Ambiguity Aversion and Household Choice Puzzles: Empirical Evidence


Journal of Financial Economics

mars 2016, vol. 119, pp.559-577

Départements : Finance, GREGHEC (CNRS)

Mots clés : Ambiguity aversion; Stock market participation; Household portfolio puzzles; Home-bias; Own-company stock puzzle; Portfolio under-diversification; Household finance; Financial literacy

We test the relation between ambiguity aversion and five household portfolio choice puz- zles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market partic- ipation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, am- biguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks

Are retail traders compensated for providing liquidity?


Journal of Financial Economics

avril 2016, vol. 120, n°1, pp.146-168

Départements : Finance

Mots clés : Liquidity, Retail investors, Crisis

This paper examines the extent to which individual investors provide liquidity to the stock market and whether they are compensated for doing so. We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four-factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because they experience a negative return on the day of their trade and they reverse their trades long after the excess returns from liquidity provision are dissipated. During the financial crisis, French active retail stock traders stepped up to the plate,increased stock holdings, and provided liquidity. In contrast, mutual fund investors fled from delegation by selling their mutual funds

Debt decisions in deregulated industries


Journal of Corporate Finance: Contracting, Governance and Organization

février 2016, vol. 36, pp.230-254

Départements : Finance, GREGHEC (CNRS)

Mots clés : Debt decisions, Debt maturity, Public and private debt issues, Deregulation

Deregulation significantly affects firms’ debt decisions. Prior to deregulation, regulated firms depend more on long-term and public debt but reduce this dependence considerably during deregulation. Cross-sectional analysis shows that the lower use of long-term and public debt results from changing firm sensitivities to determinants of debt decisions triggered by deregulation. Consistent with credit and liquidity risk theories of debt maturity, the concave relation between firm quality and debt maturity is attenuated among regulated firms. Inconsistent with these theories, the convex relation between firm quality and public debt issues exists only among regulated firms. I find limited support for other theories

Fed Funds Futures Variance Futures


Quantitative Finance

2016, vol. 16, n°9, pp.1413-1422

Départements : Finance

Mots clés : fed funds futures, Funding costs, Unsecured interbank money market

We develop a novel contract design, the fed funds futures (FFF) variance futures, which reflects the expected realized basis point variance of an underlying FFF rate. The valuation of short-term FFF variance futures is completely model-independent in a general setting that includes the cases where the underlying FFF rate exhibits jumps and where the realized variance is computed by sampling the FFF rate discretely. The valuation of longer-term FFF variance futures is subject to an approximation error which we quantify and show is negligible. We also provide an illustrative example of the practical valuation and use of the FFF variance futures contract

Information asymmetry, the cost of debt, and credit events: Evidence from quasi-random analyst disappearances


Journal of Corporate Finance: Contracting, Governance and Organization

aout 2016, vol. 39, pp.295-311

Départements : Finance, GREGHEC (CNRS)

Mots clés : Information asymmetry, Cost of debt, Default, Bankruptcy, Natural experiment, Matching estimators, Difference-in-differences, Equity research analysts, Creditors

We hypothesize that greater information asymmetry causes greater losses to debtholders. To test this, we identify exogenous increases in information asymmetry using the loss of an analyst that results from broker closures and broker mergers. We find that the loss of an analyst causes the cost of debt to increase by 25 basis points for treatment firms compared to control firms, and the rate of credit events (e.g., defaults) is roughly 100–150% higher. These results are driven by firms that are more sensitive to changes in information (e.g., less analyst coverage). The evidence is broadly consistent with both financing and monitoring channels, although only a financing channel explains the impact of the loss of an analyst on firms' cost of debt

Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks


Quarterly Journal of Economics

août 2016, vol. 131, n°3, pp.1543-1592

Départements : Finance

Mots clés : E23 - Production E32 - Business Fluctuations; Cycles L14 - Transactional Relationships; Contracts and Reputation; Networks

