Browse Articles

 

Prince Hikouatcha and Roméo Tédongap

"Valuing downside risk on international stock markets"

Michael O’Connell

"Model Comparison in French Stock Returns"

Philippe Bertrand and Jean-Luc Prigent

"Optimal Portfolio Allocation with Long-Short Strategies: Application to Factor Investing"

Philippe Madiès, Mathis Mourey and Ollivier Taramasco

"Size does matter, as well as sector activities: Systemic Risk Sensitivities of financial firms in the U.S. and European Stock Markets"

Bert D’Espallier, Marek Hudon, Susanna Khavul, Ariane Szafarz 

"Donors talk: The signaling and imprinting effects of giving to social enterprises", Finance, 45(2)


Isabelle Allemand, Daniela Borodak, Xavier Hollandts

"Board Gender Diversity and ESG: The Influence of the Varieties of Capitalism", Finance, 45(2)


Eric De Bodt, Jean-Gabriel Cousin, Marion Dupire

"Does CSR Help Firms to Cope with Supply Chain Disruptions? Evidence from the Suez Canal Ever Given Obstruction", Finance,45(2)


Max Berre

"Can Startups Disrupt the Gender Pay Gap? Disruption of Economic Exclusion A Two-Tiered Approach", Finance,45(2)
 

François Belot, Edith Ginglinger, Laura T. Starks

"Encouraging long-term shareholders: The effects of loyalty shares with double voting rights", Finance,45(1)


Dejan Glavas, Franck Bancel

"Does State Ownership Impact Green Bond Issuance? International Evidence", Finance,45(1)


Gaëtan Le Quang

"Mind the conversion risk: contingent convertible bonds as a transmission channel of systemic risk", Finance, 45(1)


Miia Chabot, Jean-Louis Bertrand, Valentin Courquin

"Climate Interconnectedness and Financial Stability", Finance,45(1)

 Nicolae Stef, Sophia Dimelis

"Does government stability affect the banking system’s stability?", Finance, 44(3)


Ramzi Benkraiem, Sabri Boubaker, Imen Derouiche, Emilios Galariotis

"Excess Control Rights, Multiple Large Shareholders, and Corporate Cash Holding Behavior", Finance, 44(3)


Jean-Gabriel Cousin, Marion Dupire, Jean-Yves Filbien

"Proximity with affinity: How M&A top executives could exacerbate agency conflicts?",  Finance, 44(3)


Massimiliano Caporin,
Syed Jawad Hussain Shahzad

"Sign effects of volatility and jumps in forex markets and a reappraisal of meteor showers and heat waves", Finance, 44(3)

François Desmoulins-Lebeault, Jean-François Gajewski, Luc Meunier

"The Impacts of Incentive Contracts and Hormones on Risk Taking", Finance, 44(2)


Rémy Estran, Victor-Manuel de Fabritus, Antoine Souchaud

"Development of a Shadow Rating Model", Finance, 44(2)


Florence Depoers, Assil Guizani, Faten Lakhal

"Stock Price Crash Risk, Managerial Ownership, and Cost of Debt", Finance, 44(2)


Radu Burlacu, Patrice Fontaine, Sonia Jimenez-Garces

"Why Do Investors Buy Shares of Actively Managed Equity Mutual Funds? Considering the Correct Reference Portfolio from an Uninformed Investor’s Perspective", Finance, 44(2)


Cécile Casteuble, Laetitia Lepetit, Thu Ha Tran

"Board gender quotas: can women realistically boost firm performance?", Finance, 44(1)

Roman Skripnik

"Mutual Fund Screening Versus Weighting", Finance, 44(1)

Thomas David, Michael Troege

"How do Large Firms Manage their Banking Pools?", Finance, 44(1)

Ludovic Vigneron

"Distance in Reward-Based Crowdfunding", Finance, 44(1)

Fabio Bertoni, Alexander Peter Groh

"The Benefit of Cross-Border Investments in the Chinese Emerging Venture Capital and Private Equity Market", Finance, 43(3)

Muhammad Farooq Ahmad, Eric De Bodt, Helen Bollaert

"Mergers and Acquisitions Across Cultures", Finance, 43(3)

Christophe Desagre, Catherine D’Hondt, Mikael Petitjean

"The rise of fast trading: Curse or blessing for liquidity?", Finance, 43(3)

Hamid Boustanifar

"Bankruptcy Reform, Credit Availability, and Financial Distress", Finance, 43(3)

Erkin Diyarbakirlioglu, Marc Desban, Souad Lajili Jarjir

"Asset pricing models with measurement error problems: A new framework with Compact Genetic Algorithms", Finance, 43(2)

Constantin Mellios, Anh Ngoc Lai

"Incentive Fees with a Moving Benchmark and Portfolio Selection under Loss Aversion", Finance, 43(2)

Serge Darolles, Gaëlle Le Fol, Gulten Mero

"Timing the Size Risk Premia", Finance, 43(2)

Vivien Lefebvre, Anaïs Hamelin

"The oak and the reed: Working capital management and the role of business group affiliation", Finance, 43(2)

Special issue honoring the memory of Professor Roland Portait

Patrice Poncet, Patricia Charléty, Bernard Dumas, Isabelle Bajeux-Besnainou, Benjamin Croitoru

"Honoring the Memory of Professor Roland Portait", Finance, 43(1)

Roméo Tédongap, Jules Tinang

"Portfolio Optimization and Asset Pricing Implications under Returns Non-Normality Concerns", Finance, 43(1)

Georges Hübner, Thomas Lejeune

"Portfolio choice and mental accounts: A comparison with traditional approaches", Finance, 43(1)

Philippe Bertrand, Jean-Luc Prigent

"Performance Participation Strategies: OBPP versus CPPP", Finance, 43(1)

Hervé Boco, Laurent Germain, Fabrice Rousseau

"When Overconfident Traders Meet Feedback Traders", Finance, 42(3)

Vivien Lefebvre

"Cash holdings in privately held firms: A closer look on the precautionary motivation for smaller firms", Finance, 42(3)

Alexandre Garel, Arthur Petit-Romec

"The Resilience of French Companies to the COVID-19 Crisis", Finance, 42(3)

Marion Dupire, Frédéric Lobez, Jean-Christophe Statnik

"Credit spread determinants. How loan officer seniority matters", Finance, 42(3)

Hubert de La Bruslerie, Alain Coën

"Hyperbolic or exponential time discounting function? Empirical evidence using a conditional Consumption Capital Asset Pricing Model", Finance, 42(2)

Hava Orkut

"Foreign Stock Investment and Sophistication of French Retail Investors", Finance, 42(2)

Raphaëlle Bellando, Laura-Dona Capotă, Sébastien Galanti

"Bond Fund Fragility: Flow Reactions to Extremely Negative Return Shocks", Finance, 42(2)

Olessia Caillé, Louis Raffestin

"Cross-Asset Holdings and the Interbank Lending Market", Finance, 42(2)

Aitzaz Ahsan Alias ​​Sarang (Aix-Marseille University), Nicolas Aubert (Aix-Marseille University), Xavier Hollandts (Kedge Business School)

"Board Gender Diversity and Corporate Cash Holdings", Finance, 42(1)

Lionel Almeida (Conservatoire national des arts et métiers)

"Controlling shareholders and CEO pay monitoring: A panel threshold approach on the degree and seniority of control", Finance, 42(1)

Alain Coën (Univsersity of Quebec in Montreal), Arnaud Simon (Paris Dauphine University), Saadallah Zaiter (Paris Dauphine University)

"Why is there a Home Bias? An Analysis of US REITs Geographic Concentration", Finance, 42(1)

François Belot (CY Cergy Paris University), Timothée Waxin (Léonard de Vinci University Center)

"Family Control, Stock Price Levels, and Stock Split Activity", Finance, 42(1)

Hayne Leland (Berkeley Haas), Dirk Hackbarth (Questrom School of Business)

"Debt Maturity and the Leverage Ratcheting Effect", Finance, 40(3)

Hayne Leland (Berkeley Haas)

"Bond Prices, Yield Spreads, and Optimal Capital Structure with Default Risk", Finance, 40(3)

Ulrich Hege (TSE), Pierre Mella-Barral (TBS Business School)

"Bond Exchange Offers or Collective Action Clauses?", Finance, 40(3)

David C. Shimko (NYU Tandon)

"Long-Term Project Valuation in Capital-Constrained Firms", Finance, 40(3)

Franck Moraux (Université de Rennes 1)

"On Bankruptcy Procedures and the Valuation of Corporate Securities", Finance, 40(3)

Thomas Renault (Université Paris 1 Panthéon-Sorbonne), Roland GILLET (Université Paris 1 Panthéon-Sorbonne)

"When machines read the Web: market efficiency and costly information acquisition at the intraday level", Finance, 40(2)

Patricia Charléty (ESSEC), Marie-Cécile Fagart (Paris Descartes University), Saïd Souam (Paris-Nanterre University)

"Mandatory Voting, Large Shareholder Power, and Wolf Packs", Finance, 40(2)

Olessia Caillé ( University of Orléans) , Daria Onori ( University of Orléans )

"Conditional Risk-Based Portfolio", Finance, 40(2)

Louis Raffestin (Université de Bordeaux)

"Endogenous crashes in the foreign exchange market: a theoretical model", Finance, 40(1)

Anna Calamia (TBS Business School), Laurent Deville (EDHEC BS), Fabrice Riva (Université Paris-Dauphine)

"Liquidity provision in ETF markets: The basket and beyond", Finance, 40(1)

Stefano Nasini (IÉSEG School of Management), Deniz Erdemlioglu (IÉSEG School of Management)

"Multiple channels of financial contagion: an empirical analysis of stock price dynamics", Finance, 40(1)




Institutional Trading and Near-Term Stock Returns

 

Authors : Bernd Hanke, Garrett Quigley, David Stolin, Maxim Zagonov

It is common for investment practitioners and commentators to link security returns with the level of institutional demand for these securities. The academic literature on linking (changes in) institutional holdings and subsequent stock returns has now reached critical mass. However, most of the evidence is US based with institutional holdings disclosed on an infrequent (i.e. at most quarterly) basis and reported with a substantial delay. Our paper, on the other hand, uses comprehensive UK institutional holdings data which are disclosed on a monthly basis and in a timelier manner. This allows us to conduct a cleaner analysis and helps gain insight into shorter-term linkages between institutional trading and returns. In contrast to US findings, we find no evidence that institutional trading significantly moves prices in the concurrent month, or that institutional trading positively predicts near-term returns. In fact, portfolios that are long stocks with little institutional trading activity outperform portfolios of actively traded stocks by up to 1 percent per month.

