Impact of Covid-19 on corporate solvency and possible policy responses in the EU.

The massive contagion of new coronavirus (Covid-19) has disrupted many businesses across the European Union. This has resulted in an immense drag on the revenues and cash flows that may lead to a significant increase in corporate bankruptcies. In this paper, we investigate the impact of Covid-19 on the solvency profile of the firms in the EU member states. We introduce multiple stress scenarios on the non-financial listed firms and report a progressive increase in the probability of default, an increase of debt payback, and declining coverages. Our results indicate that the solvency profile of all firms deteriorates. The manufacturing, mining, and retail sector are most vulnerable to a decline in market capitalization and a reduction in sales revenues. The paper also examines the possible policy interventions to sustain solvency at a pre Covid-19 level. Our findings suggest that for a moderate deterioration in economic conditions, a tax deferral is sufficient. However, in the event of exacerbating business shocks, there should be hybrid support through debt and equity to avoid a meltdown. This study has important implications for policymakers, corporate managers, and creditors.

COVID19: A blessing in disguise for European stock markets?

This study aims to bridge the gap that has remained unfilled after the initial scrutiny and reporting of the damaging effects of Covid-19 on financial markets. The study analyzes 10 European stock markets and compares their pre and post covid return dynamics. Our findings are surprisingly pleasant, albeit counterintuitive to some. We observe a quick and unprecedented recovery in the European stock market, yielding significantly higher returns post covid, given a reasonably large holding period. We also observe an alteration and change in the status quo of countries while transmitting or receiving cross-market spillovers.

The impact of COVID-19 on the valuations of non-financial European firms.

This paper assesses the impact of the COVID-19 pandemic on non-financial firms' valuations in the European Union (EU) using a stress testing approach. Notably, the paper investigates the extent to which the COVID-19 may deteriorate non-financial firms' value in the ten EU countries to provide a robust anchor to policymakers in formulating strategic government interventions. We employ a sample of 5342 listed non-financial firms across the selected member states that have consistent analyst coverage from 2010 to 2019. First, we estimate the input sensitivities of free cash flow and residual income models using a random effect panel employed to in-sample data. Second, based on these sensitivities, we compute the model-driven ex-post valuations and compare their robustness with actual price and analyst forecasts for the same period. Finally, we introduce multiple stress scenarios that may emanate from COVID-19, i.e., a decline in expected sales and an increase/decrease in equity cost. Our findings show a significant loss in valuations across all sectors due to a possible reduction in sales and an increase in equity cost. In extreme cases, average firms in some industries may lose up to 60% of their intrinsic value in one year. The results remained consistent regardless of the cash flow or residual income-driven valuation.

Is green investment different from grey? Return and volatility spillovers between green and grey energy ETFs.

Investment in Green energy is becoming a popular alternative asset class for investors, primarily due to its environment-friendly attributes. However, there is a dire need for subjective evaluation of this emerging asset class based on the risk-return dynamics to which investors are exposed. To respond to this call, in this study, we conduct this evaluation utilizing a unique and rich data set consisting of daily prices of exchange-traded funds (ETFs) established on different asset classes. We use Vector autoregression and Baba-Engle-Kraft-Kroner parameterization of multivariate GARCH models and assess the relative strength of return and volatility spillovers from the Green and Grey energy markets. Our results reveal the return shocks originated in the Green energy market and transmitted to other markets are more pronounced. It is also observed that the potential to earn high returns and the weak correlation of Green energy ETFs with the traditional asset classes are the crucial factors helpful in inviting attention and investment of investors after 2015. Although our results further suggest that the role of Grey energy is diminishing, as shown by the Impulse response functions and the coefficients of multivariate ARCH and GARCH. Nonetheless, for some asset classes, e.g., Bonds, the volatility spillovers that originated in the Grey energy market are still prominent and robust.

Carbon neutrality, bank lending, and credit risk: Evidence from the Eurozone.

The development of a green financial intermediation channel is imperative to achieve zero-carbon economies. In this study, we assess the impact of carbon-neutral lending on the credit risk in the Eurozone. We employ quarterly data for a sample of 344 lending institutions of 19 member states spanning over ten years from 2011 to 2020. Using two specific credit risk measures, the findings show that the exposure to carbon-neutral lending is negatively related to the default risk. The results remain consistent for the various size sorts, depicting that regardless of the bank size, the impact of green financing on the credit risk is the same. We attribute the credit risk reduction to the lower volatility of the borrowers' earnings and cash flows emanating from their sustainable business model. As a consequence of lower credit risk, financial institutions can benefit from lower loan loss provisions and economic capital requirements. This incentive is vital to increase the carbon neutral credit and contribute towards pro-environmental goals.

The impact of human capital efficiency on Latin American mutual funds during Covid-19 outbreak.

The mutual funds' returns, inter alia, are dependent on fund managers' performance. This makes human capital efficiency very central for consistent risk-adjusted performance. The persistence in performance becomes more critical during periods of high turbulence, like the one we are experiencing amidst the outbreak of Covid-19. In this research, we attempt to evaluate the performance of equity funds in massively impacted Latin American countries. These equity funds, with 95% of their investment in the infected region, are ranked as per their human capital efficiency using 2019 as the base year. Our findings demonstrate that funds with higher human capital efficiency significantly outperform their counterparts that rank lower on human capital efficiency. These findings remained consistent for the sub-periods that we specify to map the evolution of Covid-19. We conclude that equity funds should enhance their human capital efficiency to endure resilience amid macroeconomic shocks.

Price reaction, volatility timing and funds' performance during Covid-19.

In this paper we assess the price reaction, performance and volatility timing of European investment funds during the outbreak of Covid-19. We analyze the time period between January and June 2020 and demonstrate that while most of the investment funds exhibit stressed performance, social entrepreneurship funds endured resilience. This performance remained robust during the various stages of evolution of this contagion. The social funds also demonstrated volatility timing that was absent for most of their counterparts. We attribute the overall stability of these funds to their niche investments in social enterprises that specialize in providing innovative solutions for social issues.

Trade and technological innovation: The catalysts for climate change and way forward for COP21.

Following the adaptation of the Paris Agreement at COP21, it was noted that the traditional measures of carbon emissions have several limitations; and a reliable and relevant carbon emissions measurement is important to formulate a response to the challenge of climate change. This study, therefore, explores the relationship between international trade and consumption-based carbon emissions, which is a trade adjusted indicator; and measures the outflow and the inflow of emissions through exports and imports separately. We also include technological innovation in the model to understand its impact on consumption-based carbon emissions. The results show that exports and consumption-based carbon emissions are negatively associated, and technological innovation helps reducing the adverse effect of CO2 growth. In contrast, Imports and gross domestic product are positively linked with consumption-based carbon emissions. The findings also suggest the countries which embraced the Paris Climate Agreement must focus on consumption-based carbon emissions rather than the production-based carbon emissions.