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

Dynamic Dependence and Diversification in Corporate Credit


Review of Finance

2017, pp.1-40

Départements : Finance, GREGHEC (CNRS)

Mots clés : Credit risk, Default risk, CDS, Dynamic dependence, Copula

We characterize dependence in corporate credit and equity returns for 215 firms using a new class of large-scale dynamic copula models. Copula dependence and especially tail dependence are highly variable and persistent, increase significantly in the financial crisis, and have remained high since. The most drastic increases in credit dependence occur in July/August of 2007 and in August of 2011 and the decrease in diversification potential caused by the increases in dependence and tail dependence is large. Credit default swap correlation dynamics are important determinants of credit spreads

Financial Transaction Taxes, Market Composition, and Liquidity


The Journal of Finance

décembre 2017, vol. 72, n°6, pp.2685–2716

Départements : Finance, GREGHEC (CNRS)

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

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

Health Cost Risk: A Potential Solution to the Annuity Puzzle


Economic Journal

aout 2017, vol. 127, n°603, pp.1598–1625

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

Housing Collateral and Entrepreneurship


The Journal of Finance

février 2017, vol. 72, n°1, pp.99-132

Départements : Finance

We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross-sectional variation in local house-price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.

Investor Horizon and the Life Cycle of Innovative Firms: Evidence from Venture Capital


Management Science

septembre 2017, vol. 63, n°9, pp.3021-3043

Départements : Finance

Mots clés : finance; innovation; venture capital; entrepreneurship; investor horizon

This paper studies whether and how the contractual horizon of venture capital funds affects their investments in innovative firms. I find that funds with a longer remaining horizon select younger companies at an earlier stage of their development, which grow their patent stock significantly more than companies financed by funds with a shorter horizon. The sensitivity of investment decisions to horizon is stronger among experienced venture capital firms, who allocate investments across a larger number of fund vintages. Finally, I find that the interaction of funds’ fixed horizon with their option-like compensation structure affects their investment decisions: when early performance has been high, fund managers target less innovative companies. These findings shed light on the drivers of venture capital investment decisions and on their implications for the type of companies that receive venture capital financing

Linear-Rational Term Structure Models


The Journal of Finance

avril 2017, vol. 72, n°2, pp.655-704

Départements : Finance

We introduce the class of linear-rational term structure models in which the state price density is modeled such that bond prices become linear-rational functions of the factors. This class is highly tractable with several distinct advantages: (i) ensures nonnegative interest rates, (ii) easily accommodates unspanned factors affecting volatility and risk premiums, and (iii) admits semi-analytical solutions to swaptions. A parsimonious model specification within the linear-rational class has a very good fit to both interest rate swaps and swaptions since 1997 and captures many features of term structure, volatility, and risk premium dynamics—including when interest rates are close to the zero lower bound

Relative Optimism and the Home Bias Puzzle


Review of Finance

août 2017, vol. 21, n°5, pp.2045–2074

Départements : Finance

Mots clés : G15 - International Financial Markets G02 - Behavioral Finance: Underlying Principles

We study whether relative optimism leads to home bias in portfolio holdings by looking at two novel databases: a survey that includes expectations of identified professional asset management companies for equity, bonds, and currencies, and the International Monetary Fund portfolio holdings data for equity and bonds. We document that relative optimism for equity is persistent over the period 1997–2012, but relative optimism for bonds and currencies exhibits more time-series variation. Moreover, we show that relative optimism is an economically significant variable that helps explain home bias in portfolio holdings, not only for equity, but also for bonds

Risk-Based Capital Requirements for Banks and International Trade


Review of Financial Studies

novembre 2017, vol. 30, n°11, pp.3970-4002

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

We test the trade finance channel of exports by controlling for the bank credit channel. Using Turkey’s July 2012 adoption of Basel II as a quasi-natural experiment, we examine whether shocks to trade financing costs affect exports. With data for 16,662 Turkish exporters shipping 2,888 different products to 158 countries, we find that the share of letters-of-credit-based exports decreases (increases) when the associated risk weights for counterparty exposure increase (decrease) after the adoption of Basel II. However, growth of firm-product-country-level exports remains unaffected. Trade financing might have a lesser role in exports than previously suggested by the previous literature. © The Author 2017. Published by Oxford University Press on behalf of The Society for Financial Studies