Niccolò Battistini | Rutgers, The State University of New Jersey (original) (raw)

Papers by Niccolò Battistini

Social Science Research Network, 2022

Economic Bulletin Boxes, Nov 8, 2021

Economic Bulletin Articles, Nov 9, 2021

This paper presents a model of endogenous sovereign default in a multi-country economy, where cou... more This paper presents a model of endogenous sovereign default in a multi-country economy, where country-specific fundamentals, default risk, and bond prices are interconnected and affected by investors' risk aversion, as the latter (i) smooth consumption and seek to insure against output volatility (so that they feature an intertemporal elasticity of substitution between consumption today and tomorrow), and (ii) perceive bonds as imperfect substitutes and seek to diversify their portfolios (so that they display an intratemporal elasticity of substitution between bonds issued by different sovereigns). The model suits extensive empirical evidence on the euro-area sovereign debt market, pointing at investors' risk aversion as a major determinant of the shift in yield dynamics occurred in the wake of the euro sovereign debt crisis. Finally, a quantitative assessment generates dynamics of government bond yields and macroeconomic fundamentals with promising results in light of a perspective empirical evaluation of the model.

Economic Policy, 2014

Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS p... more Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS premia. At the same time, banks' sovereign debt portfolios featured an increasing home bias. We investigate the relationship between these two facts, and its rationale. First, we inquire to what extent the dynamics of sovereign yield differentials relative to the swap rate and CDS premia reflect changes in perceived sovereign solvency risk or rather different responses to systemic risk due to the possible collapse of the euro. We do so by decomposing yield differentials and CDS spreads in a country-specific and a common risk component via a dynamic factor model. We then investigate how the home bias of banks' sovereign portfolios responds to yield differentials and to their two components, by estimating a vector error-correction model on 2008-12 monthly data. We find that in most countries of the euro area, and especially in its periphery, banks' sovereign exposures respond positively to increases in yields. When bank exposures are related to the country-risk and common-risk components of yields, it turns out that (i) in the periphery, banks increase their domestic exposure in response to increases in country risk, while in core countries they do not; (ii) in most euro area banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (i) hints at distorted incentives in periphery banks' response to changes in their own sovereign's risk. Finding (ii) indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the euro-area sovereign market more segmented.

Economic Bulletin, 2020

This box presents illustrative ECB staff scenarios for the impact of the COVID-19 pandemic on eco... more This box presents illustrative ECB staff scenarios for the impact of the COVID-19 pandemic on economic activity in the euro area. The unprecedented uncertainty surrounding the developments and economic impact of the COVID-19 pandemic warrants an analysis based on alternative scenarios. These illustrative ECB staff scenarios point to a drop in euro area GDP of between 5% and 12% in 2020. At its trough, quarterly real GDP growth could be as low as around -15% in the second quarter of 2020 under a severe scenario. JEL Classification: E21, E22, E33

According to conventional indicators, the euro-area financial integration has receded since 2007,... more According to conventional indicators, the euro-area financial integration has receded since 2007, mainly in the money market, sovereign debt market and uncollateralized credit markets. But price-based measures of debt market segmentation are inappropriate when solvency risk differs across countries: only the component of yield differentials that is not a reward for the issuer’s credit risk may reflect segmentation. We apply this idea to the euro sovereign debt market, using a dynamic factor model to decompose yield differentials in a country-specific and a common (or systemic) risk component. As the country-specific component dominates, purging yields from it produces much smaller measures of bond market segmentation than conventional ones for the crisis period. We also investigate how the home bias of banks’ sovereign portfolios – a quantity-based measure of segmentation – is related to yield differentials, by estimating a vector error-correction model on 2008-12 monthly data. We f...

