Universität zu Köln

Kaldorf, Matthias ORCID: 0000-0002-1194-4037 (2022). Essays on Macroeconomics, Collateral, and Default Risk. PhD thesis, Universität zu Köln.

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Abstract

The introductory chapter one of the dissertation "Essays on Macroeconomics, Collateral, and Default Risk" argues that the interaction of collateral premia and default risk on the corporate and government bond market is an important issue, both from a macroeconomic and a policymaker's perspective. Different aspects of this interaction are discussed in four distinct chapters. Chapter two asks how the eligibility of corporate sector assets as collateral affects collateral supply and risk-taking by the corporate sector. Since banks are willing to pay collateral premia on eligible assets, this makes debt financing cheaper for all firms satisfying eligibility requirements, which are best thought of minimum ratings. We provide a novel analytical characterization of heterogeneous firm responses to collateral easing, i.e., relaxing eligibility requirements. While high-quality firms respond by increasing their debt issuance, some low-quality firms are incentivized to reduce their debt outstanding to benefit from collateral premia. If risk-taking effects are sufficiently large, firm responses increase the resources losses from corporate default. Applying the model to the ECB's collateral easing policy during the 2008 financial crisis, our results suggest that firm responses introduce a central bank trade-off between collateral supply and resource losses of default. The preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument is discussed in Chapter three. Green and conventional firms issue corporate bonds to banks that use them as collateral. The associated collateral premium induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Due to these adverse effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which reduces pollution. The limited response of green investment is directly related to higher risk-taking of green firms. Chapter four studies how convenience yield interacts with sovereign risk and the supply of government bonds? This chapter builds a quantitative model of sovereign debt and default, in which convenience yield arises because investors derive non-pecuniary benefits from holding risky government bonds. Convenience yield depends on government bond supply and on haircuts that increase in sovereign risk, reflecting mark-to-market practice on financial markets. The model can replicate observed properties of financial market variables and public debt management. To understand convenience yield through the lenses of our model, we provide a decomposition of it into individual components. Counterfactual experiments suggest that the elasticity of a collateral valuation component and a haircut component with respect to government bond supply and default risk can have sizable effects on debt and default dynamics. The European debt crisis of 2011 has been characterized by an unprecedented divergence in borrowing costs for euro area members. While 'peripheral' government bond yields increased to unprecedented levels, yields on German and other 'core' bonds strongly declined, even though their CDS-spreads reached an all-time high in 2011. To reconcile this flight-to-quality, Chapter five propose a model of a financially integrated monetary union in which heterogeneous sovereign borrowers issue bonds subject to default risk. Investors value the collateral service of government bonds, which decreases in haircuts that are specified by the central bank in its collateral framework. In a union-wide fiscal crisis, larger haircuts increase the yields of riskier government bonds and also imply a contraction of aggregate collateral supply. This makes the collateral service of the safest available bonds more valuable to investors: yields on the safest bonds decline, even though their default risk increases. Using the calibrated model, I show that a full collateral backstop policy accepting all bonds with zero haircuts during a fiscal crisis reduces the dispersion of government bond spreads and reduces sovereign risk in the monetary union.

Item Type:	Thesis (PhD thesis)
Creators:	Creators Email ORCID ORCID Put Code Kaldorf, Matthias matthias.kaldorf@gmx.de orcid.org/0000-0002-1194-4037 UNSPECIFIED
URN:	urn:nbn:de:hbz:38-639011
Date:	23 October 2022
Language:	English
Faculty:	Faculty of Management, Economy and Social Sciences
Divisions:	Faculty of Management, Economics and Social Sciences > Economics > Macroeconomic, Financial and Economic Policy > Professorship 1 for Macroeconomic
Subjects:	Economics
Uncontrolled Keywords:	Keywords Language Macroeconomics Caddo Collateral UNSPECIFIED Default Risk UNSPECIFIED
Date of oral exam:	8 July 2022
Referee:	Name Academic Title Barbie, Martin Professor Schabert, Andreas Professor
Refereed:	Yes
URI:	http://kups.ub.uni-koeln.de/id/eprint/63901