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Daniel Kapp
International & European Relations
- Division
EU Institutions & Fora
- Current Position
-
Deputy Head of Division
- Fields of interest
-
Macroeconomics and Monetary Economics,Financial Economics,International Economics
- 31 January 2024
- WORKING PAPER SERIES - No. 2899Details
- Abstract
- The European Union plays a prominent role in climate regulations initiatives, this commitment likely implies that climate risk premiums look different in Europe compared to the rest of the world. This paper examines the pricing implications of climate risks in euro area corporate bond markets, focusing on physical and transition risk. Using climate news as a gauge for systematic climate risk, we find a significant pricing effect of physical risk in long-term bonds, with investors demanding higher returns on bonds exposed to physical risk shocks. The estimated physical risk premium is 34 basis points, indicating increased awareness and hedging demand after the Paris Agreement. Transition risk premiums are smaller and less significant, reflecting the ongoing transition to a low-carbon economy. Our findings contribute to understanding climate risk pricing in the European bond markets, highlighting the importance of physical risk and the evolving nature of investor demand for climate-resilient assets.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 9 August 2023
- THE ECB BLOGDetails
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets
- 4 July 2022
- WORKING PAPER SERIES - No. 2677Transition versus physical climate risk pricing in European financial markets: a text-based approachDetails
- Abstract
- We examine the existence of physical and transition climate risk premia in euro areaequity markets. To do so, we develop two novel physical and transition risk indicators, basedon text analysis, which are then used to gauge the presence of climate risk premia. Resultssuggest that climate risk premia for both, transition and physical climate risk, have increasedsince the time of the Paris Agreement. In addition, we investigate which metrics may be usedby investors to proxy a firm’s exposure to either physical or transition risk. To this end, weconstruct portfolios according to the most common firm-specific climate metrics and estimatethe sensitivity of these portfolios to our risk indicators. We compare results from these firmlevelproxies to much simpler sectoral classifications to see if investors may simply pigeonholefirms into the industry they operate in. We find that firm level information appears to beused as a gauge for transition risk, in particular since 2015, whereas sectoral classificationsappear insufficient. However, sectoral classification may be employed to broadly gauge firms’exposures to physical risk.
- JEL Code
- C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
- 19 May 2022
- WORKING PAPER SERIES - No. 2664Details
- Abstract
- This paper documents a durable increase in the cross-sectoral dispersion of earnings expectations during the COVID-19 crisis. The rise in dispersion of earnings forecasts can be explained by the introduction of lockdown measures, which had a particularly adverse impact on the travel sector. Accordingly, in terms of earnings expectations, countries that are relatively independent of the travel sector were least affected by a tightening of lockdowns. At the same time, vaccinations have been a game changer: more stringent lockdown measures added far less to the cross-sectoral dispersion in earnings expectations once vaccines started to be rolled out in late 2020. Going forward, the dispersion in earnings expectations continues to stand at elevated levels.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G10 : Financial Economics→General Financial Markets→General
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 26 April 2022
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 3, 2022Details
- Abstract
- The price of emissions allowances traded on the EU Emissions Trading System (ETS) has risen from below €10 per metric tonne of carbon to above €90 since the beginning of 2018. This box outlines the main reasons behind this increase and examines whether speculative activity may have played a significant role. It concludes that, at present, tangible evidence for a marked increase in speculative activity related to potential changes in market structure appears scarce. Furthermore, a speculation index suggests that, while speculation appears to have increased slightly since early 2019, it remains relatively moderate and well below readings during earlier phases of the ETS.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
- 23 September 2021
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 6, 2021Details
- Abstract
- In its climate change action plan, the ECB committed to accelerating the development of new models and conducting theoretical and empirical analyses to monitor the implications of climate change and related policies for the economy. As a first step in its detailed roadmap of climate-related actions, the ECB envisages the inclusion of technical assumptions on carbon pricing in Eurosystem/ECB staff projections. Against this backdrop, this box summarises the genesis and basic features of the EU emissions trading system (ETS), the system setting the carbon price in the EU. The EU ETS, which began operating in 2005, is a “cap and trade” system where a cap is set by the EU on the total amount of greenhouse gases that can be emitted by the activities covered by the system. It has been implemented in “phases” designed to gradually reduce the cap while increasing the scope of the system. In July 2021 a revision of the EU ETS was proposed in the context of the “Fit for 55” package. Meanwhile, the price of emissions allowances traded on the EU ETS has increased from €8 per tonne of carbon dioxide equivalent at the beginning of 2018 to around €60 more recently. So far, the main impact of changes in emissions allowance prices has been on HICP energy inflation, and, overall, the risk that emissions allowance prices under the current EU ETS may translate into significantly higher headline inflation in the near term appears limited. However, against the backdrop of the ECB’s recently announced action plan, these and other climate change mitigation polices will be further explored with regard to their implications for macroeconomic modelling and monetary policy.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 271Details