DATE PUBLISHED: 15/12/2018

VOLUME: 39

NUMBER: 3

Testing the new Fama and French factors with illiquidity: A panel data investigation

 

Authors : François-Éric Racicot, William F. Rentz, Raymond Théoret

We investigate the new Fama-French (FF, 2015, 2016) five factors augmented with a well-known illiquidity measure (Pástor and Stambaugh, 2003), using an innovative GMM robust instrumental variables estimator casted in a panel data framework. When using OLS, the augmented FF model seems to have explanatory power regarding the FF 12-sector returns. However, our panel data framework suggests that the only consistently significant factor is the market risk factor. Nevertheless, depending on the technique we use, we find that measurement errors may be the cause of this result, thus providing some empirical evidence in support of the new FF five-factor approach. As robustness checks, we also experiment with other liquidity measures – like the Amihud (2002) ratio and the term-spread – and bond-oriented factors. Across our 12 portfolios, the results are largely unchanged. We also apply our extended model to managed portfolios – i.e., hedge fund portfolios. The returns of hedge fund strategies seem more responsive to the augmented FF five-factor model that includes illiquidity measures, especially when accounting for the subprime crisis. There is also evidence that the new FF factors embed illiquidity.

DATE PUBLISHED: 15/12/2018

VOLUME: 39

NUMBER: 3

A literature review on neurofinance

 

Authors : Guillaume Baechler, Laurent Germain

Financial literature has taken to investigating individual investor behaviour. Some of the findings are quite puzzling, seeing as they are not consistent with classical models of rational behaviour. This is a challenge that has been partially solved by new models of investor behaviour in behavioural finance. Neurofinance has emerged as a new field since the late 1990s, seeking to understand the underlying aspects of financial decision-making. Psychology and neuroscience are some of the research fields that are merged in neurofinance to physiologically test finance theories. Our aim in this paper is to review the most prominent topics in neurofinance.

DATE PUBLISHED: 15/09/2018

VOLUME: 39

NUMBER: 2 Special issue in honor of Nobel prize winner Richard Thaler

Financial decisions of the financially literate

 

Authors : Nicolas Aubert, Niaz Kammoun, Yacine Bekrar


This paper investigates the portfolio performance of the company-based savings of a cross section of approximately 30,000 employees of a listed French bank. We have detailed information about each job position in the bank, which enables us to study the employees’ financial literacy, specific knowledge of the plans offered, and private information. These better-informed bank employees supposedly adopt behavior that is the closest to that of an informed rational investor. We explore the employees’ portfolio performance in the savings plans and find that financial expertise and knowledge of the plans are related to participation in the plans offered by the company. Financial expertise is related to better employee stock purchase plans (ESPP) individual portfolio performance but not to the company-based savings plan (CSP) and the overall performance of the company’s plans. For both offered plans, participation is more likely among the job categories (including finance experts), female employees, more educated employees and less financially constrained employees. We find evidence of the mental accounting of company stock highlighted by Benartzi and Thaler (2001).

DATE PUBLISHED: 15/09/2018

VOLUME: 39

NUMBER: 2 Special issue in honor of Nobel prize winner Richard Thaler

What can we learn from neurofinance?

 

Authors : François Desmoulins-Lebeault, Jean-François Gajewski,  Luc Meunier

Neurofinance is a relatively recent field which aims to unveil the neurobiological mechanisms through which decisions are made in finance. This article investigates how neurosciences can contribute to the study of finance and the most appropriate ways for neuroscientific methodologies to be applied to financial situations. In order to examine these areas, we have produced a literature review around three axes of the main neuroscientific studies published in finance: financial risk; discounting and credit risk; information and trading decisions. One of the crucial insights offered by neurofinance is how to reconcile classic and behavioral finance by showing that emotions are critical to rational decision-making, in spite of also being part of the origin of biases. Through its unique set of techniques, neurofinance is able to pinpoint the biological and neurological explanations behind some of the common biases highlighted by behavioral finance, as well as tackle some novel questions. We conclude this review by pointing toward potentially fruitful avenues for future research and by highlighting which methods appear particularly well adapted for neurofinancial studies.

DATE PUBLISHED: 15/09/2018

VOLUME: 39

NUMBER: 2 Special issue in honor of Nobel prize winner Richard Thaler

Richard Thaler: The anomalies of life

 

Authors : Werner De Bondt, Marie Pfiffelmann, Patrick Roger

For four decades, the spirited, contentious ideas of Richard Thaler, laureate of the 2017 Nobel Prize in economics, have perturbed eco­nomics and finance as well as decision theory, accounting, marketing, law, and public policy. We review Thaler’s research philosophy and principal contributions, with an emphasis on his contributions to finance. In particular, we summarize and evaluate his work on inefficient markets, framing, decisions under risk, and choi­ce architecture.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Analysts’ stickiness, over-reaction and drift

Author : Romain Boulland

We show that investor underreaction and overreaction to company news (Michaely, Thaler, and Womack, 1995; De Bondt and Thaler, 1985) can be traced back to sell-side analysts’ tendency to delay their stock recommendations for several months. Analysts exhibit stickiness in their stock recommendations because they face reputational concern in changing such recommendations too often and/or difficulties in processing new information. Using a broad set of corporate events, we find that heterogeneity among the population of analysts causes their response to corporate news to be spread over several months. Long-term drift and return reversal following those events can be predicted at different horizons by the fraction of contrarian recommendations, i.e., recommendations that contradict the initial market reception of the news. Together, our findings highlight the role of analysts’ stickiness in shaping long-term stock price reaction to corporate news.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Round-Number Bias in Investment: Evidence from Equity Crowdfunding

 

Authors : Fabrice Hervé,  Armin Schwienbacher

We examine whether uncertainty affects the use of round numbers in investment decisions. Using unique data of more than 15,000 investments from WiSEED—the largest equity crowdfunding platform in France—for the period 2009-2016, we find that investors are more likely to invest a round number when facing greater uncertainty in equity crowdfunding campaigns. As more investors pledge funds, the perceived uncertainty is reduced, which in turn reduces the use of round numbers by follow-up investors. This finding is consistent with the round-number bias. When investors no longer know the funding status of the ongoing campaign, experience helps reduce the round-number bias. This suggests the presence of a learning-by-doing phenomenon through experience: as investors become more familiar with equity crowdfunding investments, they are less prone to behavioral bias. These findings are consistent with behavioral theories of investment.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Investment goals and mental accounting in French retail clients

 

Authors : Marie-Hélène Broihanne, Hava Orkut

Mental accounting is a cognitive process that guides individuals’ personal financial decisions. Although well-documented, the investigation into how individuals form and select mental accounts, how these accounts evolve over time and are affected by environmental factors, has yet to be undertaken. In this paper, we identify how an external force, the MiFID questionnaire, may strengthen mental accounting. Based on a sample of more than 60,000 retail clients’ questionnaire answers and banking records, we identify the determinants of the number of investment goals. We build a typology of retail clients’ mental goals and show that the actual investment decisions of retail clients, fit their mental goals.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Employment Protection and Payout Policy

 

Authors : Muhammad Farooq Ahmad, Christof Beuselinck, Helen Bollaert

This paper examines the relationship between employment protection legislation (EPL) and corporate payouts. Employees are corporate claimants who compete with shareholders to extract economic rents generated by the firm, so management is influenced by workforce power via the EPL framework in setting its corporate payout policy. For a large international sample of 21 OECD countries for the period 1985-2013, we find that a one standard deviation increase in labor protection leads to a 5.07% (12.17%) lower dividend (total) payout. Consistent with the flexibility hypothesis, we find that EPL has a greater impact on payout in firms that are more resource-constrained such as labor-intensive firms, firms that face financial constraints and firms with higher operating leverage. The effects of tightening and loosening EPL are not symmetrical. Firms increase dividend payouts after employment protection is softened but are reluctant to cut dividends when employment protection is tightened. Our results provide important insights in the dynamics between labor law regulations and corporate financing decisions.

