Articles

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.

Capital Market Imperfections and the Sensitivity of Investment to Stock Prices

A. V. OVTCHINNIKOV, J. McConnell

Journal of Financial and Quantitative Analysis

juin 2009, vol. 44, pp.551-578

Départements : Finance, GREGHEC (CNRS)


Commonality in Liquidity: A Global Perspective

P. Brockman, DY. Chung, C. PERIGNON

Journal of Financial and Quantitative Analysis

août 2009, vol. 44, n°4, pp.851-882

Départements : Finance, GREGHEC (CNRS)

Mots clés : Liquidity, Commonality, Bid-Ask Spreads, Depths

http://dx.doi.org/10.2139/ssrn.965807


We conduct a comprehensive study of commonality in liquidity using intraday spread and depth data from 47 stock exchanges. We find that firm-level changes in liquidity are significantly influenced by exchange-level changes across most of the world’s stock exchanges. Emerging Asian exchanges have exceptionally strong commonality, while those of Latin America exhibit little if any commonality. After documenting the pervasive role of commonality within individual exchanges, we examine commonality across exchanges. We find evidence of a distinct, global component in bid-ask spreads and depths. Local (exchange-level) sources of commonality represent roughly 39% of the firm’s total commonality in liquidity, while global sources contribute an additional 19%. We also investigate potential sources of exchange-level and global commonality. We show that commonality is driven by both domestic and U.S. macroeconomic announcements

Credit, Wages, and Bankruptcy Laws

B. BIAIS, T. MARIOTTI

Journal of the European Economic Association

septembre 2009, vol. 7, n°5, pp.939-973

Départements : Finance


We analyze how bankruptcy laws affect the general equilibrium interactions between credit and wages. Soft laws reduce the frequency of liquidations and thus ex post inefficiencies, but they worsen credit rationing ex ante. This hinders firm creation and thus depresses labor demand. Rich agents who need few outside funds can invest even if creditor rights are weak. Hence, they favor soft laws that exclude poorer agents from the credit market and reduce the competition for labor. Such laws can generate greater utilitarian welfare than under perfect contract enforcement: By barring access to credit to some agents, soft laws lower wages, which increases the pledgeable income of richer agents and decreases the liquidation rates they must commit to. When they induce strong credit rationing, however, soft laws are Pareto-dominated by tougher laws combined with subsidies to entrepreneurs

Equity and Cash in Intercorporate Asset Sales: Theory and Evidence

U. HEGE, S. LOVO, M. Slovin, M. Sushka

Review of Financial Studies

février 2009, vol. 22, n°2, pp.681-714

Départements : Finance, GREGHEC (CNRS)

Mots clés : Asset sales, means of payment, auctions, two-sided asymmetric information.


We develop a two-sided asymmetric information model of asset sales that incorporates the key differences from mergers and allows the information held by each party to be impounded in the transaction. Buyer information is conveyed through a first-stage competitive auction. A seller with unfavorable information about the asset accepts the cash offer of the highest bidder. A seller with favorable information proposes a take-it-or-leave-it counteroffer that entails buyer equity. Thus, the cash-equity decision reflects seller, but not buyer, information in contrast to theoretical and empirical findings for mergers. The central prediction of our model is that there are relatively large gains in wealth for both buyers and sellers in equity-based asset sales, whereas cash asset sales generate significantly smaller gains that typically accrue only to sellers. Our empirical results are consistent with the predictions of our theoretical model

Equity or Cash? The Signal Sent by the Way You Pay

M. Sushka, U. HEGE

Harvard Business Review

mai 2009, vol. 87, n°5, pp.22

Départements : Finance, GREGHEC (CNRS)


The article reports on a study of asymmetric market information and corporate transactions such as the purchase of assets. The researchers found that buyers want to pay with equity instead of cash when they believe that their shares are overvalued and sellers want to receive equity when they believe the asset will create value for the buyer.*ASSETS (Accounting)*CORPORATIONS -- Finance*INFORMATION asymmetry*RETURN on assets*CAPITAL*VALUE


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