Viewing 13 posts categorized under Financial Markets

The rise of the walking dead: zombie firms around the world

November 10, 2023

The macroeconomic implications of unproductive and unviable zombie firms have returned to the forefront of the public debate during the Covid-19 pandemic, as the unprecedented public support to firms may have helped these zombie firms stay afloat. The presence of zombie firms creates important negative spillover effects to healthy firms operating in the same industry: zombie firms distort the competition in the markets in which they operate, ultimately depressing market prices and raising market wages, which crowd out the profits of healthy firms.

Government support measures in Portugal during the COVID-19 pandemic

October 11, 2022

During the COVID-19 pandemic, the Portuguese government provided a plethora of different support measures for firms. These included state-guarantees for new loans and a public moratorium for existing ones. These measures have been essential to support firms in the most acute phase of the crisis by providing liquidity at reduced costs in a context of an abrupt increase in the level of risk. However, there are still open questions regarding the medium- to long-term impact of these measures.

Market stigma and bank capital

September 29, 2022

The Great Financial Crisis exposed vulnerabilities in the quality and quantity of banks’ capital. It was the catalyst for increasing regulatory capital requirements, including the introduction of macroprudential buffers that can be used during economic downturns to incentivize banks to continue providing credit to the economy instead of engaging in excessive de-leveraging or de-risking behaviors. However, market pressure to maintain or even increase capital ratios can constrain banks in using their buffers during economic downturns.

Education and avoidable costs in the stock market

April 27, 2022

This study investigates preventable financial mistakes by retail investors in the stock market and whether education helps reduce their likelihood. The paper examines the change in brokers’ commission schedules in the aftermath of the acquisition of Bolsa de Valores de Lisboa e Porto, the Portuguese stock market, by Euronext Group. The acquisition led to significant changes in the structure of brokers’ trading fee schedules penalizing small transactions, which were very common among retail investors prior to the acquisition.

The real effects of FinTech lending on SMEs

January 10, 2022

Despite the attention that FinTech has received over the past years, the drivers and consequences of FinTech disruptive forces on financial markets remain open to debate. For example, an important open question relates to the impact that FinTech lending availability has on SMEs financing and investment policies. This paper addresses this question using a unique data set from a FinTech platform containing the universe of loan applications. The paper finds that FinTech serves larger, high profitability SMEs, who already have access to bank credit.

Small- and medium-sized enterprises and the financial crisis

May 5, 2021

This article studies the growth determinants of small and medium-sized firms (SMEs) before and after the 2008 subprime crisis. SME’s growth correlates positively with firm-level cash flow and GDP, whereas it correlates negatively with firm-level debt, firm size and age, as well as with the economy-wide risk-free interest rate. After 2008, the financial crisis with the associated implementation of austerity measures in the Portuguese context, produced a negative effect on SME growth.

Sovereign distress and the credibility of deposit insurance

October 9, 2020

Deposit insurance arrangements are crucial to mitigate the likelihood of bank runs. However, the success of these protection schemes depends on their credibility, which explains why they are usually guaranteed by the sovereign. But what happens when the sovereign is also in distress? Can the sovereign backstop actually weaken the credibility of deposit insurance mechanisms in some circumstances? This paper examines two episodes that occurred during the euro area sovereign debt crisis (2010-2013) to better understand the role of the credibility of the sovereign backing the deposit insurance arrangements.

The disposition effect among mutual fund participants in Portugal

June 11, 2020

The disposition effect is the propensity of investors to sell assets on which they have experienced gains and to hold assets on which they have faced (unrealized) losses. This paper studies the disposition effect among mutual fund participants in Portugal. Using a large sample of transaction-level records from a major bank for the period from 1998 to 2017, this paper finds evidence of a strong disposition effect among mutual fund investors in Portugal.

Exchange rate shocks with the Brexit referendum and Portuguese exports

November 22, 2018

Understanding the effect of exchange rate movements on international trade is a major issue for economists and for policy-makers. Using a quasi-natural experimental evidence on the effects of exchange rate shocks on export prices, quantities and export participation, the paper examines the consequences of the large, sudden and unanticipated plunge in the British pound following the Brexit referendum. As figure 1 shows, the pound depreciated sharply against the Euro after the referendum and it has stayed more or less at that level since.

Microcredit repayment in Portugal

October 27, 2018

This research examined the determinants of microcredit loan repayment based on a sample of 752 microcredit loans granted in Portugal by the National Association for the Right to Credit, adopting individual lending mechanisms and granting loans through partnerships with several credit institutions. This is the first study to ascertain the influence that a set of factors – grouped into three categories: borrowers’ individual characteristics; loan characteristics; and characteristics of business projects implemented by borrowers – has on the repayment ability of microcredit programs, in a developed country of the Eurozone experiencing the financial hardships of the 2008-2009 crisis.

Does the stock market cause economic growth? Portuguese evidence of economic regime change

March 7, 2018

This research tests the relation between stock market and economic growth for Portugal using data from 1993 to 2011. Because Portugal is a small open economy traditionally dependent on bank financing, we also consider the relation between bank financing and economic growth. The empirical approach focuses on the study of the relation between stock market and bank financing with economic growth in Portugal, but also identifies structural changes on these relations during the period of study.

Entry and exit in the 2008–2013 Portuguese economic crisis

November 6, 2017

Recessions are conventionally considered as times in which low-productivity firms are driven out of the market at a relatively accelerated pace and resources freed to more productive uses as a result. But recessions that are closely associated with financial crises can reduce efficiency in resource reallocation through reduced bank lending to profitable projects. Banks may also forbear bad debtors, delaying the process of firm death in an effort to protect their own balance sheets, thereby hindering one of the key mechanisms through which productivity growth does its job.

The Portuguese interbank money market during the subprime crisis and sovereign debt crisis

July 14, 2016

Money markets were severely impaired by the financial crisis and subsequent sovereign debt crisis. During the summer of 2007, BNP Paribas suspended redemptions for three investment funds due to the uncertainty regarding structured products. This event triggered the first stage of the financial crises in the euro area and linked it to the subprime mortgage crisis in the US. Afterwards, interbank lending was disturbed and the sovereign debt crisis aggravated the problem as country risk became a significant part of bank risk.