DATE PUBLISHED: 15/12/2017

VOLUME: 38

NUMBER: 3

Modelling bank leverage and financial fragility under the new minimum leverage ratio of Basel III regulation

 

Authors : Olivier Bruno, André Cartapanis, Eric Nasica

We analyse the determinants of banks’ balance sheet and leverage ratio dynamics, and its role in increasing financial fragility. Our results are twofold. First, we show there exists a value of bank leverage minimising financial fragility. Second, this value depends on the overall business climate and the expected value of the collateral provided by firms. Based on our findings, we argue that an adjustable leverage ratio restriction dependent on economic conditions would be preferable to the fixed ratio included in the new Basel III regulation.

DATE PUBLISHED: 15/12/2017

VOLUME: 38

NUMBER: 3

Investor Sentiment and Stock Return Predictability: The Power of Ignorance

 

Authors: Catherine D'HONDT, Patrick ROGER

Sentiment measures, based on the trading activity of retail investors, carry some predictive power of future market returns. In this paper, we use such a sentiment measure on two samples of approximately 25,000 individual investors, who differ in their choices when answering MiFID questionnaires, especially in terms of their appetite for information and professional recommendations. Our data covers 51 months from January 2008 to March 2012. We show that the sentiment of investors who disregard free information and professional advice is the best predictor of future returns on a long-short portfolio based on size. Our findings remain valid when controlling for investor characteristics like spoken language (French or Dutch), portfolio value and financial literacy. Our results bring evidence that sentiment is essentially driven by under diversification and narrow framing by retail investors. When shared by many investors, sentiment can generate long-lived mispricing, which is, therefore, difficult to arbitrage.

DATE PUBLISHED: 15/09/2017

VOLUME: 38

NUMBER: 2

Performance-Sensitive Debt: A New Mechanism

 

Authors: Sami ATTAOUI, Moez BENNOURI, Imen MEJRI

We propose a new mechanism of finite-maturity performance-sensitive debt (PSD). Unlike typical PSD, our mechanism relates positively the firm’s performance, captured by the level of its assets, to the coupon rate. That is, when its performance improves, the firm pays a high coupon rate, and when its performance deteriorates, the firm pays a low coupon rate. In a fairly general setting, we provide the necessary and sufficient conditions for our PSD to be efficient, and show that this mechanism can be immune against risk-shifting when augmented with a covenant deterring managers from changing risk following debt issuance. We analyze the characteristics of an example of such a mechanism where the coupon rate is a stepwise function of assets, and find that intermediate credit quality firms benefit most from it. This suggests that this new PSD should be considered as a complement to typical ones.

DATE PUBLISHED: 15/09/2017

VOLUME: 38

NUMBER: 2

ROE in Banks: Performance or Risk Measure? Evidence from Financial Crises

 

Authors: Christophe MOUSSU, Arthur PETIT-ROMEC

Return on equity (ROE) is a central measure of performance in the banking industry. The reliance on ROE emerged with the risk management approach that inspired bank capital regulation. In this paper, focusing on the 2007-2008 crisis, we empirically assess the validity of ROE as a performance measure in the banking industry. We document that pre-crisis ROE is a strong predictor of both bank standalone and systemic risk during the crisis. These results are unchanged for the 1998 crisis. Banks appear to be special as the same association between pre-crisis performance measures and the materialization of risk in crisis periods is not observed for firms outside the banking industry. Complementary tests confirm the existence of monetary incentives associated to ROE. Overall, our findings challenge the use of ROE as a main performance measure in banks and its incorporation in bank executives’ compensation contracts.

DATE PUBLISHED: 15/09/2017

VOLUME: 38

NUMBER: 2

Competition in Exchanges and Reputational Concerns

 

Authors: Selma BOUSSETTA

This paper proposes a theoretical model to analyse the effect of competition on the quality of the certification process offered by stock exchanges. If the stock exchange truthfully certifies the quality of a new issue, then it would list only the good projects, which would alleviate information asymmetries and generate gains from trade. However, it may be more protable for the listing requirements of exchanges to be too lax. The trade-off between short-term profits and reputation effects induces strategic behaviour. The results show that overestimating the quality of a project is an equilibrium despite the presence of reputation costs. Counterintuitively, introducing competition leads to more lax requirements than in the monopolistic case and reduces welfare as long as the reputation of the competitor is higher than that of the monopolistic stock exchange.

DATE PUBLISHED: 15/06/2017

VOLUME: 38

NUMBER: 1

Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

 

Authors: Eduard DUBIN, Olesya V. GRISHCHENKO, Vasily KARTASHOV

We explicitly solve for aggregate asset prices in a discrete-time general- equilibrium endowment economy with two agents who differ with respect to their preferences for risk aversion and sensitivity to additive habit, either internal or external. We generalize an algorithm of Dumas and Lyasoff (2012) for the case of utility functions with time nonseparability that is induced by habit preferences. In the internal habit case, we find that the equilibrium equity premium, equity return volatility, Sharpe ratio, and risk-free rate and its volatility are more consistent with historically observed aggregate prices relative to the external habit case (“catching up with the Joneses”).

DATE PUBLISHED: 15/06/2017

VOLUME: 38

NUMBER: 1

Bank Deregulation, Consolidation and Stability: Evidence on US M&A Centric Activity

 

Authors: Saqib AZIZ, Jean-Jacques LILTI

Employing a difference-in-difference estimation over a sample of 3,447 M&A deals of U.S. banks from 1990 to 2009, we examine the relation between U.S. bank deregulation, M&A centric consolidation and bank stability. Bank deregulation, in terms of its entirety, positively relate with M&A centric consolidation in U.S. However, the evidence on functional- and geographic-diversity aimed deregulatory acts is mixed. Our findings predominantly hold in the pre-crisis period analysis and disappear when the period extends to financial crisis. Lastly, deregulation and consolidation jointly cast negative effects over the stability of U.S. banks. Our findings broadly support the narrative that holds deregulation partly responsible for the 2007 financial calamity.

DATE PUBLISHED: 15/06/2017

VOLUME: 38

NUMBER: 1

Government Awards as Economic Instruments of Governance

 

Authors: Linus SIMING

This paper investigates if government awards can act as instruments that influence corporate behaviour. For identification I use the staggered introduction of orders of merit in six German states after the reunification. The introduction of orders leads to a fall in profitability but an increase in employment. However, CEOs who ultimately receive the awards are not running less profitable firms than CEOs who do not win awards but they employ more people. The performance of the honoured CEOs does not worsen after they have received an order. Overall, the results suggest that government awards function as economic instruments of governance.

DATE PUBLISHED: 15/12/2016

VOLUME: 37

NUMBER: 3

Smart Beta and CPPI Performance

 

Authors: David ARDIA, Kris BOUDT, Marjan WAUTERS

CPPIs are popular medium- to long-term investment products that dynamically allocate between a risk-free asset and a risky portfolio, with the objective of combining upside potential with a capital guarantee. This paper uses a block-bootstrap evaluation approach to study whether combining smart beta and portfolio insurance is mutually beneficial under various scenarios. Our results show that the improvement in performance is most apparent for CPPIs combined with a low-risk equity portfolio. This finding is consistent with the negative vega of CPPIs and with path-dependency of the CPPI protection against portfolio losses between rebalancing dates.

DATE PUBLISHED: 15/12/2016

VOLUME: 37

NUMBER: 3

Recent Trends in Executive Compensation: Are They Pareto Improving?

 

Authors: Igor SALITSKIY

In recent years firms have been shifting their executive compensation packages from plain stock and option grants to grants with accounting-based performance vesting provisions and awards that benchmark firm performance against those of a designated peer group. One potential explanation for this trend is that firms want to improve the signal-noise ratio of performance measures. This paper directly tests this hypothesis. It estimates the statistical relationship between various performance measures and computes the optimal combination of awards. It finds that the observed trend is consistent with compensation optimization. It also finds that firms with higher potential gains from switching to alternative performance characteristics have increased their usage more than other firms.

DATE PUBLISHED: 15/09/2016

VOLUME: 37

NUMBER: 2

Feedback Effects and Endogenous Risk in Financial Markets

 

AUTHORS: Lakshithe WAGALATH

This paper studies feedback effects and endogenous risk in financial markets. In order to model those effects in a non parsimonious manner, we propose a general framework of a financial market with multiple assets which takes into account feedback effects from systematic trading by large financial institutions and which is flexible enough to incorporate the impact of any type of trading strategy that can be source of feedback. The model yields tractable formulas linking realized volatilities and correlations to the strategies followed by large financial institutions and the asset liquidities and shows that, in the presence of feedback effects, asset dynamics may deviate significantly from fundamentals and be driven more by the market capitalizations and strategies of large financial institutions. We quantify the price-mediated contagion to other investors generated by feedback effects and give a decomposition of endogenous risk between a volatility component and a correlation component. The results developed in this paper are useful in a risk-management perspective as they provide a flexible framework to better tackle and anticipate liquidity events caused by large trades and also in a systemic risk-management perspective as they enable to quantify price-mediated contagion.

DATE PUBLISHED: 15/09/2016

VOLUME: 37

NUMBER: 2

A Repeat-sales Index for Pricing US Corporate Bonds

 

AUTHORS: Renaud BEAUPAIN, Stephanie HECK

In this paper we use a repeat-sales index methodology to construct US corporate bond price indices. Using several performance tests, we show that this methodology provides superior index estimates. In particular when assets trade at infrequent and irregular intervals the repeat-sales index is superior to taking an arithmetic price average. The methodology can readily be applied to any sub-sample of bonds based on a particular characteristic, such as the rating or the maturity. We further study the sensitivity of individual bond returns to systematic market risk as measured by a repeat-sales price index. Results indicate that variations in the price index are an important determinant of the time series and of the cross-sectional variation of corporate bond returns.

