Articles scientifiques

Belief-free price formation


Journal of Financial Economics

février 2018, vol. 127, n°2, pp.342-365

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

Mots clés : Financial market microstructure, Informed dealers, Price volatility, Belief-free equilibria

We analyze security price formation in a dynamic setting in which long-lived dealers re- peatedly compete for the opportunity to trade with short-lived retail traders. We charac- terize equilibria in which dealers’ pricing strategies are optimal irrespective of the private information that each dealer may possess. Thus, our model’s predictions are robust to dif- ferent specifications of the dealers’ information structure. These equilibria reconcile, in a unified and parsimonious framework, price dynamics that are reminiscent of well-known stylized facts: excess price volatility, price to trading flow correlation, stochastic volatility and inventory-related trading

Financing Capacity Investment Under Demand Uncertainty: An Optimal Contracting Approach


Manufacturing & Service Operations Management

hiver 2018, vol. 20, n°1, pp.85-96

Départements : Finance, GREGHEC (CNRS)

Mots clés : Capacity, Optimal Contracts, Financial Constraints, Newsvendor Model

We study the capacity choice problem of a firm whose access to capital is hampered by financial frictions in the form of moral hazard. The firm must therefore optimize not only its capacity investment under demand uncertainty, but also its sourcing of funds. Ours is the first study of this problem to follow an optimal contracting approach, where feasible source of funds are derived endogenously from fundamentals and include standard financial claims (debt, equity, convertible debt, call and put warrants, etc.) and combinations thereof. We characterize the optimal capacity level. First, we find conditions under which a feasible financial contract exists that achieves first-best. When no such contract exists, we find that under optimal financing, the choice of capacity sometimes exceeds strictly the efficient level. This runs counter to the literature on financing capacity investment in funds and the intuition that by raising the cost of external capital and hence the unit capacity cost, financial market frictions lower the optimal capacity level. We trace the value of increasing capacity beyond the efficient level to a bonus effect and a demand differentiation effect. In contrast to most of the literature on financing capacity, our results are robust to a change of financial contract

Wholesale Funding Dry-Ups


The Journal of Finance

avril 2018, vol. 73, n°2, pp.575-617

Départements : Finance, GREGHEC (CNRS)

We empirically explore the fragility of wholesale funding of banks, using transaction-level data on short-term, unsecured certificates of deposit in the European market. We do not observe a market-wide freeze during the 2008 to 2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration in bank performance. Furthermore, during periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. We therefore fail to find evidence consistent with adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders

Catching Falling Knives: Speculating on Liquidity Shocks


Management Science

août 2017, vol. 63, n°8, pp.2573-2591

Départements : Finance, GREGHEC (CNRS)

Mots clés : supply information • nonfundamental uncertainty • market crashes • arbitrage • high-frequency trading

Many market participants invest resources to acquire information about liquidity rather than fundamentals. I show that agents using such information can reduce the magnitude of short-lived pricing errors by trading against liquidity shocks. However, the short-run stabilizing effect of this behavior also makes it more difficult to identify liquidity shocks, a signal-jamming effect that slows down price discovery in the long run. As more agents invest in nonfundamental information, market prices become more resilient to liquidity shocks but also recover more slowly from temporary price deviations.



Journal of Financial and Quantitative Analysis

septembre 2017, vol. 52, n°5, pp.2183–2215

Départements : Finance, GREGHEC (CNRS)

Mots clés : Collateral, Counterparty Risk, Derivatives Markets, Extreme Dependence

We present CoMargin, a new methodology to estimate collateral requirements in derivatives central counterparties (CCPs). CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes trading externalities and enhances the stability of CCPs, thus, reducing systemic risk concerns. We assess our methodology using proprietary data from the Canadian Derivatives Clearing Corporation that includes daily observations of the actual trading positions of all of its members from 2003 to 2011. We show that CoMargin outperforms existing margining systems by stabilizing the probability and minimizing the shortfall of simultaneous margin-exceeding losses