Job Market Paper
Taxing Financial Transactions in Multiple Markets, Vincent Wolff (2023)
What are the effects of taxing stock and derivative transactions on market liquidity and welfare? My theoretical model predicts asymmetric responses to equivalent tax rates across markets, resulting in welfare improvements upon taxation. Stock volume decreases significantly relative to options volume, and liquidity improves in the taxed market due to reduced adverse selection. I causally test the model’s predictions by leveraging three separate FTT introductions on stocks and derivatives. Empirical results show reduced trading in the taxed markets and migration of informed trading to the untaxed market. I reject the common conception that the synthetic replication of stocks is a practiced alternative to avoid the tax.
Author: Vincent Wolff
JEL classification: D40, D82, F38, H21
Keywords: Financial transaction tax, optimal taxation, liquidity, welfare
Publications
Managerial Incentives to Take Asset Risk, Marc Chesney, Jacob Stromberg, Alexander F. Wagner, and Vincent Wolff, 2020, Journal of Corporate Finance 65, 101758
We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Moreover, stock holdings can induce substantial risk-taking incentives, qualifying common beliefs regarding the central role of stock options. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.
Authors: Marc Chesney, Jacob Stromberg, Alexaner F. Wagner, Vincent Wolff
JEL classification: G01, G28, G34
Keywords: Asset risk-taking, compound options, executive compensation, financial crisis, managerial incentives, risk-shifting, write-downs
Spillovers to Exchange Rates from Monetary and Macroeconomic Communications Events, Enzo Rossi and Vincent Wolff, 2020, Swiss National Bank SNB Publication 18, 24-48
We study the tightness of the link between U.S. monetary and macroeconomic communication events and the exchange rate movements against the USD of four major currencies—the euro, the Swiss franc, the Brazilian real and the Mexican peso—since the global financial crisis (GFC). We find three main results. Approximately 20 percent of the U.S. communications events were associated with statistically significant exchange rate effects. Unconventional and conventional monetary policy announcements had equal impacts. The reactions of the advanced countries’ currencies were more in line with each another than with those of the emerging markets’ currencies.
Authors: Enzo Rossi, Vincent Wolff
JEL classification: C22, E58. F31, G14.
Keywords: Central bank communication, macroeconomic news, exchange rates, event study
Published Books
Asset Pricing – Financial Derivatives and their Systemic Risks , Marc Chesney, Brigitte Maranghino-Singer, Jonathan Krakow and Vincent Wolff, Springer, 2022
The book explores financial derivatives and their relation to systemic risks, prominently showcased during the financial crisis. Following an introductory chapter, it provides insight into the functions and malfunctions of financial derivatives and markets and then comprehensively explores different derivative products, including futures, forwards, swaps, and various options. While offering formal and intuitive explanations for financial derivative products, it also uses illustrations and practical examples to enhance understanding.
Publication date: 06/30/2022
Publisher: Springer
Page Count: 325
Edition: 2nd Edition 2022
Language: German
ISBN: 978-3-658-37948-3
Cover: Hardcover
Research papers
Stock Market Liquidity, Monetary Policy and the Business Cycle, Markus Leippold, Vincent Wolff, Swiss Finance Institute Research Paper No. 22-93, 2022
Næs, Skjeltorp, and Ødegaard (2011) provide empirical evidence that stock market liquidity contains leading information about future economic activity. Their result suggests a rebalancing of small, increasingly illiquid to large stocks in recession times, an expression of “flight-to-quality”. We show that the relationship no longer holds due to the Fed’s accommodative monetary policy to buoy stock markets in crisis starting in the 1990s. Moreover, we document that liquidity dry-ups in small stocks no longer coincide with recessions. The Fed’s interventions mute the systematic link between monetary conditions and aggregate stock market liquidity’s well-established business cycle component.
Authors: Markus Leippold, Vincent Wolff
Keywords: Financial Markets and the Macroeconomy, Liquidity, Monetary Policy
JEL Classification: G10, E52
Empirical Causal Asset Pricing with Trading Costs
Author: Vincent Wolff
Do stock prices of publicly listed companies respond to changes in trading costs? We document a significant and asymmetric effect of tick-size changes on prices by leveraging a novel policy framework that allows for a randomized control trial difference-in-differences analysis. The doubling of the tick size leads to a decrease in prices by 0.9% to 1.3%, whereas halving the tick size results in an increase of 3.3% to 3.5%. The price effect is more pronounced in smaller firms and tick-unconstrained stocks. We report substantial excess returns on the day before the tick-size change attributable to quote and price clustering and, with caution, to strategic price manipulation.
The Bar Scene – A Humorous Game Theoretical Approach to Time Inconsistency
Author: Vincent Wolff
I provide a theoretical analysis of the standard problem of time-consistent behavior in a dynamic game of complete information. I develop an example of a reputational equilibrium of two players in a principle-agent setup. The universal dilemma of weighing short-term benefits against long-term costs is humorously analyzed in ”The Bar Scene”. A barkeeper chooses the amount of alcohol in a cocktail, thereby facing the dilemma of one-time increased revenues versus long-term satisfied customers. I find (1) for the subgame perfect equilibrium, a positive deviation of alcohol in the cocktails from the baseline recipe, and (2) that from the non-cooperative equilibrium, there is a Pareto improvement in infinite repeated games.
The Job Interview – A Game Theoretical Invitation to Lie
Author: Vincent Wolff
I provide a game-theoretical analysis focused on gender discrimination in job interviews due to family planning. I model the dynamic game of incomplete information as a standard signaling game. Nature decides the childbearing preferences, which are unknown to the hiring firm. The setup allows for beliefs, signals, and lies. I check for the existence of pooling and separating equilibria. I consider three examples varying in costs and benefits of lying and find two equilibria. As it turns out, the equilibria are independent of the costs or benefits of lying. (i) One equilibrium is stable when all women disclose that they do not plan to have children, whether true or not, and (ii) women who do not want to have children disclose their true preferences, whereas women who want to have children withhold true preferences.
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