- Abstract
- This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 5 August 2021
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2021Details
- Abstract
- More than a year after the onset of the COVID-19 crisis, euro area stock prices have risen close to all-time highs, mainly driven by a recovery in earnings expectations. However, COVID-19 and the associated lockdowns have left a larger and longer-lasting mark on some companies than on others. Indeed, earnings expectations have become more heterogeneous across sectors, in line with expectations of an uneven recovery. This stands in sharp contrast with the developments during the Global Financial Crisis, when cross-sectoral dispersion first dropped and then normalised.Empirical analysis suggests that cross-sectoral dispersion in 12-month earnings per share forecasts has increased with each tightening of lockdown measures. At the same time, the start of vaccination campaigns has been a game changer: since the vaccine rollout began in late 2020, more stringent lockdown measures have added far less to the dispersion in earnings expectations.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G10 : Financial Economics→General Financial Markets→General
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 12 April 2021
- WORKING PAPER SERIES - No. 2535Details
- Abstract
- This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy.
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
- 28 July 2020
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 5, 2020Details
- Abstract
- After a pronounced decline until mid-April 2020, near-term earnings growth expectations derived from surveys and derivatives pricing in euro area equity markets appear to have troughed as the economic recovery is expected to gradually take hold. At the same time, a number of indicators show that investors remain concerned about a more protracted weakness in the euro area economy. Moreover, and despite a significant improvement since the announcement of the pandemic emergency purchase programme (PEPP), market participants continue to price significant downside risks in equity markets in a highly uncertain environment. Nevertheless, equity prices continue to increase against the backdrop of a stabilisation in risk sentiment, global policy support, and the fact that tail risks of an imminent global financial crisis have faded to some extent. However, if current expectations of a recovery in earnings turn out to be overly optimistic, there will be substantial risks of significant renewed declines in equity prices.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 13 May 2020
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 3, 2020Details
- Abstract
- This article explains how negative rates are transmitted via banks and financial markets, both via standard transmission channels and via channels specific to negative interest rates. The latter can enhance the stimulus, but may also hinder it, in particular in the case of protracted periods of negative rates. Euro area bank profitability has been persistently low since the financial crisis, and this has the potential to impair bank lending. At the same time, profits have increased since 2014 and the impact of negative interest rates is assessed as broadly neutral so far, as the negative contribution to net interest income has been offset by the positive impact on borrower creditworthiness. Finally, the article reports empirical evidence – drawn from a range of studies – on how negative rates affect the broader economy, starting with bank portfolio allocation decisions, lending volumes and lending rates. The article then elaborates on the impact of the negative rate policy on key macroeconomic aggregates, notably economic activity and inflation.
- JEL Code
- E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 20 November 2019
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2019Details
- Abstract
- Global equity and corporate bond prices have increased steadily since the end of the euro area sovereign debt crisis. Equity prices relative to earnings expectations are at the upper end of their historical distribution and corporate bond yields in the euro area are on aggregate at a historical low. During this time, euro area equity and corporate bond prices have been supported by the large decline in benchmark interest rates, which – in turn – reflects a decline in nominal economic growth rates, as well as accommodative monetary policies, including measures that brought down the short and the long end of the yield curve
- 29 May 2019
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 1, 2019Details
- Abstract
- The Eurosystem’s asset purchase programme (APP) has contributed to a portfolio rebalancing of securities holdings within the euro area. The ECB’s asset purchases, with their largest component initiated in March 2015, have compressed the yields of securities across a wide range of asset classes. In line with the portfolio rebalancing transmission channel of monetary policy, many investors responded to these lower yields by shifting their holdings towards riskier securities with higher expected returns. Non-banks, in particular, have moved increasingly into less-liquid and lower-rated bonds as well as longer-term securities in a search for yield. To the extent that a slowdown in growth or other market or policy developments lead to an increase in term or risk premia, investors may rebalance back towards safer assets.
