Articles

Ambiguity Aversion and Household Choice Puzzles: Empirical Evidence

S. G. DIMMOCK, R. KOUWENBERG, O. S. MITCHELL, K. PEIJNENBURG

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

http://www.sciencedirect.com/science/article/pii/S0304405X16000040?via%3Dihub


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

Debt decisions in deregulated industries

A. OVTCHINNIKOV

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

http://dx.doi.org/10.2139/ssrn.2314302


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

D. FILIPOVIC, A. TROLLE

Quantitative Finance

2016, vol. 16, n°9, pp.1413-1422

Départements : Finance

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

http://www.tandfonline.com/doi/full/10.1080/14697688.2016.1152391


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

F. DERRIEN, A. KECSKÉS, S. A. MANSI

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

https://doi.org/10.1016/j.jcorpfin.2016.05.002


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

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

B. SOLNIK, T. WATEWAI

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

https://academic.oup.com/raps/article/6/2/221/2526567/International-Correlation-Asymmetries-Frequent-but


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

News Trading and Speed

T. FOUCAULT, J. HOMBERT, I. ROSU

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

http://dx.doi.org/10.2139/ssrn.2188822


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

E. H. COSLOR, C. SPAENJERS

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

Risk-Sharing or Risk-Taking? Counterparty Risk, Incentives, and Margins

B. BIAIS, F. HEIDER, M. HOEREVA

The Journal of Finance

aout 2016, vol. 71, n°4, pp.1669-1698

Départements : Finance


Derivatives activity, motivated by risk-sharing, can breed risk-taking. Bad news about the risk of an asset underlying a derivative increases protection sellers’ expected liability and undermines their risk-prevention incentives. This limits risk-sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers’ incentives and in turn enhance risk-sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk-prevention incentives

The Annuity Puzzle Remains a Puzzle

K. PEIJNENBURG, Theo NIJMAN, Bas WERKER

Journal of Economic Dynamics and Control

septembre 2016, vol. 70, pp.18-35

Départements : Finance, GREGHEC (CNRS)

Mots clés : Asset allocation; Life-cycle portfolio choice; Annuity; Savings

http://www.sciencedirect.com/science/article/pii/S0165188916301002


We examine incomplete annuity menus, background risk, bequest motives, and default risk as possible drivers of divergence from full annuitization. Contrary to what is often suggested in the literature, we find that full annuitization remains optimal if saving is possible after retirement. This holds irrespective of whether real or only nominal annuities are available. Whenever liquidity is desired, individuals save sizeable amounts out of their annuity income to smooth consumption shocks. Similarly, adding equity-linked annuities to the menu does not increase welfare significantly, since individuals can invest in stocks in order to get the desired equity exposure

The Sovereign-Bank Diabolic Loop and ESBies

M. K. BRUNNERMEIER, L. GARICANO, P. R. LANE, M. PAGANO, R. REIS, T. SANTOS, D. THESMAR, S. VAN NIEUWERBURGH, D. VAYANOS

American Economic Review

mai 2016, vol. 106, n°5, pp.508-512

Départements : Finance


We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free


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