DATE PUBLISHED: 15/09/2017

VOLUME: 37

NUMBER: 2

Emerging Market Risk Premia Fluctuations: A micro-founded decomposition

 

Authors: Paula MARGARETIC

This paper aims at deepening our understanding of emerging market (EM) sovereign bond spread fluctuations. I first build a noisy rational expectation model, with imperfect information, in which some informed investors receive a noisy private signal about the emerging country’s ability and willingness to repay its sovereign debt. I show that, in equilibrium, sovereign bond prices and spreads depend on country characteristics, international capital flows and more surprisingly, on how dispersed information about the EM sovereign bond market is. I then empirically test the relevance of this equilibrium relation, using a monthly Panel data for 11 EMs over 2000-2012. Interestingly, the empirical investigation provides strong evidence in favor of the parsimonious representation of the EM sovereign bond spreads the theoretical model delivers. As theoretically predicted, country spreads increase with less liquidity available, with diminishing international reserves, with worsening governance and crucially, with more dispersed information about the EM sovereign bond market. The latter is a novel and salient result for EMs.

DATE PUBLISHED: 15/06/2016

VOLUME: 37

NUMBER: 1

The Asymmetrical Behavior of Hedge Funds across the State of the Business Cycle: The q-factor Model Revisited

 

Authors: François-Éric RACICOT, Raymond THÉORET


We study the performance of the five-factor model recently proposed by Fama and French (2015) in the setting of hedge funds’ strategies. Given the dynamic dimension of the strategies followed by hedge funds, we adopt a Markov regime switching setup where the factor loadings vary according to the regime, high or low. We find that the addition of the factors which drive returns in the q-model – i.e., the investment factor (CMA) and the profitability factor (RMW) – does not improve the global performance of the classical hedge fund return model. However, we find that CMA and RMW span risk dimensions which are not captured by the size factor (SMB) and the value factor (HML). In other respects, some strategies succeed in anticipating shocks and “time” the risk factors over the two regimes while other strategies are less successful in controlling risk during the low regime. All in all, consistent with other empirical studies, we find that risk factors are generally more at play in the low regime.

DATE PUBLISHED: 15/06/2016

VOLUME: 37

NUMBER: 1

Paulson Plan Credits

 

Authors: Eric de BODT, Frederic LOBEZ, Armin SCHWIENBACHER

The Capital Purchase Plan (CPP) is one of the main ingredients of the Paulson Plan. In accordance with the CPP, U.S. federal agencies invested more than $200 billion in approximately 700 financial institutions in 2008 and 2009. This article examines whether the CPP as a major public intervention helped to decrease financial institutions’ systemic risk contribution. We use ΔCoVaR (Adrian and Brunnermeier, 2016) as measure of systemic risk contribution, as well as a difference-in-difference test. Size, business model and CPP timing all matters when it comes to identify the effects of the CPP. In particular, October 2008 recipients, a limited sample of major industry players, underwent an increase in their systemic risk contribution after CPP funding. This result suggests either a moral hazard issue and/or an indirect effect of the financial industry restructuring in the wake of the Lehman Brothers collapse.

DATE PUBLISHED: 15/06/2016

VOLUME: 37

NUMBER: 1

Overcollateralization in Corporate Securitization

 

Authors: Ilham RIACHI, Armin SCHWIENBACHER


This paper examines the amount of assets sold to the special purpose vehicle (SPV) in the course of corporate asset-backed securitization and its impact on the originator’s working capital management. Originators generally over-collateralize the vehicle as a way to enhance the rating of the securities issued. We find that credit risk of the originator, cash availability by the originator and macroeconomic conditions significantly affect the level of overcollateralization. Furthermore, true sale treatment of ABS transaction are positively linked to overcollateralization. Finally, we provide insights into the impact of ABS on working capital management. Our results suggest that ABS initiation and the use of overcollateralization both improve working capital ratios of the originating firm, in particular receivables and cash conversion cycles.

DATE PUBLISHED: 25/12/2015

VOLUME: 36

NUMBER: 3

Impact of the subprime crisis on the reputation of rating agencies

 

Authors: Jamil JABALLAH


I study the impact of the subprime crisis on the reputation of credit rating agencies by comparing investors’ perceptions of changes in ratings before and during the crisis, on both the European and American stock markets. Using a standard event study methodology, I find significant positive reactions to rating upgrades and significant negative reactions to rating downgrades in normal periods. This effect largely disappears during the crisis, although downgrades still have significant negative reactions on the European stock market. A general concern with event studies during crises is that investors are exposed to an unusual volume of dramatic news that could indirectly affect stock prices. I therefore conduct a Difference-in-Differences study in order to avoid this endogeneity issue. The Difference-in-Differences estimator shows insignificant effects for rating upgrades and downgrades on both stock markets during the crisis. This result supports the view that investors considered that CRAs did not convey reliable information during the crisis.

DATE PUBLISHED: 25/12/2015

VOLUME: 36

NUMBER: 3

The Impact of Different Risk Aversions on The Bond-Stock Mix: A Note

 

Authors: Sami ATTAOUI, Pierre SIX


This paper reexamines the issue of bond stock allocation by considering, contrary to existing literature, that the risk aversion towards consumption is higher than that towards wealth. We mainly find that a higher risk aversion towards consumption significantly increases the bond-stock ratio, due to, in particular an increase in the bond demand. Also, we find that the proportion of wealth used to satisfy future consumption decreases with the risk aversion towards consumption when the investor is sufficiently rich. Next, we show that when the investor’s current consumption decreases to zero, she saves all her wealth to meet future consumption and leaves nothing for her bequest. Finally, we find that the relative risk aversion exhibits a hump shaped pattern in the coefficient of the risk aversion towards consumption.

DATE PUBLISHED: 25/12/2015

VOLUME: 36

NUMBER: 3

Rethinking Zero Returns in the Liquidity Puzzle of a Limit Order Market

 

Authors: Paolo MAZZA


The frequency of zero returns has often been used as a proxy for illiquidity in the literature. Based on Euronext intraday data, we show that zero returns are significantly related to liquidity instead. We conduct an event study and run conditional logit regressions using spread, depth, dispersion and slope measures as liquidity variables. Although we find that zero returns are associated with less informed trading as previously outlined in the literature, this does not necessarily lead to higher illiquidity.

DATE PUBLISHED: 25/06/2015

VOLUME: 36

NUMBER: 2

On Path-Dependent Structured Funds: Complexity Does Not Always Pay (Asian versus Average Performance Funds)

 

Authors: Philippe BERTRAND, Jean-Luc PRIGENT


As emphasized by the U.S. Dodd-Frank Act and the European MiFID directive, financial institutions are required to “categorise their clients and assess their suitability for each type of investment product.” In this framework, this paper examines several standard financial structured products whose performances are based on smoothing the return of an underlying risky asset and providing a guarantee at maturity. We use various criteria such as probabilities of providing merely the guarantee at maturity and Kappa measures. Surprisingly, our study reveals that funds based on averages of calls generally do better than Asian funds.

DATE PUBLISHED: 25/06/2015

VOLUME: 36

NUMBER: 2

Too much of a good thing? The impact of a new bankruptcy law in Canada

 

Authors: Timothy C.G. FISHER, Jocelyn MARTEL

A new, more debtor-friendly bankruptcy law in Canada is associated with a tenfold increase in the proportion of insolvent firms choosing reorganization over liquidation. Comparing before-and-after samples of randomly-selected firms, we find that firms reorganizing under the new law are smaller and weaker with a capital structure exhibiting significantly higher tax claims. Reflecting the bargaining power shift towards debtors, we find the new law is also associated with 25% lower creditor recovery rates and a longer time in reorganization. Unintended effects of the new law include a possible increased government role in financing small businesses and an incentive for secured creditors to favour bankruptcy over other forms of distress resolution.

DATE PUBLISHED: 25/06/2015

VOLUME: 36

NUMBER: 2

A DARE for VaR

 

Authors: Benjamin HAMIDI, Christophe HURLIN, Patrick KOUONTCHOU, Bertrand MAILLET


This paper introduces a new class of models for the Value-at-Risk (VaR) and Expected Shortfall (ES), called the Dynamic AutoRegressive Expectiles (DARE) models. Our approach is based on a weighted average of expectile-based VaR and ES models, i.e. the Conditional Autoregressive Expectile (CARE) models introduced by Taylor (2008a) and Kuan et al. (2009). First, we briefly present the main non-parametric, parametric and semi-parametric estimation methods for VaR and ES. Secondly, we detail the DARE approach and show how the expectiles can be used to estimate quantile risk measures. Thirdly, we use various backtesting tests to compare the DARE approach to other traditional methods for computing VaR forecasts on the French stock market. Finally, we evaluate the impact of several conditional weighting functions and determine the optimal weights in order to dynamically select the more relevant global quantile model.

