects of divestment strategies, including traditional portfolio transfer and legal entity sales as well as funded reinsurance, an emerging strategy in the European market.
Evaluation of the Effects of Financial Regulatory Reforms on Infrastructure Finance, Financial Stability Board, November 2018.
This report presents the results of the evaluation of the effects of financial regulatory reforms on infrastructure finance (IF). The evaluation focuses on IF provided by the financial sector in the form of corporate and project debt financing (loans and bonds). While the G20 reforms do not specifically target the provision of IF, a broad range of financial regulations can potentially affect it. The evaluation draws on a broad range of information sources and is based on multiple analyses.
Incentives to Centrally Clear Over-the-Counter (OTC) Derivatives, Financial Stability Board, November 2018.
The FSB and the other standard-setting bodies, i.e. the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the Financial Stability Board and the International Organization of Securities Commissions, reconvened the Derivatives Assessment Team (DAT) to re-examine whether adequate incentives to clear centrally over-the-counter derivatives are in place. It is one of the first evaluations under the FSB framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms. This report sets out the DAT’s findings.
Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms, Financial Stability Board, July 2017.
The G20 launched a comprehensive programme of financial reforms post-crisis to increase the resilience of the global financial system, while preserving its open and integrated structure. An initial analysis of the effects of those reforms becomes possible, including whether the reforms are working together as intended. To that end, the FSB, in close collaboration with the Standard Setting Bodies, and informed by work carried out by its members and other stakeholders, has developed the framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms during the German G20 Presidency.
Insurance in the Financial System, BIS report, 2014.
The paper presents the principles of financial intermediation in insurance from the perspective of its functions in the financial system and assesses the effect of financial innovation on insurance functions. While hedging of market risks with derivatives and securitization of underwriting risks enhanced industry effectiveness to perform its core functions, asset management and shadow banking activities introduced new functions of supporting the payment system and asset prices. The analysis implies that an economic activity rather than a legal entity needs to be the basis of systemic risk regulation framework in insurance.
Recent Theoretical Work on Capital Markets Imperfections and Financing Arrangements, with Antonio Estache. World Bank Policy Report, 2003.
The purpose of this report is to review the recent literature on the determinants of the capital structure of the firm. We emphasize specific features of financing of regulated infrastructure projects in developing countries in order to provide a better framework for regulators and policy makers in designing guidelines for infrastructure development.
Aid-Driven Distortions in the Efficiency and Distributional Outcomes of Infrastructure Reform, with Antonio Estache. World Bank Policy Report, 2001.
A decade of experience reveals that one of the main problems of design of infrastructure privatization reforms is their neglect of the possible redistribution effects of the privatization process on the low-income customers. The paper assesses the efficiency-equity trade-offs in the context of infrastructure contracts design and derives policy implications.
Renegotiations on Concessions in Latin America and Caribbean Region: An Economic Analysis and Empirical Implications, with Jose Luis Guasch and Lucia Quesada. World Bank Policy Report, 2001.
Developing countries have seen a significant increase in private sector participation in the infrastructure sector in the past decade, largely through the medium of concessions and franchises. Private sector participation by concession in the provision of infrastructure services holds enormous promise. However, many concessions performed poorly and were frequently renegotiated shortly after being awarded. Using a newly built dataset of concession contracts in Latin America and Caribbean Region, the objective of the study is to investigate the causes of renegotiations and derive the policy implications for the optimal bidding design.
Complete List of Working Papers & Publications