Shaking the Capital Markets Tree: Euro Area Capital Market Sensitivity to Stakeholder Activities During the Negative Interest Rate Regime

42 Pages Posted: 1 Apr 2019

See all articles by Juergen Klaus

Juergen Klaus

Technische Universität Dresden Faculty of Business and Economics

Eriks Selga

The University of Hong Kong, Faculty of Law, Students

Tony Klein

Queen's University Belfast - Queen's Management School

Multiple version iconThere are 2 versions of this paper

Date Written: March 29, 2019

Abstract

This contribution analyses the impact of stakeholder interactions with the market as a consequence of the negative interest rate regime on the pricing of selected Floating-rate notes (FRNs), to understand the range of reactivity of financial markets and issuers to uncertainty caused by an untested boilerplate term in bond contracts. The subject clause stipulates ‘not applicable’ as the minimum rate of interest, which raises confusion regarding payment obligations between issuers and investor. Subsequently, we hypothesize that markets would be noticeably more sensitive to stakeholder activities, adapting to reduce risks. Using event studies, we find that markets do, to varying degrees, price stakeholder activities like court decisions, industry association statements, and public positions of sovereigns. In turn, issuers are willing to react to legal risks quickly, if costs of inertia are low. This is reflected also in the significant changes in the FRN issuance structure in the past few years.

Keywords: Sovereign Bond Markets, Floating Rate Notes, Negative Interest Rates, Legal Uncertainties

JEL Classification: K00

Suggested Citation

Klaus, Juergen and Selga, Eriks and Klein, Tony, Shaking the Capital Markets Tree: Euro Area Capital Market Sensitivity to Stakeholder Activities During the Negative Interest Rate Regime (March 29, 2019). European Banking Institute Working Paper Series 2019 – no. 39. Available at SSRN: https://ssrn.com/abstract=3362557 or http://dx.doi.org/10.2139/ssrn.3362557

Juergen Klaus (Contact Author)

Technische Universität Dresden Faculty of Business and Economics ( email )

Helmholtzstr. 10
Hülsse-Bau
Dresden, 01062
Germany

Eriks Selga

The University of Hong Kong, Faculty of Law, Students ( email )

Pokfulam Road
Hong Kong
Hong Kong

Tony Klein

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

HOME PAGE: http://www.tony-klein.info

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