6th Emerging scholars conference – more papers

Continuing my brief summaries of some of the papers presented in the December’18 Emerging scholars conference (see the first one), I bring a paper on how capital regulation affects the repo market by Antonis Kotidis and Neeltje van Horen.

I have talked about the leverage ratio several times in this blog. Ages ago I discussed a different paper looking at the same issue (here and here), and I also talked about my own paper looking at the derivatives market (here and here). This is a topic that I find particularly interesting given how the leverage ratio—and, in general, post-crisis regulation—differs from the previous regulations.

I had my issues with Allahrakta et al. (2018), especially in terms of identification. Since my posts in 2016 it has been published in the Journal of Financial Intermediation, which is a great journal. My main issue was that they did not have a clear shock to exploit. In fact, looking at the data, they observed a break in the series around the end of November 2012, when nothing happened. They concluded that dealers were realising at that time that the LR would affect their repo business. But this is a backward reasoning: they start by assuming the LR affects repo, and then they provide an explanation on why we see this effect happening when no regulation is being announced or implemented.

Kotidis and van Horen, on the other hand, pick a particular change of the leverage ratio in the UK which provides a much better identification. From January 2017 onward, the biggest banks in the UK had to calculate the leverage ratio by using a daily average rather than their situation at the end of the month. This is an important change. Most repo transactions are overnight; this means that if a requirement, such as the leverage ratio, depends on the state of the balance sheet at the end of the month, a bank can simply reduce the amount of repos for one day to reduce the requirement. This Bloomberg article, where I commented, picked on this issue.

Repo transactions are particularly taxing in terms of the leverage ratio due to their nature. They utilise balance sheet—and hence the leverage ratio applies—but they are secured and have a very low return. Therefore, they are a great candidate to be affected by this requirement.

From January 2017 onwards, as I was saying, UK banks could no longer use the window-dressing “trick”. In order to identify the effect, they look at clients that enter into (bilateral) repo transactions with a UK dealer and a non-UK dealer. This is important because different dealers might have different clients, and thus if we observe that the total repo portfolio of UK dealers drops after the regulation it could be due to their clients demanding less, not because the dealers themselves reacted. But by fixing the client (i.e., by using client fixed effects), then the effect that they pick is much more likely to come from the dealer.

They find that UK dealers did reduce liquidity in the repo markets after this reform, and this affected mainly small clients rather than the big ones. The reduction comes in terms of volume and pricing, but not haircuts and maturity. They also find evidence that non-UK dealers stepped in to substitute for the drop.

This is a great addition to the set of papers looking at the effects of post-crisis regulation. We are still figuring these things out—many of the new regulations have just been introduced in the past year or two—but we are understanding more and more. Hopefully central banks will not lose their appetite to figure out which regulations are working as intended and which ones might have unintended consequences.

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Rationally Speaking with Julia Galef

I am sometimes accused of overthinking things. I am still mulling over whether that accusation has merit (Julia Galef)

Rationally Speaking is the podcast of New York City Skeptics and is hosted by Julia Galef, a writer and speaker on matters about science and reason (wikipedia page here). I have just discovered this podcast recently but I have to recommend it right away.

Julia has a mix of skills that makes her a fantastic host for this type of podcast. She has a science background and is comfortable speaking with scientist and academics in different branches. Her scepticism is shown when she suggests alternative explanations to the assertions made by the guests. She does a lot of research on these guests and comes up with very interesting questions. And she does all this while speaking clearly and in terms a general audience can understand.

The episodes are usually around an hour long, which is perfect for discussing important topics without needing more than a day to listen to all of it. The last episode—and this is the reason why I decided to recommend it here—features Sarah Haider, co-founder of Ex-Muslims of North America. Two personal role models discussing issues regarding the work that EXMNA does, the possible trade-offs between nuance and activism, and free speech. A delight.

I do listen to several podcast, but just some episodes that I am interested in. Until now, there was only one that I never missed: Making Sense (formerly known as Walking Up) by Sam Harris. From now on, however, there is another one that I will listen religiously: Rationally Speaking, by Julia Galef.

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The Four Horsemen

The terrorist attacks of 9/11 changed the world. There is little doubt about it. Apart from the two wars that followed, and the huge impact on security and international politics, it brought the attention of religious fundamentalism in the Western society. This pushed some secular intellectuals to be more open and frontal in their criticism of religion. Between 2004 and 2007, four books came out to become bestsellers: The End of Faith, by Sam Harris; The God Delusion, by Richard Dawkins; God is not Great, by Christopher Hitchens; and Breaking the Spell, by Daniel Dennett. The four men participated in many debates during their book tours, which made them the most prominent figures of the New Atheism movement.

During September 2007, the four of them met at Hitch’s house in Washington DC. They recorded a two-hour conversation—the video can be seen here. And more than eleven years later, on the 14th of February 2019, the transcript of the conversation has finally been published as a book—The Four Horsemen: The discussion that sparked an atheist revolution. It seems that Ayaan Hirsi Ali was supposed to attend the meeting as well but had to cancel at the last minute.