DATE PUBLISHED: 15/06/2015

VOLUME: 36

NUMBER: 1

Counterparty Credit Risk in a Multivariate Structural Model with Jumps

 

Authors: Laura BALLOTTA, Gianluca FUSAI


We present a multivariate version of a structural default model with jumps and use it in order to quantify the bilateral credit value adjustment and the bilateral debt value adjustment for equity contracts, such as forwards, in a Merton-type default setting. In particular, we explore the impact of changing correlation between names on these adjustments and study the effect of wrong-way and right-way risk.

DATE PUBLISHED: 15/06/2015

VOLUME: 36

NUMBER: 1

Increased Entry Threat and Merger Activity

 

Authors: Nihat AKTAS, Marion DUPIRE-DECLERCK


This paper examines whether and how increased entry threat drives industry merger activity. We use the reduction in import tariffs as a natural experiment of exogenous increase in competitive intensity and study its effect on merger and acquisition (M&A) decisions. Our results indicate that competition drives M&As towards more efficient resource allocation. We first document that increased entry threat intensifies takeover activity, consistent with the argument that M&As are an efficient reaction to economic shocks. We also find that, after import tariff reductions, the selection of targets outside the industry becomes more efficient and industry rivals react more positively to those deals, suggesting that efficient non-horizontal deals signal the existence of investment opportunities outside the industry for the industry peers.

DATE PUBLISHED: 15/06/2015

VOLUME: 36

NUMBER: 1

Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model

 

Authors: Hubert de la BRUSLERIE, Jessica FOUILLOUX


This paper proposes a consumption-based model that accounts for term premiums of the nominal term structure of interest rates. The model focuses on ex ante term premiums, which depend on the volatility processes of real consumption and inflation. The contribution of the paper is to derive and test a parsimonious model that highlights linear relationship between term premiums and next period conditional volatilities. When calibrated to US data on interest rates, consumption and inflation, the model accounts for the C-CAPM expectations puzzle. Risk aversion coefficients between 2 and 7 are elicited.

DATE PUBLISHED: 25/12/2014

VOLUME: 35

NUMBER: 3

Performance of microfinance institutions: do board activity and governance ratings matter?

 

Authors: Hubert TCHAKOUTE TCHUIGOUA


This article aims to empirically verify the relationship among board activity, governance rating scores, and the financial performance of microfinance institutions (MFIs). The study comprises a sample of 215 MFIs rated by Planet Rating between 2003 and 2009. The findings, obtained after controlling for endogeneity and selection biases, suggest that board activity and governance rating scores are associated with profitability. In addition, the study of the moderating effect of legal status reveals a significant difference of the effect of governance rating score and CEO/Chairman duality. In view of the results, it seems difficult to conclude definitively that the legal form of MFIs has a moderating effect on their financial performance. The existence of a moderating effect and thus validation of the thesis that shareholder-based MFI governance systems would be more effective than nonprofit MFIs depends on how governance is measured. The results are robust to other measures of financial performance and to the functional form of board activity.

DATE PUBLISHED: 25/12/2014

VOLUME: 35

NUMBER: 3

The 99% Market Sentiment Index

 

Authors: Patrick ROGER


We build a market sentiment index based solely on the changes over time in the number of different stocks held by individual investors. No prices, returns or trading volumes enter the definition and trades of unwealthy and underdiversified investors are overweighted in our sentiment index. Using the trades and portfolios of a large sample of 87,373 French investors over a eight-year period, we show that our index outperforms other usual indices (based on surveys, macro-economic variables or buy-sell imbalances) in predicting short-term returns on long-short portfolios based on size or on the book-to-market ratio. An increase of one standard deviation of our market sentiment index in a given month implies a decrease of 1.05% of the return on such a long-short size based portfolio the following month. A simple dynamic strategy driven by our sentiment index delivers a Sharpe ratio higher than that of random dynamic strategies in 99.6% of cases and a much higher Sharpe ratio than the one of a buy-and-hold strategy.

 

DATE PUBLISHED: 25/12/2014

VOLUME: 35

NUMBER: 3

Explicit Representation of Cost-Efficient Strategies

 

Authors: Carole BERNARD, Phelim P. BOYLE, Steven VANDUFFEL


In this paper, we give an explicit representation of the lowest cost strategy to achieve a given payoff distribution (that we call “cost-efficient” strategy). For any inefficient strategy, we are able to construct financial derivatives which dominate in the sense of first-order or second-order stochastic dominance. We highlight the connections between cost-efficiency and dependence. This allows us to extend the theory to deal with state-dependent constraints to better reflect real-world preferences. We show in particular that path-dependent strategies (although inefficient in the Black Scholes setting) may become optimal in the presence of state-dependent constraints.

DATE PUBLISHED: 15/12/2014

VOLUME: 35

NUMBER: 2

Stock Returns Memories: a “Stardust” Memory?

 

Authors: Julien FOUQUAU, Philippe SPIESER


This article aims at investigating econometrically the market efficiency concept through an analysis of the dependence structure of stock market index returns. To that purpose, we use a large range of methods in this paper. Six different estimation procedures are applied to obtain the Hurst exponent, starting with the “R/S” approach, continuing with ARFIMA models and ending with wavelet models. We investigate the possible presence of long or short-memory in twelve market indexes between three periods, namely (1960-2013), (1980-2013) and (1990-2013). Our conclusions depend on the degree of financial maturity: most emerging markets display the presence of memory, whereas mature markets show an absence of or very short-memory dynamics.

DATE PUBLISHED: 15/12/2014

VOLUME: 35

NUMBER: 2

The Computation of Risk Budgets under the Lévy Process Assumption

 

Authors: Olivier LE COURTOIS, Christian WALTER


This paper revisits the computation of Value-at-Risk and other risk indicators based on the use of Lévy processes. We first provide a new presentation of Variance Gamma Processes with Drift: we reconstruct them in an original way, starting from the exponential distribution. Then, we derive general Fourier formulas that allow us to compute VaR quickly and efficiently, but also other typical indicators like Tail Conditional Expectation (TCE). Based on such a formula, we conduct a study of the term structure of VaR, and provide a discussion of the Basle 2 and Solvency II agreements.

DATE PUBLISHED: 15/12/2014

VOLUME: 35

NUMBER: 2

Acquisitions and Bidder Stock Valuations: Empirical Evidence from the French Market

 

Authors: Christophe TROWSKI

 

This paper analyzes the influence of industry shocks, mispricing, and managerial overconfidence on merger and acquisition activities on the Euronext Paris stock market, between 1996 and 2010. Merger and acquisition waves are led by industry shocks, where the probability that the target’s shareholders will be paid with stock increases with overpricing of the bidding firm’s shares, and tends to decrease with overconfidence of its manager. It thus appears that behavioral predictions do not necessarily contradict the economic disturbance hypothesis. Quite to the contrary, the influence of managerial overconfidence on the method of payment seems to be sensitive to industry shocks.

DATE PUBLISHED: 15/06/2014

VOLUME: 35

NUMBER: 1

Irrational Market Makers

 

Authors: Laurent GERMAIN, Fabrice ROUSSEAU, Anne VANHEMS


We analyze a model where irrational and rational informed traders exchange a risky asset with irrational market makers. Irrational traders misperceive the mean of prior information (optimistic/pessimistic bias) and the variance of the noise in their private signal (overconfidence/ underconfidence bias). Irrational market makers misperceive both the mean and the variance of the prior information. We show that moderately underconfident traders can outperform rational ones and that irrational market makers can fare better than rational ones. Lastly, we find that extreme level of confidence implies high trading volume.

DATE PUBLISHED: 15/06/2014

VOLUME: 35

NUMBER: 1

M&A Outcomes and Willingness to Sell

 

Authors: Eric DE BODT, Jean-Gabriel COUSIN, Irina DEMIDOVA


Should target shareholders divulgate their willingness to sell (WTS)? In this article, we tackle this issue by investigating the net WTS wealth effect. We first model the trade-off between the probability of a sale and the price paid in case of a sale, and derive testable predictions. We then provide an empirical test using a proxy of the target’s WTS based on deal initiation and the chosen selling procedure, which are hand-collected in Securities and Exchange Commission filings. The results reveal a negative relationship between the target’s displayed WTS and its expected profits, mitig

DATE PUBLISHED: 15/06/2014

VOLUME: 35

NUMBER: 1

Legality and the Spread of Voluntary Investor Protection

 

Authors: CUMMING D., IMAD’EDDINE G., SCHWIENBACHER A.


We examine the spread of Undertakings for Collective Investment
in Transferable Securities (UCITS) funds around the world and consi-
der whether such mutual funds, which voluntarily adopt higher stan-
dards of investor protection, expand their operations to other countries
with higher or lower investor protection regimes. The data indicate
equity funds spread to countries with better anti-director rights and
bond funds spread to countries with better creditor rights; however,
either type of spread is uncorrelated with and unexplained by enforce-
ment standards. The data therefore indicate that the loss of insider
managerial benefits from UCITS constraints is smaller in countries
where legal standards are higher, and this mechanism is a primary
determinant of the spread of voluntary protection mechanisms among
mutual funds. This central finding holds over a wide range of robust-
ness checks and the use of treatment-effect models that account for self selection.

DATE PUBLISHED: 15/12/2013

VOLUME: 34

NUMBER: 3

The value effect of operational hedging: Evidence from foreign takeovers

 

Authors: AKTAS N., COUSIN J.-G., ZHANG J. Y.