The housing market has important macroeconomic and macroprudential implications for the euro area... more The housing market has important macroeconomic and macroprudential implications for the euro area economy. In view of the duration of the ongoing upturn in euro area house prices and residential investment, which started at the end of 2013, analysing the state of the housing market is particularly informative. This article discusses the ongoing housing market upturn, from a chronological and fundamental perspective. It also explores a selected set of indicators that can potentially inform on the state of the housing market, elaborating on the demand and supply factors underpinning the current upturn, as well as their relative importance. JEL Classification: E22, E31, E32, R31

With monetary policy constrained by the effective lower bound (ELB), the debt sustainability impl... more With monetary policy constrained by the effective lower bound (ELB), the debt sustainability implications of a fiscal expansion are a pressing concern. In a general equilibrium model of fiscal limits, we find that the adverse impact of a fiscal expansion on sustainability is muted at the ELB compared with normal times. Getting the timing of public spending increases right, however, is essential for containing sustainability risks. JEL Classification: E52, E61, E63

SSRN Electronic Journal

This paper should not be reported as representing the views of the European Central Bank (ECB). T... more This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS p... more Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS premia. At the same time, banks’ sovereign debt portfolios have featured an increasing home bias. In this paper, we investigate the relationship between these two facts, and its rationale. First, we inquire to what extent the dynamics of sovereign yield differentials relative to the swap rate and CDS premia reflect changes in perceived sovereign solvency risk or rather different responses to systemic risk due to the possible collapse of the euro. We do so by decomposing yield differentials and CDS spreads in a country-specific and a common risk component via a dynamic factor model. We then investigate how the home bias of banks’ sovereign portfolios responds to yield differentials and to their two components, by estimating a vector error-correction model on 2007-13 monthly data. We find that in most countries of the euro area, and especially in its periphery, banks’ sovereign exposures respond positively to increases in yields. When bank exposures are related to the country and common risk components of yields, it turns out that (i) in the periphery, banks increase their domestic exposure in response to increases in country risk, while in core countries they do not; (ii) in most euro area banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (i) suggests distorted incentives in periphery banks’ response to changes in their own sovereign’s risk. Finding (ii) indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the euro-area sovereign market more segmented.

In this report, three indicators are considered with respect to cross-border MFI claims in the EU... more In this report, three indicators are considered with respect to cross-border MFI claims in the EU: (i) bilateral cross-border MFI exposures, both in a stock- and a flow perspective, (ii) foreign MFI dependence, which focuses on a country’s economy as a destination of capitals, and (iii) MFIs’ home bias, which concentrates on a country’s MFI sector as an origin of funds.

During the credit crisis that hit the United States in 2007 and in the recovery period that foll... more During the credit crisis that hit the United States in 2007 and in the
recovery period that followed, bank performance was extremely poor, yet highly volatile across banks. I use this variability of stock returns in order to assess the explanatory power of financial statement measures. Notably, I investigate the determinants of bank stock return performance in the U.S. during the credit crisis, from July 2007 to December 2008, and in the most recent period, January through December 2010. The analysis shows how theoretically relevant attributes of banks' financial statements, such as the degree of investments in securities, empirically turn out to be irrelevant or related to stock returns in an unexpected way. Further results confirm the importance of capitalization as a cushion against financial distress. Finally, relative performance, as opposed to performance tout court, reveals itself to be a highly persistent attribute of U.S. credit institutions.

Social Science Research Network, 2022

Economic Bulletin Boxes, Nov 8, 2021

Economic Bulletin Articles, Nov 9, 2021

Economic Policy, 2014

Economic Bulletin, 2020

SSRN Electronic Journal

Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS p... more Since 2008, euro-area sovereign yields have diverged sharply, and so have the corresponding CDS premia. At the same time, banks’ sovereign debt portfolios have featured an increasing home bias. In this paper, we investigate the relationship between these two facts, and its rationale. First, we inquire to what extent the dynamics of sovereign yield differentials relative to the swap rate and CDS premia reflect changes in perceived sovereign solvency risk or rather different responses to systemic risk due to the possible collapse of the euro. We do so by decomposing yield differentials and CDS spreads in a country-specific and a common risk component via a dynamic factor model. We then investigate how the home bias of banks’ sovereign portfolios responds to yield differentials and to their two components, by estimating a vector error-correction model on 2007-13 monthly data. We find that in most countries of the euro area, and especially in its periphery, banks’ sovereign exposures respond positively to increases in yields. When bank exposures are related to the country and common risk components of yields, it turns out that (i) in the periphery, banks increase their domestic exposure in response to increases in country risk, while in core countries they do not; (ii) in most euro area banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (i) suggests distorted incentives in periphery banks’ response to changes in their own sovereign’s risk. Finding (ii) indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the euro-area sovereign market more segmented.