Articles

A Model of Trading in the Art Market

C. SPAENJERS, S. LOVO

American Economic Review

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Départements : Finance, GREGHEC (CNRS)

Mots clés : art; auctions; endogenous trading; price indexes; private values; returns

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2404339


We present an infinite-horizon model of endogenous trading in the art auction market. Agents make purchase and sale decisions based on the relative magnitude of their private use value in each period. Our model generates endogenous cross-sectional and time-series patterns in investment outcomes. Average returns and buy-in probabilities are negatively correlated with the time between purchase and resale (attempt). Idiosyncratic risk does not converge to zero as the holding period shrinks. Prices and auction volume increase during expansions. Our model finds empirical support in auction data and has implications for selection biases in observed prices and transaction-based price indexes

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


Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

J. HOMBERT, A. MATRAY

The Journal of Finance

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Départements : Finance, GREGHEC (CNRS)


We study whether R&D-intensive firms are more resilient to trade shocks. Wecorrect for the endogeneity of R&D using tax-induced changes to R&D cost. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (by about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained R&D allowing firms to increase product differentiation. As a result, while firms in import-competing industries cut capital expenditures and employment, R&D-intensive firms downsize considerably less

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

Data abundance and asset price informativeness

T. FOUCAULT, J. DUGAST

Journal of Financial Economics

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Asset Price Informativeness, Big Data, FinTech, Information Processing, Markets for Information, Contrarian and momentum trading

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398904


Information processing filters out the noise in data but it takes time. Hence, low precision signals are available before high precision signals. We analyze how this feature affects asset price informativeness when investors can acquire signals of increasing precision over time about the payoff of an asset. As the cost of low precision signals declines, prices are more likely to reflect these signals before more precise signals become available. This effect can ultimately reduce price informativeness because it reduces the demand for more precise signals (e.g., fundamental analysis). We make additional predictions for trade and price patterns

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 Capacity Investment Under Demand Uncertainty: An Optimal Contracting Approach

F. DE VERICOURT, D. GROMB

Manufacturing & Service Operations Management

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Départements : Finance, GREGHEC (CNRS)

Mots clés : Capacity, Optimal Contracts, Financial Constraints, Newsvendor Model


We study the capacity choice problem of a firm whose access to capital is hampered by financial frictions in the form of moral hazard. The firm must therefore optimize not only its capacity investment under demand uncertainty, but also its sourcing of funds. Ours is the first study of this problem to follow an optimal contracting approach, where feasible source of funds are derived endogenously from fundamentals and include standard financial claims (debt, equity, convertible debt, call and put warrants, etc.) and combinations thereof. We characterize the optimal capacity level. First, we find conditions under which a feasible financial contract exists that achieves first-best. When no such contract exists, we find that under optimal financing, the choice of capacity sometimes exceeds strictly the efficient level. This runs counter to the literature on financing capacity investment in funds and the intuition that by raising the cost of external capital and hence the unit capacity cost, financial market frictions lower the optimal capacity level. We trace the value of increasing capacity beyond the efficient level to a bonus effect and a demand differentiation effect. In contrast to most of the literature on financing capacity, our results are robust to a change of financial contract

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


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