Iman van Lelyveld

Published Papers

Crowded trades, market clustering, and price instability

Joint with Marc van Kralingen, Diego Garlaschelli and Karolina Scholtus in 2021 in Entropy, 23(3), p. 1-29

Does similar trading behaviour affect price discovery in the market? We find that crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock, the clustering measure captures the degree of trading overlap among any two investors in that stock, based on a comparison with the expected crowding in a null model where trades are maximally random while still respecting the empirical heterogeneity of both stocks and investors. We investigate the effect of crowded trades on stock price stability and present evidence that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability. (Link)
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@article{VanKralingen2021,
abstract = {Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock, the clustering measure captures the degree of trading overlap among any two investors in that stock, based on a comparison with the expected crowding in a null model where trades are maximally random while still respecting the empirical heterogeneity of both stocks and investors. We investigate the effect of crowded trades on stock price stability and present evidence that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability.},
author = {van Kralingen, Marc and Garlaschelli, Diego and Scholtus, Karolina and van Lelyveld, Iman},
doi = {10.3390/e23030336},
issn = {1099-4300},
journal = {Entropy},
keywords = {crowded trading,entropy,financial stability,risk,tail},
number = {3},
pages = {336},
title = {{Crowded Trades, Market Clustering, and Price Instability}},
url = {https://www.mdpi.com/1099-4300/23/3/336},
volume = {23},
year = {2021}
}


Bibtex

Pension fund equity performance: Patience, activity or both? 

Joint with Tanja Artiga González and Katarina Lučivjanská in 2020 in  Journal of Banking and Finance, 115, p. 1-16

Pension funds tend to herd, incentivized by the fear of solitary failure or regulatory straightjackets. The question we tackle here is whether it pays for pension funds to go it alone and stay the course. We study how pension fund (out)performance is influenced by a) a pension fund’s activity, i.e., how much the pension fund deviates in its stock allocation from typical pension fund behavior, and b) whether the pension fund is patient in exploiting investment opportunities (measured by stock holding duration). We do not find that high activity or higher holding duration, separately, lead to higher risk adjusted returns on average. However, if high activity is paired with long-term holdings, the pension fund’s performance increases. Quantitatively, if an active pension fund increases its duration by one standard deviation, annual returns tend to increase by 2.3%. Our findings indicate that some pension funds are patient enough to exploit long-term investment opportunities. (Link)
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A dynamic network model of the unsecured interbank lending market

Joint with Francisco Blasques and Falk Bräuning in 2018 in Journal of Economic Dynamics & Control, 90, 310-342

Does the network structure affect the setting of monetary policy -- especially in the face of asymmetric information? Conversely, does the monetary policy framework affect private contracting? To answer this question, we introduce a dynamic network model of interbank lending and estimate the parameters by indirect inference using network statistics of the Dutch interbank market from February 2008 to April 2011. We find that credit-risk uncertainty and peer monitoring are significant factors in explaining the sparse core-periphery structure of the market and the presence of relationship lending. Shocks to credit-risk uncertainty lead to extended periods of low market activity, intensified by reduced peer monitoring. Moreover, changes in the central bank’s interest rate corridor have both a direct effect on the market as well as an indirect effect by changing banks’ monitoring efforts. (Link)
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The missing links: A global study on uncovering financial network structures from partial data

Joint with Kartik Anand and many great co-authors in 2018 in Journal of Financial Stability, 35, 107-119

Network structure is important. But what if we don't have the information about bilateral linkages? What is the best approach? Such information is important if we want to capture financial network linkages and contagion in stress test models for banking supervisors and central banks responsible for micro- and macroprudential policy. However, granular data on financial networks is often lacking, and instead the networks must be reconstructed from partial data. In this paper, we conduct a horse race of network reconstruction methods using network data obtained from 25 different markets spanning 13 jurisdictions. Our contribution is two-fold: first, we collate and analyze data on a wide range of financial networks. And second, we rank the methods in terms of their ability to reconstruct the structures of links and exposures in networks. (Link)
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Enhanced capital-asset pricing model for bipartite financial networks reconstruction