- 28 June 2018
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 4, 2018Details
- Abstract
- Equity capital is among the main sources of funding for euro area non-financial corporations (NFCs), making it an important factor in the transmission of monetary policy. From a central bank perspective, improving the measurement and understanding of the cost of equity is therefore essential. Unlike the cost of debt, which has declined substantially in recent years, the cost of equity has remained relatively stable at elevated levels. Results from the analysis performed in this article suggest that a persistently high “equity risk premium” (ERP) has been the key factor underpinning the high cost of equity for euro area NFCs. In fact, since the start of the global financial crisis, increases in the ERP have largely offset the fall in the yield of risk-free assets. This article argues that the widely used workhorse model to derive the cost of equity and the ERP, namely the three-stage dividend discount model, can be improved upon. In particular, incorporating short-term earnings expectations, discounting payouts to investors with a discount factor with appropriate maturity, and considering share buy-backs all yield beneficial refinements. This in turn would strengthen the theory and basis of the model and improve the robustness of its estimates. Most notably, share buy-back activity seems to matter, specifically for the level of the ERP. Notwithstanding such improvements in the modelling approach, estimating the ERP, particularly its level, remains subject to considerable uncertainty. Ultimately, such uncertainty advocates the use of a variety of models and survey estimates, as well as a focus on the dynamics, rather than on the level, of the ERP. From an applied perspective, the article demonstrates that cost of equity modelling can be used to disentangle the different drivers of changes in equity prices. This is helpful from a monetary policy perspective, as changes in equity prices can contain important information about the economic outlook and warrant monitoring for financial stability purposes. Moreover, the article shows that adding an international perspective to the analysis of the ERP for the overall market may provide valuable insights for policymakers. For instance, the greater reliance on share buy-backs among companies in the United States than those in the euro area appears to be behind some of the recent steeper decline in the ERP in the United States when compared with the ERP in the euro area.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy
- 19 March 2018
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 2, 2018Details
- Abstract
- The liquidity of euro area sovereign bond markets is important for the transmission of the ECB’s monetary policy. In particular, a high degree of liquidity fosters the link between the ECB’s monetary policy decisions, the yield curve, financial asset prices in general, and the overall cost and flow of finance in the economy. The liquidity of sovereign bond markets needs to be monitored more closely since the implementation of the ECB’s public sector purchase programme (PSPP), under which a significant share of outstanding euro area sovereign bonds has been bought. Against this background, this box presents some of the market liquidity indicators that the ECB monitors regularly. Overall, the indicators suggest that liquidity conditions in sovereign bond markets have not deteriorated since the start of the PSPP (on 9 March 2015).
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
- 5 May 2017
- WORKING PAPER SERIES - No. 2054Details
- Abstract
- Stress tests have been increasingly used in recent years by regulators to foster confidence in the banking sector by not only increasing its resilience via mandatory capital increases but also by enhancing transparency to allow investors to better discriminate between banks. In this study, using an event study approach, we explore how market participants reacted to the 2014 Comprehensive Assessment and the 2016 EBA EU-wide stress test. The results show that stress test disclosures revealed new information that was priced by the markets. We also provide evidence that the publication of stress test results enhanced price discrimination as the impact on bank CDS spreads and equity prices tended to be stronger for the weaker performing banks in the stress test. Finally, we provide some evidence that also sovereign funding costs were affected in the aftermath of the stress test publications. The results provide insights into the effects and usefulness of stress test-related disclosures.
- JEL Code
- G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
- 28 July 2014
- OCCASIONAL PAPER SERIES - No. 154Details
- Abstract
- This study examines the European Commission
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
- 2023
- Dutch Central Bank
- 2014
- Economic Modelling
- 2014
- The European Journal of Finance.
- 2014
- Cuadernos de Economia
- 2014
- Institute for New Economic Thinking
- 2012
- Institute of Strategic ThinkingQuantifying Real Output Costs of Financial Crises with the Help of Standard Insurance Tools
- 2011
- CES.