EconPol Working Paper Series

Financial markets routinely experience a variety of frictions that hinder their efficient functioning by impacting price formation. These frictions are usually due to how trading is organized in a market, regulatory constraints, or trading capital. EconPol expert Sophie Moinas (TSE) and her co-authors propose an empirical investigation of the dynamic relationships between funding and market illiquidity measures in the European Treasury bond market. They find that funding illiquidity shocks affect bond market illiquidity and of a weaker, but significant, reverse feedback effect. Their analysis also shows that the responses of individual bonds' market illiquidity to funding illiquidity shocks increase with bond duration, the credit risk of the issuer, and with haircuts.

Liquidity issues in financial markets arise because of two main factors: asymmetric information and cost of market participation. To alleviate these frictions, several exchanges start with a pre-opening period characterized by the accumulation of orders and the absence of trading. What is the role of Euronext’s pre-opening mechanism in the price discovery and liquidity formation of the exchange itself versus two other competing venues deprived of such a mechanism, namely BATS and Chi-X? EconPol expert Sophie Moinas (TSE) and her co-authors find evidence that tentative clearing prices set during the pre-opening period contribute to discover opening price; and that tentative clearing volume is positively correlated with liquidity across all three platforms.

How do German voters feel about euro area reforms? In this working paper EconPol expert Mathias Dolls and co-author Nils Wehrhöfer find that few Germans are willing to accept fiscal risk-sharing through common unemployment insurance. But a majority supports a sovereign insolvency procedure aimed at strengthening market discipline. In their randomized surveys the authors also confronted survey participants with the potentially adverse effects of reforms, which lowered approval rates considerably. The survey results also revealed broad-based acceptance of inner German transfers, but low levels of support for transfers to other euro area member states.

We study whether and to what extent the electoral dynamics in Italy over the 1994-2008 period can be explained by the development of economic factors associated with globalization. To measure the level of exposure to globalization for local labor markets, our main unit of analysis, we use the intensity of import competition from China and the presence of immigrants.

How can the European Union tackle its aging populations? Network member Thomas Avoine, IHS, investigates international spillovers due to capital market integration when populations age and the cross-country redistribution that this generates. Using a multi-country overlapping-generations model, he finds that labour supply drops more in rapidly aging countries, pushing up the capital-labour ratio, lowering returns on investment and generating capital flows towards countries with younger populations. The author looks at how governments can reform tax and pension policy to influence redistribution patterns and how rapidly aging countries can promote immigration to mitigate the negative redistributive effects of capital market integration.