Joint with Tiziano Squartini, Assaf Almog, Guido Caldarelli, Diego Garlaschelli and Giulio Cimini in 2017 in Physical Review E, 96(3), 32315–32327

Reconstructing patterns of interconnections from partial information is one of the most important issues in the statistical physics of complex networks. What can we learn if we apply these concepts to financial networks? As we know all to well, the spreading and amplification of financial distress in capital markets is strongly affected by the interconnections among financial institutions. Yet, while the aggregate balance sheets of institutions are publicly disclosed, information on single positions is mostly confidential and, as such, unavailable. Standard approaches to reconstruct the network of financial interconnection produce unrealistically dense topologies, leading to a biased estimation of systemic risk. Moreover, reconstruction techniques are generally designed for monopartite networks of bilateral exposures between financial institutions, thus failing in reproducing bipartite networks of security holdings (\eg, investment portfolios). Here we propose a reconstruction method based on constrained entropy maximization, tailored for bipartite financial networks. Such a procedure enhances the traditional {\em capital-asset pricing model} (CAPM) and allows to reproduce the correct topology of the network. We test this ECAPM method on a dataset, collected by the European Central Bank, of detailed security holdings of European institutional sectors over a period of six years (2009-2015). Our approach outperforms the traditional CAPM and the recently proposed MECAPM both in reproducing the network topology and in estimating systemic risk due to fire-sales spillovers. In general, ECAPM can be applied to the whole class of weighted bipartite networks described by the fitness model. (Link)
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Dynamic visualization of large financial networks

Joint with Ronald Heijmans, Richard Heuver and Clement Levallois in 2016 in Journal of Network Theory in Finance, 2(2), 57–79

Networks are fascinating to look at, even more so if we can show how they develop over time. In this paper we show how large data sets can be visualized in a dynamic way to support data exploration, highlight econometric results or provide early warning information. We use payments and unsecured money market transaction data from the Dutch part of the Eurosystem's large value payment system, TARGET2, to showcase how video animations facilitate analysis at three different levels. First, animation shows how the market macrostructure develops. Second, it enables us to follow individual banks that are of interest. Finally, it facilitates a comparison of the same market at different times, and of different markets (such as countries) at the same time. (Link)
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Banks’ liquidity buffers and the role of liquidity regulation

Joint with Clemens Bonner and Robert Zymek in 2015 in Journal of Financial Services Research, 48(3),  215-234

Does liquidity regulation neutralizes banks’ incentives to hold liquid assets? To answer this questin, we assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks from 25 OECD countries. We highlight the role of several bank-specific, institutional and policy variables in shaping banks’ liquidity risk management. Without liquidity regulation, the determinants of banks’ liquidity buffers are a combination of bank-specific and country-specific variables. While most incentives are neutralized by liquidity regulation, a bank’s disclosure requirements remain important. The complementarity of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation. (Link)
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Geographic diversification in Banking

Joint with Yiwei Fang in 2014 in Journal of Financial Stability, 15, 172-181

Can international banks diversify away local risks? And, if so, should prudential regulation reflect this? In the aftermath of the 2007–2009 crisis, banks claiming positive diversification benefits are being met with skepticism. Nevertheless, diversification might be important and sizable for some large internationally active banking groups. We use a universally applicable correlation matrix approach to calculate international diversification effects, in which bank subsidiaries are treated as individual assets of the banking group portfolio. We apply the framework to 49 of the world's largest banking groups with significant foreign business units over the 1992–2009 period. Focusing on the most important risk in banking, credit risk, we find that allowing for geographical diversification could reduce banks’ credit risk by 1.1% on average, with risk reduction ranging from negligible up to 8%. (Link)
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Finding the core: Network structure in interbank markets

Joint with Daan in ‘t Veld in 2014 in Journal of Banking and Finance, 49, 27-40

Networks connections are not random. But what structure do we see in the Dutch interbank market? To answer this question, we investigates the network structure of interbank markets in this paper. Using a dataset of interbank exposures in the Netherlands, we corroborate the recent hypothesis that the core periphery model is a ‘stylised fact’ of interbank markets. We find a core of highly connected banks intermediating between periphery banks and pay particular attention to model selection. Our analysis can help improve systemic risk assessments, especially as more granular data is becoming available. (Link)
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Multinational banks and the global financial crisis: Weathering the perfect storm?

