(Interstate) banking and (interstate) trade: Does real integration follow financial integration?


Journal of Financial Economics

avril 2012, vol. 104, n°1, pp.89-117

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

Mots clés : Trade; Banking deregulation; Finance'growth nexus

We examine whether financial sector integration leads to real sector integration through trade. Our conjecture is that financial sector integration between two regions leads to higher trade flows between them. In our stylized model, this happens because banks with presence in the two regions are better able to assess risks and charge the appropriate premiums for trade-related projects pertinent for the two markets; whereas the same banks charge higher average interest rates for projects that involve trade to other markets from which they are absent. We use the deregulation of the inter-state banking in the U.S. as a natural experiment to test the implication of our theory model with the state-level Commodity Flow Survey data. Our empirical evidence, based on difference-in-difference and GMM2S-IV estimates, indicates that there is a trade channel associated with the finance-growth nexus: the trade share of state-pairs that have opened their banking market to each other's financial institutions increases by 9.2% relative to the trade shares of state-pairs that did not. Looking at actual entry data, we estimate that bank entry within a trading pair increases trade in this pair by 54% relative to those that do not have such a bank link. This is probably the lower bound estimate for international trade barriers stemming from the lack of a unified banking system.

A Global Equilibrium Asset Pricing Model with Home Preference


Management Science

février 2012, vol. 58, n°2, pp.273-292

Départements : Finance

Mots clés : International asset pricing, Home bias, Familiarity, Regret

We develop a global equilibrium asset pricing model assuming that investors suffer from foreign aversion, a preference for home assets based on familiarity. Using a utility formulation inspired by regret theory, we derive closed-form solutions. When the degree of foreign aversion is high in a given country, investors place a high valuation on domestic equity, which results in a lower expected return. Thus, the model generates the simple prediction that a country’s degree of home bias and the expected return of its domestic assets should be inversely related. Our predicted relation between the degree of home bias and a country’s expected return has the opposite sign predicted by models that assume some form of market segmentation. Using IMF portfolio data we find that expected returns are negatively related to home bias

Clearing, Counterparty Risk, and Aggregate Risk


International Monetary Fund (IMF) Economic Review

juillet 2012, vol. 60, n°2, pp.193-222

Départements : Finance

The paper studies the optimal design of clearing systems. The paper analyzes how counterparty risk should be allocated, whether traders should be fully insured against that risk, and how moral hazard affects the optimal allocation of risk. The main advantage of centralized clearing, as opposed to no or decentralized clearing, is the mutualization of risk. While mutualization fully insures idiosyncratic risk, it cannot provide insurance against aggregate risk. When the latter is significant, it is efficient that protection buyers exert effort to find robust counterparties, whose low default risk makes it possible for the clearing system to withstand aggregate shocks. When this effort is unobservable, incentive compatibility requires that protection buyers retain some exposure to counterparty risk even with centralized clearing

Competition and the Cost of Debt


Journal of Financial Economics

septembre 2012, vol. 105, n°3, pp.661-682

Départements : Finance

Mots clés : Product market competition, Import tariffs, Cost of debt, Bank loans

This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition

Cross-Listing, Investment Sensitivity to Stock Price and the Learning Hypothesis


Review of Financial Studies

novembre 2012, vol. 25, n°11, pp.3305-3350

Départements : Finance, GREGHEC (CNRS)

accepté le 28 juin 2012Cross-listed firms in the United States have a higher investment-to-price sensitivity than do firms that never cross-list. This difference is strong, does not exist prior to the cross-listing date, and does not vanish afterward. Moreover, it does not appear to be primarily driven by improvements in governance, disclosure, and access to capital associated with a U.S. cross-listing. Instead, we argue that a cross-listing enhances managers' reliance on stock prices because it makes stock prices more informative to them. Consistent with this explanation, U.S. cross-listings that are more likely to strengthen the informativeness of stock prices for managers feature a higher investment-to-price sensitivity.

Hard assets: The returns on rare diamonds and gems

L. Renneboog, C. SPAENJERS

Finance Research Letters

décembre 2012, vol. 9, n°4, pp.220-230

Départements : Finance, GREGHEC (CNRS)

Mots clés : Alternative investments, Auctions, Diamonds, Gems, Hedonic regression, Luxury goods

This note examines the investment performance of diamonds andother gems (sapphires, rubies, and emeralds) over the period1999'2010, using a novel data set of auction transactions. Overour time frame, the annualized real USD returns for white and coloreddiamonds equaled 6.4% and 2.9%, respectively. Since 2003, theaverage returns have been 10.0%, 5.5%, and 6.8% for white diamonds,colored diamonds, and other gems, respectively. Bothwhite and colored diamonds outperformed stocks between 1999and 2010. Nevertheless, gem returns covary positively with stockreturns, underlining the importance of wealth-induced demandfor luxury consumption in collectibles markets

Individual Political Contributions and Firm Performance

A. V. OVTCHINNIKOV, E. Pantaleoni

Journal of Financial Economics

août 2012, vol. 105, n°2, pp.367-392

Départements : Finance, GREGHEC (CNRS)

pas sous affiliation HEC

Is the Potential for International Diversification Disappearing? A Dynamic Copula Approach


Review of Financial Studies

décembre 2012, vol. 25, n°12, pp.3711-3751

Départements : Finance, GREGHEC (CNRS)

Mots clés : Stock return Comovements, Emerging equity markets, Volatility, Risk, Time, Models world, Integration, Dependence

International equity markets are characterized by nonlinear dependence and asymmetries. We propose a new dynamic asymmetric copula model to capture long-run and short-run dependence, multivariate nonnormality, and asymmetries in large cross-sections. We find that correlations have increased markedly in both developed markets (DMs) and emerging markets (EMs), but they are much lower in EMs than in DMs. Tail dependence has also increased, but its level is still relatively low in EMs. We propose new measures of dynamic diversification benefits that take into account higher-order moments and nonlinear dependence. The benefits from international diversification have reduced over time, drastically so for DMs. EMs still offer significant diversification benefits, especially during large market downturns.

Religion, economic attitudes, and household finance

L. Renneboog, C. SPAENJERS

Oxford Economic Papers

janvier 2012, vol. 64, n°1, pp.103-127

Départements : Finance, GREGHEC (CNRS)

Mots clés : Inheritance & succession, Economic attitudes, Religion, Protestants, Catholics, Households

We investigate the differences in economic attitudes and financial decisions between religious and non-religious households. Using Dutch survey data, we find that religious households consider themselves more trusting, and have a stronger bequest motive and a longer planning horizon. Furthermore, Catholics attach more importance to thrift and are more risk averse, while Protestants combine a more external locus of control with a greater sense of financial responsibility. Religious households are more likely to save. Catholic households invest less frequently in the stock market. Economic attitudes are particularly helpful in explaining the financial decisions of Catholic households

Strategic Default and Equity Risk Across Countries

G. Favara, E. Schroth, P. VALTA

The Journal of Finance

décembre 2012, vol. 67, n°6, pp.2051-2095

Départements : Finance

Mots clés : Debt Enforcement, Strategic Default, Liquidation Costs, Equity Risk

We show that the prospect of a debt renegotiation favorable to shareholders reduces the firm's equity risk. Equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country's insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, equity risk is independent of shareholders' incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the firm's equity risk