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Peter Hoffmann

Research

Division

Financial Research

Current Position

Senior Economist

Fields of interest

Financial Economics

Email

peter.hoffmann@ecb.europa.eu

Education
2005-2011

PhD in Finance, Universitat Pompeu Fabra, Barcelona, Spain

Professional experience
2011-

Economist - Financial Research Division, Directorate General Research, European Central Bank

2015-2016

Economist - European Systemic Risk Board, Frankfurt, Germany

Awards
2017

BEDOFIH-EUROFIDAI Data Award

2011

Josseph de la Vega Prize, Federation of European Securities Exchanges (FESE)

Teaching experience
2018-

Visiting Fellow and Instructor, HEC Paris

2006-2010

Teaching Assistant, Universitat Pompeu Fabra

4 March 2013
WORKING PAPER SERIES - No. 1519
Details
Abstract
We study the role of informed trading in a fragmented financial market under the absence of inter-market price priority. Due to frictions in traders’ market access, liquidity providers on alternative trading platforms may be exposed to an increased adverse selection risk. As a consequence, the main market dominates (offers better quotes) frequently albeit charging higher transaction fees. The empirical analysis of a dataset of trading in French and German stocks suggests that trades on Chi-X, a lowcost trading platform, carry significantly more private information than those executed in the Primary Markets. Consistent with our theory, we find a negative relationship between the competitiveness of Chi-X’s quotes and this excess adverse selection risk faced by liquidity providers in the cross-section. Our results have some implications for the design of best-execution policies.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies
13 March 2013
WORKING PAPER SERIES - No. 1526
Details
Abstract
We study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting with slow market participants. On the one hand, the existence of fast traders can help to reduce the inefficiency that is rooted in the risk of being "picked off" after unfavourable price movements and therefore allows more gains from trade to be realized. On the other hand, slow traders face a relative loss in bargaining power which leads them to strategically submit limit orders with a lower execution probability, thereby reducing trade. Due to this negative externality, the equilibrium level of investment is always welfare-reducing. The model generates additional testable implications regarding the effects of high-frequency trading on order flow statistics.
JEL Code
G19 : Financial Economics→General Financial Markets→Other
C72 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Noncooperative Games
D62 : Microeconomics→Welfare Economics→Externalities
19 December 2014
WORKING PAPER SERIES - No. 1755
Details
Abstract
This paper examines the degree of fragmentation in the Euro overnight unsecured money market during the period June 2008
JEL Code
G1 : Financial Economics→General Financial Markets
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
Network
Macroprudential Research Network
22 September 2016
OCCASIONAL PAPER SERIES - No. 11
Details
Abstract
Policy is only as good as the information at the disposal of policymakers. Few moments illustrate this better than the uncertainty before and after the default of Lehman Brothers and the subsequent decision to stand behind AIG. Authorities were forced to make critical policy decisions, despite being uncertain about counterparties’ exposures and the protection sold against their default. Opacity has been a defining characteristic of over-the-counter derivatives markets – to the extent that they have been labelled “dark markets” (Duffie, 2012). Motivated by the concern that opacity exercerbates crises, the G20 leaders made a decisive push in 2009 for greater transparency in derivatives markets. In Europe, this initiative was formalised in 2012 in the European Markets Infrastructure Regulation (EMIR), which requires EU entities engaging in derivatives transactions to report them to trade repositories authorised by the European Securities Markets Authority (ESMA). Derivatives markets are thus in the process of becoming one of the most transparent markets for regulators. This paper represents a first analysis of the EU-wide data collected under EMIR. We start by describing the structure of the dataset, drawing comparisons with existing survey-based evidence on derivatives markets. The rest of the paper is divided into three sections, focusing on the three largest derivatives markets (interest rates, foreign exchange and credit).
JEL Code
G15 : Financial Economics→General Financial Markets→International Financial Markets
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
28 February 2017
WORKING PAPER SERIES - No. 2030
Details
Abstract
We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term investors. Finally, our findings show that moderate aggregate effects on market quality can mask large adjustments made by individual agents.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
