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

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

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

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


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


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

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


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

Accurate Methods for Approximate Bayesian Computation Filtering


Journal of Financial Econometrics

automne 2015, vol. 13, n°4, pp.798-838

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

Mots clés : Bandwidth, Kernel density estimation, Likelihood estimation, Model selection, Particle filter, State-space model, Value-at-risk forecasts

The Approximate Bayesian Computation (ABC) filter extends the particle filtering methodology to general state-space models in which the density of the observation conditional on the state is intractable. We provide an exact upper bound for the mean squared error of the ABC filter, and derive sufficient conditions on the bandwidth and kernel under which the ABC filter converges to the target distribution as the number of particles goes to infinity. The optimal convergence rate decreases with the dimension of the observation space but is invariant to the complexity of the state space. We show that the adaptive bandwidth commonly used in the ABC literature can lead to an inconsistent filter. We develop a plug-in bandwidth guaranteeing convergence at the optimal rate, and demonstrate the powerful estimation, model selection, and forecasting performance of the resulting filter in a variety of examples

Central clearing and collateral demand


Journal of Financial Economics

mai 2015, vol. 116, n°2, pp.237-256

Départements : Finance, GREGHEC (CNRS)

Mots clés : Central clearing party; Margin; Credit default swap; Collateral; Client clearing

We use an extensive data set of bilateral credit default swap (CDS) positions to estimatethe impact on collateral demand of new clearing and margin regulations. The estimatedcollateral demands include initial margin and the frictional demands associated with themovement of variation margin through the network of market participants. We estimatethe impact on total collateral demand of more widespread initial margin requirements,increased novation of CDS to central clearing parties (CCPs), an increase in the number ofclearing members, the proliferation of CCPs of both specialized and non-specialized types,collateral rehypothecation practices, and client clearing. System-wide collateral demand isincreased significantly by the application of initial margin requirements for dealers,whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements,mandatory central clearing is shown to lower, not raise, system-wide collateraldemand, provided there is no significant proliferation of CCPs. Central clearing does,however, have significant distributional consequences for collateral requirements acrossmarket participants

Dynamics of Innovation and Risk


Review of Financial Studies

mai 2015, vol. 28, n°5, pp.1353-1380

Départements : Finance

We study the dynamics of an innovative industry in which agents learn about the likelihood of negative shocks. Managers can exert risk prevention effort to mitigate the consequences of shocks. If no shock occurs, confidence improves, attracting managers to the innovative sector. But, when confidence becomes high, inefficient managers exerting low riskprevention effort also enter. This stimulates growth, while reducing risk prevention. The longer the boom, the larger the losses if a shock occurs. Although these dynamics arise in the first-best, asymmetric information generates excessive entry of inefficient managers, earning informational rents, inflating the innovative sector, and increasing its vulnerability