They focus the conversation, obviously, on religion. But they touch on a  range of topic within religion. They discuss arrogance—a typical criticism that they receive—and offence, remarking that there is probably nothing more arrogant than to think that you are doing God’s work. They also talk about the literality of scripture and the space between theologians and the masses. They discuss authority in religion and science, highlighting how in the latter there is always competition. They wonder whether criticising religion could actually be a bad thing to do. And they finalise arguing whether some religions are worse than others.

The conversation is great especially if one is familiar with the different topics that they debate. Of the four, Sam and Hitch are the ones I have read the most. It is great, for instance, to see how Sam introduces the concept of spirituality without religion: “I think there is a place for the sacred in our lives, but under some construal that doesn’t presuppose any bullshit“. This would be a book several years later. Or to see Hitch talking about the many debates and conversations he has had with religious people, and being reluctant to say that he would wish that religion would disappear because he would have nobody to debate.

While reading the book one wishes that the conversation would have lasted twice or three times as much. Or more. This cannot be repeated—Hitch died seven years ago—but at least we get to relive it. Maybe too informal at time—this is a conversation among friends, not a debate—the only shame is that they did not spend more time on topics that they disagree. But it is overall a fantastic conversation that anyone with a slight interest in religion should read.

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Letter to a Christian Nation, by Sam Harris

After reading The End of Faith and The Moral Landscape, and listening to many of his podcasts and debates, I anticipated that Sam Harris‘s Letter to a Christian Nation would not add much more to my atheist arguments. And I was right. That said, it is a short book—I read it in a couple of days—and it is directed to Christians in particular in the US. The main argument of the book is how strange is to hold beliefs such as creationism in this era and how dangerous it is to protect these beliefs in the name of “religious tolerance.” These beliefs have consequences, such as asking schools to teach creationism. Any secular person—as well as Christian liberals who accept evolution—should criticise this and similar beliefs.

Perhaps I will mention a point Sam Harris makes in the book which I find very persuasive, and it concerns morality. Where does morality come from? It is said by many believers that, if you do not believe in God, how do you judge what is right or wrong? They seem to take Nietzsche’s view: if there is no God, there is no morality. Yet most Christians decide to ignore the passages about slavery, adultery, or even homosexuality that one can find in the Bible. They, instead, select the passages that they find more moral, such as the golden rule (Matthew 7:12):

Therefore whatever you desire for men to do to you, you shall also do to them; for this is the law and the prophets

It is certainly moral to live one’s life following this rule in general. But this is just one of the many claims about morality in the Bible. Choosing some claims over the others is something we bring to the Bible, not something that the Bible offers. Choosing the golden rule is, therefore, we humans defining morality, not God’s work. Therefore, the mere existence of religious moderates—those that do not read the holy scripture literally—proves that we, as human beings, define morality.

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6th Emerging Scholars conference – some papers

I have been meaning to write these posts (I do not know how many they will be) but some things got in the way, mainly Christmas holidays and exam marking. We had a wonderful 6th Emerging Scholars in Banking and Finance conference the 10th and 11th of December last year; 13 papers were presented, and we enjoyed a keynote lecture by David Miles about the half-life of economic injustice and a publication workshop—all that matters to assistant professors is to publish in top journals—by Thorsten Beck and Neeltje Van Horen. Two exhausting but very productive days (although I did not present, I discussed Ishita Sen‘s job market paper, which is a great paper and it seems that many institutions agree with this assessment).

So I wanted to quickly mention some of the papers that were presented. I am going to start with Collateral requirements and corporate policy decisions, presented by Kizkitza Biguri and co-authored by Jorg Stahl. The authors want to empirically assess whether there is a trade-off between risk management and investment decisions due to collateral constraints.

Some firms have limited collateral, and this collateral can be used to hedge risks in the derivative markets (for instance by entering an interest-rate swap or an exchange-rate forward). But the collateral can also be used to borrow (from a bank) and invest into long-term projects. Therefore, at least in theory, firms could face a trade-off in terms of hedging versus investment. This questions is particularly important since the introduction of central clearing, which affects big financial firms and some non-financial corporations as well, given the fact that central clearing of derivatives is associated to a substantial increase in collateral requirements.

The authors test this trade-off empirically for non-financial firms but do not find evidence that it exists. In particular, while financially constrained firms do hedge less, among those firms that are financially constrained, the ones that are pledging some collateral for debt purposes actually hedge more that the ones that are not pledging collateral. Therefore, having some collateral tied-up in debt (in a secured loan, for instance) does not prevent hedging.

Instead, they identify cash as being very relevant for hedging—and not other type of collateral such as properties and equipment—thus introducing a trade-off between liquidity management and (other) risk management. They test this additional trade-off using the Hurricane Katrina as an exogenous shock to liquidity, and they find that firms in states more affected by the hurricane hedge less after the shock.