This article examines whether firm-level idiosyncratic shocks propagate in production networks. We identify idiosyncratic shocks with the occurrence of natural disasters. We find that affected suppliers impose substantial output losses on their customers, especially when they produce specific inputs. These output losses translate into significant market value losses, and they spill over to other suppliers. Our point estimates are economically large, suggesting that input specificity is an important determinant of the propagation of idiosyncratic shocks in the economy

International Correlation Asymmetries: Frequent-but-Small and Infrequent-but-Large Equity Returns


Review of Asset Pricing Studies

décembre 2016, vol. 6, n°2, pp.221-260

Départements : Finance

Mots clés : G01 - Financial Crises G11 - Portfolio Choice; Investment Decisions G15 - International Financial Markets

We propose a novel regime-switching model to study correlation asymmetries in international equity markets. We decompose returns into frequent-but-small diffusion and infrequent-but-large jumps and derive an estimation method for many countries. We find that correlations due to jumps, not diffusion, markedly increase in bad markets, leading to correlation breaks during crises. Our model provides a better description of correlation asymmetries than do GARCH, copula, and stochastic volatility models. Good and bad regimes are persistent. Regime changes are detected rapidly, and risk diversification allocations are improved. Asset allocation results in- and out-of-sample are superior to other models, including the 1/N strategy

Investing in the Beta Space


Journal of Investing

2016, vol. 25, n°3, pp.9-16

Départements : Finance

The beta space is a powerful way to map the investment strategies of semidiversified investors. Three metrics define the beta space: regular or exogenous betas (x-ßs), linked to macroeconomic cycles; endogenous betas (n-ßs), related to innovation hazards; and a combination of the two—the total betas (t-ßs). The beta space is the first to endow unsystematic risk with measurable entity. It debunks the myth that innovation entails high exogenous betas, and it suggests a simpler definition of style investing: Growth investors tend to favor industries with large t-ßs, whereas value investors do the opposite

News Trading and Speed


The Journal of Finance

février 2016, vol. 71, n°1, pp.335-382

Départements : Finance, GREGHEC (CNRS)

Mots clés : News, Liquidity, Volume, Price discovery, High frequency trading

We compare the optimal trading strategy of an informed speculator when he can trade ahead of incoming news (is “fast”), versus when he cannot (is “slow”). We find that speed matters: the fast speculator's trades account for a larger fraction of trading volume, and are more correlated with short-run price changes. Nevertheless, he realizes a large fraction of his profits from trading on long-term price changes. The fast speculator's behavior matches evidence about high frequency traders. We predict that stocks with more informative news are more liquid even though they attract more activity from informed high frequency traders

Organizational and Epistemic Change: The Growth of the Art Investment Field


Accounting Organizations and Society

novembre 2016, vol. 55, pp.48 - 62

Départements : Finance, GREGHEC (CNRS)

Mots clés : Accounting and financial knowledge claims; Art investment; Epistemic cultures; Performance measurement; Technical fields; Valuation practices

What can studying the creation of knowledge tell us about how new technical fields emerge and develop? This paper shows how a knowledge community may be necessary to support the legitimacy of new products that undergo performance evaluation before purchase. Using historical and ethnographic data covering half a century, we review the growth of the art investment field through an epistemic cultures lens. Technical knowledge about the financial characteristics of art has been developed alongside practical knowledge about how best to structure investment ventures. Investment venture success has been determined by legitimacy as much as by profitability, given durable expectations about the evaluation and monitoring of investments. The growth of knowledge, practices and tools was thus a necessary condition for the recognition of artwork as an asset class. Crucially, the epistemic cultures approach highlights deepening knowledge, resources and professional expertise, and their development through experimentation, failures and negative knowledge. This shows accounting issues contributing to technical field legitimacy and emergence, such as the role of knowledge production, valuation practices and receptive environments, and the distinction between legitimate investments that can be valued and investment venture profitability