Articles scientifiques

Accurate Methods for Approximate Bayesian Computation Filtering


Journal of Financial Econometrics

automne 2015, vol. 13, n°4, pp.798-838

Départements : Finance, GREGHEC (CNRS), Economie et Sciences de la décision

Mots clés : Bandwidth, Kernel density estimation, Likelihood estimation, Model selection, Particle filter, State-space model, Value-at-risk forecasts

The Approximate Bayesian Computation (ABC) filter extends the particle filtering methodology to general state-space models in which the density of the observation conditional on the state is intractable. We provide an exact upper bound for the mean squared error of the ABC filter, and derive sufficient conditions on the bandwidth and kernel under which the ABC filter converges to the target distribution as the number of particles goes to infinity. The optimal convergence rate decreases with the dimension of the observation space but is invariant to the complexity of the state space. We show that the adaptive bandwidth commonly used in the ABC literature can lead to an inconsistent filter. We develop a plug-in bandwidth guaranteeing convergence at the optimal rate, and demonstrate the powerful estimation, model selection, and forecasting performance of the resulting filter in a variety of examples

Central clearing and collateral demand


Journal of Financial Economics

mai 2015, vol. 116, n°2, pp.237-256

Départements : Finance, GREGHEC (CNRS)

Mots clés : Central clearing party; Margin; Credit default swap; Collateral; Client clearing

We use an extensive data set of bilateral credit default swap (CDS) positions to estimatethe impact on collateral demand of new clearing and margin regulations. The estimatedcollateral demands include initial margin and the frictional demands associated with themovement of variation margin through the network of market participants. We estimatethe impact on total collateral demand of more widespread initial margin requirements,increased novation of CDS to central clearing parties (CCPs), an increase in the number ofclearing members, the proliferation of CCPs of both specialized and non-specialized types,collateral rehypothecation practices, and client clearing. System-wide collateral demand isincreased significantly by the application of initial margin requirements for dealers,whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements,mandatory central clearing is shown to lower, not raise, system-wide collateraldemand, provided there is no significant proliferation of CCPs. Central clearing does,however, have significant distributional consequences for collateral requirements acrossmarket participants

Dynamics of Innovation and Risk


Review of Financial Studies

mai 2015, vol. 28, n°5, pp.1353-1380

Départements : Finance

We study the dynamics of an innovative industry in which agents learn about the likelihood of negative shocks. Managers can exert risk prevention effort to mitigate the consequences of shocks. If no shock occurs, confidence improves, attracting managers to the innovative sector. But, when confidence becomes high, inefficient managers exerting low riskprevention effort also enter. This stimulates growth, while reducing risk prevention. The longer the boom, the larger the losses if a shock occurs. Although these dynamics arise in the first-best, asymmetric information generates excessive entry of inefficient managers, earning informational rents, inflating the innovative sector, and increasing its vulnerability

Equilibrium fast trading


Journal of Financial Economics

mai 2015, vol. 116, n°2, pp.292-313

Départements : Finance, GREGHEC (CNRS)

Mots clés : High frequency trading, Liquidity welfare, Adverse selection, Investment

High-speed market connections improve investors' ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to observe market information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two types of markets: one accepting fast traders, the other banning them. However, utilitarian welfare is maximized by having i) a single market type on which fast and slow traders coexist and ii) Pigovian taxes on investment in the fast trading technology

Fund managers under pressure: Rationale and determinants of secondary buyouts


Journal of Financial Economics

janvier 2015, vol. 115, n°1, pp.102-135

Départements : Finance, GREGHEC (CNRS)

Mots clés : Leveraged buyouts Secondary buyouts Private equity Limited investment horizon Agency conflicts in fund management

The fastest growing segment of private equity (PE) deals is secondary buyouts (SBOs)—sales from one PE fund to another. Using a comprehensive sample of leveraged buyouts, we investigate whether SBOs are value-maximizing, or reflect opportunistic behavior. To proxy for adverse incentives, we develop buy and sell pressure indexes based on how close PE funds are to the end of their investment period or lifetime, their unused capital, reputation, deal activity, and fundraising frequency. We report that funds under pressure engage more in SBOs. Pressured buyers pay higher multiples, use less leverage, and syndicate less suggesting that their motive is to spend equity. Pressured sellers exit at lower multiples and have shorter holding periods. When pressured counterparties meet, deal multiples depend on differential bargaining power. Moreover, funds that invested under pressure underperform