One thing I find particularly relevant about the paper is the focus on non-financial firms. Most papers on the topic have so far focused on financial institutions because of, well, the mess they made during the financial crisis. But research on non-financial companies is key to properly understand the effects of the new financial regulations; it would not be a great outcome if reforms on the financial sector led to insufficient hedging in the real sector.

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Mindfulness meditation

It has been several months since I started doing meditating every morning. In the recent weeks, I have discussed my practice with other people who have found it interesting, and hence I thought I could mention it here. There is a lot of confusion about meditation, especially for sceptics, because it might seem to relate to mysticism or strong (Buddhist) religious beliefs. But fear not: meditation is useful to understand our consciousness better. Understand oneself better.

The first benefit that one gets from meditating, which is probably what many people find when they start, is the reduction of stress. This comes from just relaxing for ten minutes before starting the day. At the very beginning, I used to sit in my couch with my eyes closed thinking: should I stop? I have so much work to do. But after few sessions one realises that these ten minutes are nothing compared to how distracted we are during the day.

The second is the training on attention. Breath is a usual one. In a time where our attention is constantly challenged by social media and emails, this training is incredibly useful—and probably more valuable, as Cal Newport explains in Deep Work. How many times a day are you working on something important just to find yourself completely lost in thought? Mindfulness meditation is the solution.

The third and probably most important benefit that I have found is the realisation that I am different than my thoughts. This might be obvious on an intellectual level, but not on a behavioural one. Think about the last time you were angry. Maybe you were angry at someone close to you. Can you remember how long you stayed angry? How much of this anger came from this person’s action, and how much came from your thoughts about this action? You are not your thoughts; you can change them. Understanding this difference is understanding the difference between pain and suffering. While pain might be unavoidable, the suffering associated to it can typically be significantly reduced.

On a more practical note, I usually meditate first thing in the morning, between 4 and  5, just after preparing my coffee. The coffee is key here because if one is tired and sleepy it is extremely easy to just fall asleep while meditating. A 10-minute meditation a day is enough to achieve some of its benefits. From time to time, typically one a week, I do longer sessions: 30 minutes to one hour. I think one hour meditation a day would be fantastic but I have not improved my focus as much as to have time to do that.

People train their bodies, and we identify this practice as healthy—not only that, but this is encouraged in many levels. Mental training and mental health should not be any different—in fact, even if we do not understand many things about consciousness, the brain is just another organ. Training the mind, training the focus, being able to direct your attention to what matters and what makes you happy, should be a must for today’s lives full of distractions.

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Why Orwel Matters, by Christopher Hitchens

Political language… is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind (George Orwell in Politics and the English Language).

And the more one is conscious of one’s political bias the more change one has of acting politically without sacrificing one’s aesthetic and intellectual integrity (George Orwell in Why I Write).

George Orwell appears to be the clearest influence of Christopher Hitchens. They are the two most important British essayist of the past century and the first decade of the current one.  This makes it a joy to read Why Orwell Matters, where Hitch dissects Orwell’s ideas, thoughts and relations with political ideologies and other topics of his time.

Orwell is a difficult figure to analyse. He is mostly known by his dystopian book 1984, from which the term Orwellian derives (a usual adjective to describe, for instance, the North Korean regime).  But, as Hitch highlights, this novel is “the first and only time that his efforts as a novelist rise to the level of his essays.” Through his essays, letters, and articles, and to a certain extend his novels, Hitch is able to provide a clear picture of Orwell’s motives, stances and contradictions.

As much as I highly recommend this book for anyone with an interest for Orwell, it is at the same time worth mentioning the prior knowledge of Orwell and history that it requires. This is not an Introduction to Orwell, so to speak. The reading improves dramatically as one increases in particular its knowledge of European history of the first half of the 20th century. Orwell’s writings are marked by the communist revolution, the rise of fascism and Stalinism, and the British empire. Here I must admit my own lack of knowledge of the époque, which I just tried to somehow mitigate, at least in the eyes of the reader, by using a French word to appear culte (Orwell did not feel particularly welcoming of such expressions, as he emphasises in Politics and the English Language: “Foreign words and expressions such as cul de sac, ancien regime… are used to give an air of culture and elegance. Except for the useful abbreviations i.e., e.g., and etc., there is no real need for an of the hundreds of foreign phrases now current in English.”)

Let me, however, remark one thing about Orwell’s life that is extensively covered in Hitch’s book. What fascinates me most about Orwell is how early he realised what the Soviet Union had become. It became apparent to him during his adventures in Spain, where he witnessed first hand how the communist party abducted, and later executed, Andreu Nin, the leader of a different communist party (POUM), on the orders of Josef Stalin. This was at a time where many British socialist intellectuals, as he was, considered the Soviet Union as a utopia-adjacent state. This realisation during the 1930s, and his subsequent activism, made Orwell “one of the founding fathers of anti-communism.” And these are the experiences would later on be the seed to 1984.

All in all, Why Orwell Matters is an excellent book to get closer to the core of Orwell’s thoughts and views about that time, about that époque.

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