H32 : Public Economics→Fiscal Policies and Behavior of Economic Agents→Firm
21 June 2017
WORKING PAPER SERIES - No. 2080
Details
Abstract
Monetary policy communication is particularly important during unconventional times because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank’s toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state‐contingent or when it provides guidance about a long horizon than when it is open‐ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme.
JEL Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
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
Network
Discussion papers
15 December 2017
WORKING PAPER SERIES - No. 61
Details
Abstract
New regulatory data reveal extensive discriminatory pricing in the foreign exchange derivatives market, in which dealer-banks and their non-financial clients trade over-the-counter. After controlling for contract characteristics, dealer fixed effects, and market conditions, we find that the client at the 75th percentile of the spread distribution pays an average of 30 pips over the market mid-price, compared to competitive spreads of less than 2.5 pips paid by the bottom 25% of clients. Higher spreads are paid by less sophisticated clients. However, trades on multi-dealer request-for-quote platforms exhibit competitive spreads regardless of client sophistication, thereby eliminating discriminatory pricing.
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
D4 : Microeconomics→Market Structure and Pricing
24 May 2018
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2018
Details
Abstract
This special feature analyses the distribution of interest rate risk in the euro area economy using balance sheet data and information on derivatives positions from significant credit institutions. On aggregate, banks’ interest rate risk exposure is small relative to their loss absorption capacity, but exposure varies across institutions. This variation is driven by loan rate fixation practices at country level. Banks use derivatives for hedging, but retain residual interest rate risk exposures. In fixed-rate countries the main vulnerability to rising interest rates lies with the banks that have the greatest interest rate risk, while households would be directly affected in countries with predominantly variable-rate loans. In the latter case, increased loan servicing costs due to rising interest rates could affect banks through lower asset quality.
JEL Code
G00 : Financial Economics→General→General
24 September 2018
WORKING PAPER SERIES - No. 2176
Details
Abstract
We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
22 February 2019
RESEARCH BULLETIN - No. 55
Details
Abstract
Challenging conventional wisdom, recent research shows that, collectively, euro area banks have limited exposure to interest rate risk, but that their individual exposures vary significantly from institution to institution. Differences in interest-rate setting conventions for loan contracts, especially mortgages, across euro area countries have been shown to be an important driver of this heterogeneity. This heterogeneity remains pronounced even after taking into account hedging activity in derivatives markets, suggesting that monetary policy may be transmitted through different channels in different parts of the euro area.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
Network
Research Task Force (RTF)
15 April 2019
WORKING PAPER SERIES - No. 2263
Details
Abstract
Central banks have used different types of forward guidance, where the forward guidance horizon is related to a state contingency, a calendar date or left open-ended. This paper reports cross-country evidence on the impact of these different types of forward guidance on the sensitivity of bond yields to macroeconomic news, and on forecaster disagreement about the future path of interest rates. We show that forward guidance mutes the response to macroeconomic news in general, but that calendar-based forward guidance with a short horizon counterintuitively raises it. Using a model where agents learn from market signals, we show that the release of more precise public information about future rates lowers the informativeness of market signals and, as a consequence, may increase uncertainty and amplify the reaction of expectations to macroeconomic news. However, when the increase in precision of public information is sufficiently large, uncertainty is unambiguously reduced.
JEL Code
D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
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
30 July 2019
RESEARCH BULLETIN - No. 61
Details
Abstract
Forward guidance, i.e. communication by a central bank about the likely future path of interest rates, usually reduces uncertainty. But it matters how this is done in practice, because forward guidance with a short time horizon can raise uncertainty. This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative.
JEL Code