The paper examines cross-border takeovers using the lens of cur-
rency risk management. With a sample of 152 large, cross-border deals
undertaken by listed French firms, the findings reveal that acquirers
tend to be firms with greater exposure to the target currency prior to the
takeover announcement. The value of the acquiring firm becomes less
sensitive to the target currency after the transaction. Acquirer abnormal
returns also are positively associated with a decrease in exposure to the
target currency; this gain is economically substantial. For example, for
an acquirer worth €100 million in equity, a one-unit decrease in cur-
rency exposure leads to a gain of €1.68 million.

DATE PUBLISHED: 15/12/2013

VOLUME: 34

NUMBER: 3

What drives the herding behavior of individual investors?

 

Authors: MERLI M., ROGER T.


We introduce a new measure of herding that allows for tracking
dynamics of individual herding. Using a database of nearly 8 million
trades by 87,373 retail investors between 1999 and 2006, we show that
individual herding is persistent over time and that past performance
and the level of sophistication influence this behavior. We are also able
to answer a question that was previously unaddressed in the literature:
is herding profitable for investors? Our unique dataset reveals that the
investors trading against the crowd tend to exhibit more extreme
returns and poorer risk-adjusted performance than the herders.

DATE PUBLISHED: 15/12/2013

VOLUME: 34

NUMBER: 3

A scenario-based description of optimal American capital guaranteed strategies

 

Authors: ATTAOUI S., LACOSTE V.


The aim of the paper is to describe portfolio strategies with partial
guarantee of the initial capital. We consider the option-based (OBPI)
and the constant proportion portfolio insurance (CPPI) strategies with
both European and American features. First, we provide explicit for-
mulae for all strategies and contribute to the literature by providing the
value of the American CPPI. Second, relying on both historical data
and path simulations, we show that strategies perform differently in a
bear market. We focus on liquidation values when the market recovers
after a sharp drop. We find that the American CPPI strategy usually
outperforms the American OBPI one due to the Asian component of
the former and despite the lookback feature of the latter. To complete
our analysis, we investigate both deltas and gammas of our strategies.

DATE PUBLISHED: 15/06/2013

VOLUME: 34

NUMBER: 2

Portfolio choice and financial advice

 

Authors: DIRER A., VISSER M.


This paper analyzes portfolio allocation decisions of individual
investors. Our dataset records how individuals allocate their money
among risky funds and a money-market fund, and also the characteris-
tics of both the investors and the financial advisors who sell the pro-
ducts. These data offer a unique opportunity to investigate how portfo-
lio decisions are affected by financial advisors. Our empirical strategy
consists in studying the relationship between the share of the total capital invested in risky funds and the characteristics of buyers and sellers. Since the dependent variable is bounded between zero and one, we estimate a fractional response model. We find that the share invested in risky funds is larger when the advisor is more educated. Furthermore, male advisors sell larger shares of risky funds than female advisors. We offer possible explanations for these findings

DATE PUBLISHED: 15/06/2013

VOLUME: 34

NUMBER: 2

Underwriting Syndicate Structure and Lead Manager Reputation: An Empirical Study on European Stock Markets

 

Authors: BERNOUSSI A., DEREEPER S., SCHWIENBACHER A.


Using a comprehensive sample of 1542 initial public offerings
(IPOs) sold on German, French and British stock markets, we investi
gate the structure of underwriting syndicates in the presence of reputa
ble lead managers. We consider two aspects of syndicate structure: the number of syndicate members and the ratio of the total number of
members to the number of lead managers. First, we find that the lead
manager is often the sole bank to perform the underwriting; the lead
manager delegates part of the tasks of distributing shares to other par-
ticipants in only 41% of the IPOs. An important reason is that a large
fraction of the IPOs in Europe are relatively small. Second, we show
that the extent of task delegation increases with lead manager reputa-
tion because it leads to more co-managers and other managers partici-
pating in the syndicate. However, this effect only occurs for larger
issuances; in general, smaller IPOs are left to smaller and less reputa-
ble underwriters, some of whom nevertheless perform a large number
of small deals. Overall, our findings are consistent with the view that
lead manager reputation generates market segmentation between larger and smaller issuances.

 

DATE PUBLISHED: 15/06/2013

VOLUME: 34

NUMBER: 2

Analysis and Comparison of Leveraged ETFs and CPPI-type Leveraged Strategies

 

Authors: Philippe Bertrand et Jean-Luc Prigent


Among leveraged funds, leveraged ETFs are designed to achieve multiple exposure (e.g., twice) to some financial index returns, on a daily basis. In this paper, we provide and analyze various properties of the value process of a leveraged ETF. We examine its main statistical properties and point out that there is some probability that the stock index price increases while, at the same time, the leveraged fund decreases. This is an event that is difficult to accept for an investor in such a fund. In the continuous-time framework, we prove an equivalence result stating that a leveraged ETF can also be viewed as a CPPI fund with a floor proportional to the portfolio value itself. Next, from a more practical point of view, we compare Leveraged ETFs and Leveraged CPPI having a specific variable leverage. This type of Leveraged CPPI portfolio is not fully equivalent to a Leveraged ETF because the leverage is reduced in falling markets as well as bounded from above. We derive a quasi explicit expression for the value of such Leveraged CPPI. Then, using Monte Carlo simulations, we compare the Leveraged ETFs and Leveraged CPPI return distributions by means of their moments as well as by relying on Omega and Kappa performance measures.

DATE PUBLISHED: 15/03/2013

VOLUME: 34

NUMBER: 1

Is the Market Portfolio Efficient? A New Test of Mean-Variance Efficiency when all Assets are Risky

 

Authors: M. Brière, B. Drut, V. Mignon, K. Oosterlinck, A. Szafarz


The market portfolio efficiency remains controversial. This paper develops a new test of portfolio mean-variance efficiency relying on the realistic assumption that all assets are risky. The test is based on the vertical distance of a portfolio from the efficient frontier. Monte Carlo simulations show that our test outperforms the previous mean-variance efficiency tests for large samples since it produces smaller size distortions for comparable power. Our empirical application to the U.S. equity market highlights that the market portfolio is not mean-variance efficient, and so invalidates the zero-beta CAPM.

DATE PUBLISHED: 15/03/2013

VOLUME: 34

NUMBER: 1

On the Bankruptcy Risk of Insurance Companies

 

Authors: Olivier Le Courtois et Rivo Randrianarivony


The fall of AIG proved that the insurance business is not immune to bankruptcy, contrary to the actuarial literature which postulates that insurance firms can survive forever. In this article we model the surplus process of an insurance firm firstly by a stable Lévy process, secondly by a double exponential compound Poisson process. We compute finite-time survival and bankruptcy probabilities under such hypotheses. To achieve this, we make use of the Wiener-Hopf factorization and compute bankruptcy formulas written in terms of inverse Laplace transforms. The Abate and Whitt, and Gaver-Stehfest algorithms are used to obtain numerical estimations. This article can be viewed as an illustration of a general approach to the bankruptcy of financial institutions.

DATE PUBLISHED: 15/03/2013

VOLUME: 34

NUMBER: 1

A Structural Balance Sheet Model of Sovereign Credit Risk

 

Authors: FRANÇOIS, Pascal ; HÜBNER, Georges ; SIBILLE, Jean-Roch


This article studies sovereign credit spreads using a contingent claims model and a balance sheet representation of the sovereign economy. Analytical formulae for domestic and external debt values as well as for the financial guarantee are derived in a framework where recovery rate is endogenously determined as the solution of a strategic bargaining game. The approach allows to relate sovereign credit spreads to observable macroeconomic factors, and in particular accounts for contagion effects through the corporate and banking sectors. Pricing performance as well as predictions about credit spread determinants are successfully tested on the Brazilian economy.

DATE PUBLISHED: 15/12/2012

VOLUME: 32

NUMBER: 2

Corporate Risk Management and Information Disclosure

 

Authors: Emmanuelle Gabillon et Jean-Claude Gabillon


In this paper, we propose a theory linking corporate risk management, information disclosure and cost of capital. We show that the hedging strategy of a value-maximizing firm can be an instrument of its disclosure policy. We emphasize that optimal hedging strategy does not systematically eliminate all risks but distinguishes between undesired risks that have to be hedged because they are a source of noise, and risks that should not be eliminated because they have an informational content. We show that optimal risk management, by eliminating noise, reduces the variability of the firm’s cost of capital, thereby creating value. Moreover, having shown that optimal hedging policy depends on whether hedge transactions are disclosed or not, we then discuss the optimality of disclosure requirements in hedge accounting standards.

DATE PUBLISHED: 15/12/2012

VOLUME: 33

NUMBER: 2

Ownership Structure and Board Characteristics as Determinants of CEO Turnover in French-Listed Companies

 

Authors: NGUYEN, Bang Dang


This paper investigates whether ownership structure and board characteristics determine CEO turnover in a sample of largest French-listed firms from 1994 to 2001. The results show that CEO turnover is negatively and significantly related to prior accounting and stock performance. Controlling for prior performance, ownership structure and characteristics of boards of directors impact the sensitivity of CEO turnover to prior performance. Firms with blockholders, high government ownership, two-tier boards, and larger boards are less likely to dismiss CEOs for poor performance. Institutional investors and their co-existence with large blockholders, do not impact the sensitivity of CEO turnover to prior performance

DATE PUBLISHED: 15/12/2012

VOLUME: 32

NUMBER: 2

Ownership, control and market liquidity

 

Authors: Edith Ginglinger et Jacques Hamon


We examine how ownership concentration and the separation of ownership and control affect secondary-market liquidity in France. We find that firms with a large insider blockholder exhibit significantly lower liquidity. However, different methods of enhancing control affect liquidity in different ways. Pyramid structures impair market liquidity. Double voting right shares, a French specific means of control enhancement rewarding long-term shareholders and restraining insiders from trading their shares, lead to increased liquidity, especially for family firms. Our results suggest that by using double voting rights to enhance their control, a transparent decoupling mechanism, rather than pyramids, an opaque decoupling mechanism, blockholders offer higher secondary-market liquidity to outside investors.