Joint with Ralph de Haas in 2014 in Journal of Money, Credit and Banking, 46(s1), 333–364

The benefits of international bank have a flip side … We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark of 202 domestic banks. Contrary to earlier and more contained crises, parent banks were not a significant source of strength to their subsidiaries during 2008–09. When controlling for other bank characteristics, multinational bank subsidiaries had to slow down credit growth almost three times as fast as domestic banks. This was in particular the case for subsidiaries of banking groups that relied more on wholesale funding. (Link)
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Early-Warning Signals of Topological Collapse in Interbank Networks

Joint with Tiziano Squartini and Diego Garlaschelli in 2013 in Scientific Reports, 3 (3357)

Getting an early warning signal from changes in the deeper network structures not immediately apparent from market aggregates could give us some time to react to imminent market collapse. At least, we can predict the last crisis … The financial crisis clearly illustrated the importance of characterizing the level of ‘systemic’ risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998–2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear – but unpredictable – signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops could have led to the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies. (Link)
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Home Bias and Dutch Pension Funds’ Behaviour

Joint with Ghulame Rubbaniy and Willem F.C Verschoor in 2013 in European Journal of Finance, 1-13

Theory tells us that investors should consider all investments, not just domestic ones. Do Dutch pension funds follow this insight? Using a panel data set of more than 600 Dutch pension funds (PFs) between 1992 and 2006, we investigate asset allocation behavior of Dutch PFs across multiple asset classes. We find that domestic investments, also known as home bias, in portfolio choices of Dutch institutional investors have fallen. We also find that the introduction of the euro, the dot-com crisis (1999–2001) and individual PF's characteristics are significant determinants of home bias. Overall, mature PFs’ portfolios are diversified internationally, whereas large PFs seem to prefer to only scale up their foreign, less-risky positions at the expense of domestic fixed-income positions. The effect of the dot-com crisis is more pronounced for domestic bonds, whereas the introduction of the euro was more important for domestic equities. (Link)
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Network Dynamics of TOP payments

Joint with Marc Pröpper and Ronald Heijmans in 2013 in Journal of Financial Market Infrastructures, 2(3), 3–30

Networks are changing all the time. Can we find ways to incorporate more dynamic measures of what constitutes a network? We present an application of network theory to the Dutch payment system with specific attention to systemic stability. The network nodes comprise banks active in the Netherlands where links between the nodes are established by payments. Traditional measures such as transactions and values show that payments are at first relatively well-behaved through time. Analysis of the properties of prominent network measures over time shows that network characteristics become clear in the early phase of network formation (lasting about one hour) and develop more slowly afterward. The payment network is small in terms of actual nodes and links, compact in terms of path length and eccentricity, and sparse in terms of connectivity for all time periods. In the long run a mere 12% of the possible number of interbank connections is ever used and banks are on average only two steps apart. Relations in the network tend to be reciprocal. Our results also indicate that the network is susceptible to directed attacks. In a final section we show the effect of the start of the financial crisis on the network structure including the effects of the migration to TARGET2. (Link)
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An empirical assessment of reinsurance risk

Joint with Franka Liedorp and Manuel Kampman in 2011 in Journal of Financial Stability, 7(4), 191-203

Insurers reinsure their risks thus creating a network of exposures. Does this reduce or increase financial stability risks? We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, a firm's loss could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we gain insight into the reinsurance market structure and perform a scenario analysis to measure contagion risks. Considering entities on a standalone basis, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. At group level our analysis points to the contagion risk of in-house reinsurance structures, given that such in-house reinsurance parties are generally not higher capitalised than other group members. (Link)
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Internal Capital Markets and Lending by Multinational Bank Subsidiaries

