Articles scientifiques

A Dynamic Model of the Limit Order Book

I. ROSU

Review of Financial Studies

novembre 2009, vol. 22, n°11, pp.4601-4641

Départements : Finance, GREGHEC (CNRS)


pas sous affiliation hecThis paper presents a model of an order-driven market where fully strategic, symmetrically informed liquidity traders dynamically choose between limit and market orders, trading off execution price and waiting costs. In equilibrium, the bid and ask prices depend only on the numbers of buy and sell orders in the book. The model has a number of empirical predictions: (i) higher trading activity and higher trading competition cause smaller spreads and lower price impact; (ii) market orders lead to a temporary price impact larger than the permanent price impact, therefore to price overshooting; (iii) buy and sell orders can cluster away from the bid-ask spread, generating a hump-shaped order book; (iv) bid and ask prices display a comovement effect: after, e.g., a sell market order moves the bid price down, the ask price also falls, by a smaller amount, so the bid-ask spread widens; (v) when the order book is full, traders may submit quick, or fleeting, limit orders.

A General Stochastic Volatility Model for the Pricing of Interest Rate Derivatives

A. TROLLE, S. E. SCHWARTZ

Review of Financial Studies

2009, vol. 22, n°5, pp.2007-2057

Départements : Finance

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.532.9852&rep=rep1&type=pdf


We develop a tractable and flexible stochastic volatility multifactor model of the term structure of interest rates. It features unspanned stochastic volatility factors, correlation between innovations to forward rates and their volatilities, quasi-analytical prices of zerocoupon bond options, and dynamics of the forward rate curve, under both the actual and risk-neutral measures, in terms of a finite-dimensional affine state vector. The model has a very good fit to an extensive panel dataset of interest rates, swaptions, and caps. In particular, the model matches the implied cap skews and the dynamics of implied volatilities

A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium

A. LANDIER, Alex Edmans, Xavier Gabaix

Review of Financial Studies

décembre 2009, vol. 22, n°12, pp.4881-4917

Départements : Finance

Mots clés : D3 - Distribution G34 - Mergers; Acquisitions; Restructuring; Corporate Governance J3 - Wages, Compensation, and Labor Costs D2 - Production and Organizations

https://academic.oup.com/rfs/article/22/12/4881/1574895/A-Multiplicative-Model-of-Optimal-CEO-Incentives


This paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium, by embedding a moral hazard problem into a talent assignment model. By considering multiplicative specifications for the CEO's utility and production functions, we generate a number of different results from traditional additive models. First, both the CEO's low fractional ownership (the Jensen–Murphy incentives measure) and its negative relationship with firm size can be quantitatively reconciled with optimal contracting, and thus need not reflect rent extraction. Second, the dollar change in wealth for a percentage change in firm value, divided by annual pay, is independent of firm size, and therefore a desirable empirical measure of incentives. Third, incentive pay is effective at solving agency problems with multiplicative impacts on firm value, such as strategy choice. However, additive issues such as perk consumption are best addressed through direct monitoring

Applying Regret Theory to Investment Choices: Currency Hedging Decisions

S. Michenaud, B. SOLNIK

CFA Digest

février 2009, vol. 39, n°1, pp.55-56

Départements : Finance

http://dx.doi.org/10.2139/ssrn.676728


The authors develop a model that has two components of risk: traditional risk (volatility) and regret risk. They apply the model to currency hedging to demonstrate behavior that would be counterintuitive when considering only traditional risk. The model is limited to relatively simple decision constructs because of the intricacy of applying regret theory and is distinctly different from other loss aversion behavioral models.

Belief-free equilibria in games with incomplete information

J. Hörner, S. LOVO

Econometrica

mars 2009, vol. 77, n°2, pp.453-487

Départements : Finance, GREGHEC (CNRS)


We define belief-free equilibria in two-player games with incomplete information as se- quential equilibria for which players' continuation strategies are best-replies, after every history, independently of their beliefs about the state of nature. We characterize a setof payoffs that includes all belief-free equilibrium payoffs. Conversely, any payoff in the interior of this set is a belief-free equilibrium payoff.Keywords: repeated game with incomplete information; Harsanyi doctrine; belief-free equilibria.


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