DATE PUBLISHED: 15/12/2012

VOLUME: 33

NUMBER: 2

The Performance of French LBO Firms: New data and new results

 

Authors: Gaspar, José-Miguel


This paper investigates the operating performance of French targets of Leveraged Buy-Out (LBO) transactions during the 1995-2005 period. To benchmark LBO performance, I use a propensity score methodology to find a suitable non-LBO matching pair. The study finds that after the deal, the representative LBO firm exhibits higher operating returns of 4% to 5% relative to its matching control. This finding seems mostly due to increased gross margins, productivity gains, and working capital efficiency gains. These findings are not particular to a certain type of targets and are unchanged if I use the industry of the LBO firm as a benchmark.

DATE PUBLISHED: 15/12/2012

VOLUME: 33

NUMBER: 2

Backtesting Value-at-Risk: From Dynamic Quantile to Dynamic Binary Tests

 

Authors: E-I. Dumitrescu, C. Hurlin, V. Pham


In this paper we propose a new tool for backtesting that examines the quality of Value-at-Risk (VaR) forecasts. To date, the most distinguished regression-based backtest, proposed by Engle and Manganelli (2004), relies on a linear model. However, in view of the dichotomic character of the series of violations, a non-linear model seems more appropriate. In this paper we thus propose a new tool for backtesting (denoted DB) based on a dynamic binary regression model. Our discrete-choice model, e.g. Probit, Logit, links the sequence of violations to a set of explanatory variables including the lagged VaR and the lagged violations in particular. It allows us to separately test the unconditional coverage, the independence and the conditional coverage hypotheses and it is easy to implement. Monte-Carlo experiments show that the DB test exhibits good small sample properties in realistic sample settings (5% coverage rate with estimation risk). An application on a portfolio composed of three assets included in the CAC40 market index is finally proposed.

DATE PUBLISHED: 15/06/2012

VOLUME: 33

NUMBER: 1

Hedge Fund Market Risk Exposures: A Survey

 

Authors: Lambert, Marie


This paper reviews the literature on Hedge Fund performance attribution. Hedge Funds follow very dynamic and leveraged strategies and invest massively in derivatives and illiquid securities. Consequently, these funds present linear but also non-linear relationships with market indexes. The article investigates the risk factors that have been used to capture the linear and non-linear comovements of Hedge Fund returns with passive indexes. The review especially discusses the significance of adding option-like or distribution-based factors to benchmark models. It moreover supports the evidence that multi-moment risk premiums could considerably improve the models traditionally used to evaluate Hedge Funds.

DATE PUBLISHED: 15/06/2012

VOLUME: 33

NUMBER: 1

Sophistication of Individual Investors and Disposition Effect Dynamics

 

Authors: Boolell-Gunesh S., Broihanne M-H., Merli M.


This paper analyses the disposition effect at an individual level by studying the trading records of 20 379 investors over 1999-2006. As in previous studies, we confirm a huge heterogeneity among investors and we propose to explain these differences on the basis of financial sophistication and trading behavior proxies. In our new approach, we use direct sophistication variables: trading of foreign assets, derivative assets and bonds as well as trading on both tax-free and traditional accounts. We show that these variables significantly reduce the level of the disposition effect. Furthermore, based on a dynamic panel data analysis, we question investors’ ability to correct their bias over time. Results show that individual investors’ disposition effect decreases over time and that this decrease is partly caused by sophistication variables.

DATE PUBLISHED: 15/06/2012

VOLUME: 33

NUMBER: 1

Misunderstanding risk and return?

 

Authors: LIOUI, Abraham ; PONCET, Patrice


In a seminal contribution, Campbell (1996) [Campbell, J., 1996, Understanding Risk and Return, Journal of Political Economy 104(2), 298-345] proposed a methodology based on a VAR(1) process to test Merton’s Intertemporal CAPM. Innovations in predictors of portfolio returns are estimated and used as risk factors in an asset pricing model. One key element is the triangularization of the VAR system used to obtain orthogonal innovations. We show that this procedure makes the cross-sectional prices of risk associated with the predictors non identifiable. This is because they depend on the arbitrary ordering of the variables in the VAR. Moreover, since the factors are orthogonal to the market and to one another, the comparison with alternative multi-factor models is problematic. To illustrate, we revisit recent results that allegedly showed that innovations in the predictors drive the two Fama-French factors out in the cross section of portfolio excess returns and concluded that HML and SMB proxy for time-varying investment opportunities. We show that these results are mainly a statistical artifact of the methodology used to obtain orthogonal innovations.

DATE PUBLISHED: 15/12/2011

VOLUME: 32

NUMBER: 2

The Link between Social Rating and Financial Capital Structure

 

Authors: GIRERD-POTIN, Isabelle ; JIMENEZ-GARCÈS, Sonia ; LOUVET, Pascal


This article focuses on the link between a firm’s corporate financial structure and its social rating. We propose a new general model showing that less socially engaged firms issue more debt in order to avoid the financial market penalties experienced by non-socially responsible firms. With growing investor interest in social responsibility, these non-SR firms bear a higher financing cost when issuing equity capital. However, they can issue debt at the same cost as their SR counterparts given that banks do not take into account SR criteria in their interest rate determinations. Debt will thus be preferred by non-socially responsible companies while socially responsible firms take advantage of issuing equity capital. We tested the main implications of our model on the European market. Our sample consists of 562 firms which were rated by the Vigeo rating agency from 1999 to 2007. We use regression methodology to study the link between a firm’s debt ratio and its social rating. Our regressions used for explaining firm debt ratios include various control variables (as explanatory variables) such as bankruptcy costs, tax rates, agency and adverse selection variables. Our results show that European firms with a lower social rating tend to exhibit a higher or increasing debt ratio over the period 1999-2007. In particular, when considering the top and bottom quartile firms in term of their social rating, a firm’s social rating has a negative and highly significant influence on its debt ratio. Moreover, we get a significant and negative link between the debt ratio variation and each social dimension rating, except the environmental and the community involvement ones. Globally, our results seem to show that debt financing is a way for firms with low social commitment to avoid the equity market penalty.

DATE PUBLISHED: 15/12/2011

VOLUME: 32

NUMBER: 2

A survey of 'culture and finance'

 

Authors: REUTER Charles H. J.

 

In this research article, peer-reviewed academic journals in the area of finance have been screened to investigate the recent rise in interest for “cultural approaches”. The aim has been to let the definitions emerge from the screening process; thus, building a field-based analysis about “culture” in finance, and its operationalization. The results of that screening are as follows: firstly, the concept of “culture” is mainly connected to the notion of “national cultures”. Secondly, the survey shows that “culture” is now used in a very large range of financial research areas: from the study of international financial flows, to corporate financial management, through to the analysis of the development, efficiency and robustness of stock markets and financial macro-structures. Thirdly, a marked polarization has been noted: some approaches rely on “national cultural indices” (dimensionalism), while others generally provide no definition of “culture”. Taken together, these other approaches provide a fuzzy view, and no consistent framework emerges to compete with dimensionalism. As a consequence, the review, presented here, is extended to all dimensionalist work that can be identified in the field of finance, which provides a fourth result: the only framework with current generality in finance is not likely to be adapted as a unifying model anytime soon. Overall, the research contributes to a preliminary roadmap for cross-referencing with other disciplines; it suggests the adoption of backward definitions, and the building upon of complementarities in existing approaches, including, in particular, dimensionalism, trust, religions, or, still, the idea of “culture”, as layers, derived, in particular, from recent advances in cognitive sciences.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Are Jumps Contagious? An Empirical Investigation of Jumps Transmission Mechanisms in the Nasdaq Sector Indexes

 

Authors: ANÉ Thierry, MÉTAIS Carole


This article relies on the comparison of the realized variance and the realized bipower variation to provide a nonparametric extraction of jumps in Nasdaq sector indexes. It proceeds with their empirical analysis along two directions: intensity and size. Whereas the jump intensity appears to be sector-specific, the average jump contribution to the total variance is approximately constant across sectors. Moreover, unlike volatility, jumps do not cluster through time. A multivariate analysis reveals that jump arrivals are significantly linked even though the contemporaneous occurrence of discontinuities does not increase the average jump size. Finally, despite their interdependence, jumps do not seem to be very contagious and few spillover effects can be observed.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Capital Structure Decisions of French Very Small Businesses

 