Joint with Ralph de Haas in 2010 in Journal of Financial Intermediation, 19(1), 1-2

Our original internal capital markets paper. Here we look at the benefits of diversifying away local shocks. We use new panel data on the intra-group ownership structure and the balance sheets of 45 of the largest multinational bank holdings to analyze what determines the credit growth of their subsidiaries. We find evidence for the existence of internal capital markets through which multinational banks manage the credit growth of their subsidiaries. Multinational bank subsidiaries with financially strong parent banks are able to expand their lending faster. As a result of parental support, foreign bank subsidiaries also do not need to rein in their credit supply during a financial crisis, while domestic banks need to do so. (Link)
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Do financial conglomerates create or destroy value? Evidence for the EU

Joint with Klaas Knot in 2009 in Journal of Banking and Finance, 33 (12), 2312-2321

Theoretically, combining very different activities in a single conglomerate should make the total less risky. Does it ….? There is an ongoing debate about whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued lower. Various factors are important in determining the size of the discount, for example cross-subsidization and agency problems. The existing literature, however, generally focuses on non-financial firms or on banks combining investment and commercial banking. Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. The discount is explained by the size (increasing), the familiarity with the conglomerate business model (decreasing) and the risk profile (decreasing). Our results are robust to the historical origin, the merger record and the age of the conglomerate, as well as peer group specification and outlier elimination. (Link)
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Interbank Contagion in the Dutch Banking Sector

Joint with Franka Liedorp in 2006 in International Journal of Central Banking, 2, 99-132

My first venture into networks where we investigated interlinkages and contagion risks in the Dutch interbank market. Based on several data sources, including survey data, we estimate the exposures in the interbank market at bank level. Next, we perform a scenario analysis to measure contagion risks. We find that the bankruptcy of one of the large banks will put a considerable burden on the other banks but will not lead to a complete collapse of the interbank market. The exposures to foreign counterparties are large and warrant further research. An important contribution of this paper is that we show, using survey data, that the entropy estimation using large exposures data as applied in many previous papers gives an adequate approximation of the actual linkages between banks. Hence, this methodology does not seem to introduce a bias. (Link)
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Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis

Joint with Ralph de Haas in 2006 in Journal of Banking and Finance, 30(7), 1927-1952

We examine whether foreign and domestic banks in Central and Eastern Europe react differently to business cycles and banking crises. Our panel dataset comprises data of more than 250 banks for the period 1993–2000, with information on bank ownership and mode of entry. During crisis periods domestic banks contracted their credit base, whereas greenfield foreign banks did not. Also, home country conditions matter for foreign bank growth, as there is a significant negative relationship between home country economic growth and host country credit by greenfields. Finally, greenfield foreign banks’ credit growth is influenced by the health of the parent bank. (Link)
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Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe

Joint with Ralph de Haas in 2004 in Journal of Emerging Market Finance, 3(2), 125-152

The first venture into the activities of internationally active banks. Here we analyse foreign bank penetration in Central and Eastern Europe (CEE) and its influence on private sector credit. By combining BIS data and BankScope data into a unique database we make a clear distinction between cross-border credit and credit by foreign bank subsidiaries. We show that the relative importance of foreign bank subsidiaries has increased considerably during recent years. We do not find evidence of foreign banks deserting CEE during financial crises or economic downturns. Although cross-border credit did decrease during some periods, foreign banks expanded the credit supply of their subsidiaries simultaneously. (Link)
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Inflation and Unemployment? Who cares?

Just me in 1999 in European Journal of Political Economy, 15(3), 463-484.

My first publication! Do the public's first-hand experience of inflation matter for their preferences? And, if so, what does this imply for monetary policy? In the last two decades a large number of game-theoretic models describing monetary policy have been used to examine the characteristics of policies over a wide range of 'rules of the game'. Regardless of the specification of the model, the degree of inflation aversion - relative to unemployment - plays an important role. In this paper I estimate inflation aversion at the individual level from survey data, and test the theoretical assumptions used for various models. The results show that income has a small role in explaining aversion to inflation and that redistributional motivation and political inclination have more significant effects. (Link)
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