Articles

Belief-free price formation

S. LOVO, T. TOMALA, J. HÖRNER

Journal of Financial Economics

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


Catching Falling Knives: Speculating on Liquidity Shocks

J. E. COLLIARD

Management Science

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Départements : Finance, GREGHEC (CNRS)


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.

CoMargin

J. A. CRUZ LOPEZ, J. HARRIS, C. HURLIN, C. PERIGNON

Journal of Financial and Quantitative Analysis

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Départements : Finance, GREGHEC (CNRS)

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

https://depts.washington.edu/jfqa/2016/02/25/comargin/


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

Financial Transaction Taxes, Market Composition, and Liquidity

J. E. COLLIARD, Peter HOFFMANN

The Journal of Finance

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Financial transaction tax, institutional trading, liquidity, high-frequency trading

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2215788


We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on the impact of FTTs. 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 idea 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 institutional investors. More generally, our findings confirm that moderate aggregate effects on market quality can mask large adjustments made by individual market participants

Financing Investment: The Choice between Bonds and Bank Loans

E. MORELLEC, P. VALTA

Management Science

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Départements : Finance

Mots clés : Debt structure, Capital structure, Investment, Credit supply, Competition,

http://dx.doi.org/10.2139/ssrn.2162896


We build a model of investment and financing decisions to study the choice between bonds and bank loans in a firm's marginal financing decision and its effects on corporate investment. We show that firms with more growth options, higher bargaining power in default, operating in more competitive product markets, and facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence that supports our theory

Health Cost Risk: A Potential Solution to the Annuity Puzzle

K. PEIJNENBURG, T. NIJMAN, B. J. M. WERKER

Economic Journal

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Life-cycle portfolio choice;retirement;post-retirement investment


We find that health cost risk lowers optimal annuity demand at retirement. If medical expenses can be sizeable early in retirement, full annuitisation at retirement is no longer optimal because agents do not have enough time to build a liquid wealth buffer. Furthermore, large deviations from optimal annuitisation levels lead to small utility differences. Our results suggest that health cost risk can explain a large proportion of empirically observed annuity choices. Finally, allowing additional annuitisation after retirement results in welfare gains of at most 2.5% when facing health cost risk, and negligible gains without this risk

How Much Do Means Tested Benefits Reduce the Demand for Annuities?

Monika BUTLER, K. PEIJNENBURG, Stefan STAUBLI

Journal of Pension Economics and Finance

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Means-Tested Benefits, Occupational Pension, Annuity


We analyze the effect of means-tested benefits on annuitization decisions using an administrative dataset of pension wealth cash-out choices. Availability of means-tested payments creates an incentive to cash out pension wealth for low and middle income earners, instead of taking the annuity. Agents trade off the advantages from annuitization, receiving longevity risk insurance, to the disadvantages, giving up “free” wealth in the form of means-tested supplemental income. Our life-cycle model demonstrates that the availability of means-tested benefits substantially reduces the desire to annuitize especially for low and intermediate levels of pension wealth. In our empirical analysis we show that the model’s predicted fraction of retirees choosing the annuity is able to match the annuitization pattern of occupational pension wealth observed in Switzerland

Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

K. PEIJNENBURG

Journal of Financial and Quantitative Analysis

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Départements : Finance, GREGHEC (CNRS)


Linear-Rational Term Structure Models

D. FILIPOVIC, M. LARSSON, A. TROLLE

The Journal of Finance

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Départements : Finance


Marking to Market and Inefficient Investment Decisions

C. OTTO, P. F. VOLPIN

Management Science

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Marking to Market, Investment Decisions, Reputation, Agency Problem


We examine how mark-to-market accounting affects the investment decisions of managers with reputation concerns. Reporting the current market value of a firm's assets can help mitigate agency problems because it provides outsiders (e.g., shareholders) with new information against which the management's decisions can be evaluated. However, the fact that the assets' market value is informative can also have a negative side effect: Managers may shy away from investments that indicate conflicting private information and would damage their reputation. This effect can lead to inefficient investment decisions and make marking to market less desirable when market prices are more informative


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