D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
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
30 September 2019
WORKING PAPER SERIES - No. 2319
Details
Abstract
This paper develops composite indicators of financial integration within the euro area for both price-based and quantity-based indicators covering money, bond, equity and banking markets. Prior to aggregation, individual integration indicators are harmonised by applying the probability integral transform. We find that financial integration in Europe increased steadily between 1995 and 2007. The subprime mortgage crisis marked a turning point, bringing about a marked drop in both composite indicators. This fragmentation trend reversed when the European banking union and the ECB's Outright Monetary Transactions Programme were announced in 2012, with financial integration recovering more strongly when measured by price-based indicators. In a growth regression framework, we find that higher financial integration tends to be associated with an increase in per capita real GDP growth in euro area countries. This correlation is found to be stronger the higher a country's growth opportunities.
JEL Code
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
G01 : Financial Economics→General→Financial Crises
G15 : Financial Economics→General Financial Markets→International Financial Markets
3 July 2020
WORKING PAPER SERIES - No. 2438
Details
Abstract
We study the effects of technological change on financial intermediation, distinguishing between innovations in information (data collection and processing) and communication (relationships and distribution). Both follow historic trends towards an increased use of hard information and less in-person interaction, which are accelerating rapidly. We point to more recent innovations, such as the combination of data abundance and artificial intelligence, and the rise of digital platforms. We argue that in particular the rise of new communication channels can lead to the vertical and horizontal disintegration of the traditional bank business model. Specialized providers of financial services can chip away activities that do not rely on access to balance sheets, while platforms can interject themselves between banks and customers. We discuss limitations to these challenges, and the resulting policy implications.
JEL Code
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes
Network
Discussion papers
26 February 2021
WORKING PAPER SERIES - No. 2529
Details
Abstract
We propose a new model of trading in OTC markets. Dealers accumulate inventories by trading with end-investors and trade among each other to reduce their inventory holding costs. Core dealers use a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers’ aggregate inventory position differs from zero. Price dispersion increases in the size of this position. The model generates new predictions about the effects of dealers' connectedness and dealers' aggregate inventories on prices.
JEL Code
G10 : Financial Economics→General Financial Markets→General
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G19 : Financial Economics→General Financial Markets→Other
2021
Journal of Finance, forthcoming
Inventory Management, Dealers' Connections, and Prices in OTC Markets
  • Colliard, J.-E., Foucault, T., Hoffmann, P.
2021
Management Science, forthcoming
Discriminatory pricing of over-the-counter derivatives
  • Hau, H., Hoffmann, P., Langfield, S., Timmer, Y.
2021
Journal of Financial Stability
Fintech: What's old, what's new?
  • Boot, A., Hoffmann, P., Laeven, L., Ratnovski, L.
2020
Economics Letters
Determinants of excess reserve holdings
  • Hoffmann, P., Sigaux, J.-D.
2020
Review of Financial Studies
Mutual Funding
  • Gil-Bazo, J., Hoffmann, P., Mayordomo, S.
2020
Economics Letters
Financial integration in Europe through the lens of composite indicators
  • Hoffmann, P., Kremer, M., Zaharia, S.
2019
Journal of Monetary Economics
Can more public information raise uncertainty? The international evidence on forward guidance
  • Ehrmann, M., Gaballo, G., Hoffmann, P., Strasser, G.
2019
Review of Financial Studies
Who bears interest rate risk?
  • Hoffmann, P., Pierobon, F., Langfield, S., and Vuillemey, G.
2017
Journal of Finance
Financial Transaction Taxes, Market Composition, and Liquidity
  • Colliard, J.-E., and Hoffmann, P.
2016
Journal of Banking and Finance
Adverse selection, market access and inter-market competition
  • Hoffmann, P.
2014
Economics Letters
Fragmentation in the Euro Overnight Unsecured Money Market
  • Garcia de Andoain, C., Hoffmann, P., and Manganelli, S.
2014
Journal of Financial Economics
A dynamic limit order market with fast and slow traders
  • Hoffmann, P.
2018
S. Eijffinger and D. Masciandaro (eds.), Hawks and Doves: Deeds and Words. Economics and Politics of Monetary Policymaking
More, and More Forward-Looking: Central Bank Communication After the Crisis
  • G. Coenen, M. Ehrmann, G. Gaballo, P. Hoffmann, A. Nakov, S. Nardelli, E. Persson and G. Strasser