Authors: AKTAS, Nihat ; BELLETTRE, Ingrid ; COUSIN, Jean-Gabriel


Very small businesses (VSB) experience financing constraints unlike those encountered by larger companies; however, they are rarely studied. Their unique characteristics, including the important information asymmetry they suffer and the predominant role of their shareholder-manager, may be well suited to a pecking order theory framework as a means to analyze their capital structure decisions. Specifically, VSB financing choices appear to follow a hierarchical order, such that they prefer internal to external financing and debt to stock issuance. Using a sample of 393,662 firm-year observations from 56,605 individual French VSB, this study shows that the pecking order theory can explain most of their financing decisions. In addition, a change in debt relates asymmetrically to financing deficit. Firms with a positive deficit rely almost entirely on debt for financing, whereas firms with a negative deficit (excess of financing) behave more conservatively and are less likely to repay their debts spontaneously in advance.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Report of Editors of FINANCE for years 2009 & 2010

 

Authors: DERRIEN François, MORAUX, Franck


This report aims at exposing official statistics about Finance – the official publication of the French Finance Association. For this first report, we will analyze a couple of years 2009 and 2010 and present first some elements on the Submission process and then turn to some descriptive statistics related to publications. In this report, we want to mention.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Dynamic strategies when consumption and wealth risk aversions differ

 

Authors: SIX, Pierre


This paper focuses on the consequences on asset allocation of an empirical fact outlined in a recent survey of the literature about risk aversion (Meyer and Meyer, 2005): Investors are more risk averse toward consumption than they are toward wealth. We demonstrate that this empirical fact can be assessed with the study of a single financial variable. This variable measures the share of wealth that investors set aside to satisfy their future consumption. We show that this variable depends on wealth only when the empirical case is considered. Our findings build on some methodological results developed by Karatzas et al. (1987) as well as insights provided by Wachter (2002) and Munk and Sørensen (2007) for the restricted setting in which risk aversions are equal.

DATE PUBLISHED: 15/12/2010

VOLUME: 31

NUMBER: 2

How to get a syndicated loan fast? The role of union composition and organization

 

Authors: GODLEWSKI, Christophe J.


We empirically investigate the organizational determinants of the speed of a loan syndication process, with a particular focus on the influence of syndicate composition and organization. Indeed, the major advantage of syndicated lending is the speed with which the required funding can be obtained, while syndication composition and organization are considered as crucial for successful syndication. In a cross-country framework, we show that syndicate composition and organization characteristics clearly matter for the duration of the syndication process and therefore for borrower satisfaction in terms of the speed of obtaining the necessary funding. In particular, a syndicate composition and organization adapted to the specific agency problems of syndication, with numerous, reputable and experienced arrangers holding a larger portion of the loan and with more lenders from the same country as the borrower reduces the duration. Furthermore, past relationships between lenders or arrangers and borrowers allow for a faster syndication process as well.

DATE PUBLISHED: 15/12/2010

VOLUME: 31

NUMBER: 2

Money and Asset Prices in a Production Economy

 

Authors: LIOUI, Abraham ; PONCET, Patrice


We generalize the monetary economy with cash and credit goods pioneered by Lucas and Stokey (1983, 1987) to the case of a neoclassical production economy. Assuming a fairly general continuous time stochastic process for real capital returns, we show that money non-neutrality is generic, even though the money growth rate is i.i.d. and the representative agent’s utility is log separable. We also show that the capital to wealth ratio plays a key role in the transmission mechanism by which monetary policy affects the dynamics of all real variables, in particular those of the pricing kernel and of asset excess returns. We finally provide some empirical evidence that supports the hypothesized influence of the capital to wealth ratio on the US equity market premium.

DATE PUBLISHED: 15/12/2010

VOLUME: 31

NUMBER: 2

Employee's investment behaviors in a company based savings plan

 

Authors: AUBERT, Nicolas ; RAPP, Thomas

This paper investigates the investment behaviors of 44,649 employees working in a CAC 40 index listed company. The company savings plan offers its employees a choice among various asset categories generally listed by financial institutions. We first describe employees’ saving behaviors for each asset category offered within the company savings plan. We then focus on the individual determinants of employees’ participation in each asset category and the total amount invested in each asset category. We finally investigate the individual determinants of portfolio breadth in terms of number of funds selected and number of asset categories selected. We document extreme saving strategies such as high investment in company stocks. We find the existence of a positive association between the number of funds offered, and the number of funds chosen within the plan. Our results emphasize how several proxies of human capital are associated with company-based investment strategies.

 

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Exchange Options when One Underlying Price Can Jump

 

Authors: QUITTARD-PINON, François ; RANDRIANARIVONY, Rivo


Many problems in life insurance and finance can be described in terms of exchange options. These contracts give their holders the right to exchange an asset against another one at some specified later date. Exchange options were introduced in the classical diffusive framework where an explicit formula can be obtained for the price. This article extends this framework by taking jumps into account. In the particular case where one asset follows a jump diffusion model, the present authors present two alternative approaches for the pricing of these exchange options. The first one is a complete probabilistic approach where a quasi-closed form formula can be obtained. The second one is based on the generalized Fourier transform approach. With the latter, this article gives a general methodology for pricing exchange options when one underlying can jump. This methodology can then be used in many areas such as the study of guaranteed funds in life insurance.

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Mathematical Methods for Financial Markets

 

Authors: JEANBLANC, Monique ; YOR, Marc ; CHESNEY, Marc


Mathematical Methods for Financial Markets succeeds to be both an excellent finance textbook and an excellent maths textbook. Contrary to what the profane may believe, it is therefore not just a textbook in financial mathematics or in mathematical finance. The enlighten reader shall be able to find in this book essential elements to understand options markets...

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Volatility regimes and liquidity co-movements in cap-based portfolios

 

Authors: BEAUPAIN, Renaud ; GIOT, Pierre ; PETITJEAN, Mikael


In contrast with prior studies focused on market-wide liquidity co-movements, we study class-wide liquidity co-movements and condition the analysis on volatility regimes using the Markov switching methodology. By defining three regimes of volatility (low, normal and high), we can investigate whether, and to what extent, liquidity co-movements in cap-based portfolios are affected by volatility fluctuations. As our analysis points out, class-wide shocks dominate stock-specific shocks in low volatility regimes for both large and mid caps. For small caps, cross-sectional statistical evidence of liquidity co-movements is weak in both high and low volatility regimes. Evidence indicates that failure to recognise the importance of volatility to determine class-wide variations in liquidity could significantly alter the performance and risk of size-based portfolios.

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Dynamics of Implied Distributions: Evidence from the CAC 40 Options Market

 

Authors: KERMICHE, Lamya


This paper discusses the dynamics of the entire risk-neutral density, based on a Principal Component Analysis (PCA) of distribution curves calculated using a moneyness metric. The PCA revealed a limited number of factors that influence these dynamics. This paper outlines the time series of these factors and shows that at least one of them, displaying a strong correlation with the distribution variance, contains jumps. These findings are consistent with recent research showing that a jump component exists in the shock factors affecting implied volatility surfaces. Finally, this paper gives an example of how these findings can be applied to options portfolio hedging.

DATE PUBLISHED: 15/12/2009

VOLUME: 30

NUMBER: 2

Idiosyncratic Volatility Change and Event Study Tests

 

Authors: AKTAS, Nihat ; DE BODT, Éric ; COUSIN, Jean-Gabriel


The idiosyncratic volatility is a key input to the standard event-study method. The recent literature has suggested that the idiosyncratic volatility is not stable through time. This paper investigates the extent to which the event-study method is affected by this economic phenomenon. Using both simulation and real dataset analyses, we show that standard event-study methods suffer from a significant loss of power in the presence of increasing idiosyncratic volatility, as intuition would suggest. This affects the comparability of event study results obtained in two different empirical contexts (time periods or geographical zones). Therefore, to compare results between high and low regime of idiosyncratic volatility on a fair ground, everything else being equal, the ratio of the sample sizes needs to be equal to the ratio of the idiosyncratic variances in the two contexts.

DATE PUBLISHED: 15/12/2009

VOLUME: 30

NUMBER: 2

Is employee ownership so senseless

 

Authors: AUBERT, Nicolas ; GRAND, Bernard ; LAPIED, André ; ROUSSEAU, Patrick


Since Enron and the ruin of thousands of its employees, employee ownership is harshly criticized. Investing savings in employer’s stock would be equivalent to bet on only one asset. Moreover, employee ownership’s debated efficiency would not justify employers to grant company stock to their employees. Still, employee ownership is put in place by thousands of companies and withhold by millions of employees throughout the world. This paper considers a moral hazard setting where a risk neutral entrepreneur grants company stock to its risk averse employee as an incentive. We show that there is an optimal transfer of employee ownership that satisfies employee’s risk preference and has an incentive effect. We thus bring about rational argument in favor of employee ownership.

DATE PUBLISHED: 15/12/2009

VOLUME: 30

NUMBER: 2

An Empirical Analysis of the Firm's Reorganization Decision

 

Authors: FISHER, Timothy C. G.; MARTEL, Jocelyn


While the bankruptcy framework introduced in the seminal work of
Bulow & Shoven, later extended by White, has been the foundation for
theoretical work in the area for the last 20 years, it has never been
empirically tested. The paper empirically examines the liquidationreorganization decision using micro data on 640 bankrupt firms in Canada. Results are generally supportive of the Bulow-Shoven-White framework: the probability of reorganization increases with the level of free assets, the amount of debt reduction, and firm size while it decreases with the firm’s liquidation value. Results also show that the BSW framework does not provide a complete picture of the firm’s reorganization decision. In particular, the relative size of Crown (government) claims, the legal form of the firm, and the asset/debt ratio are also significant determinants of the reorganization decision.

 

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Disposition effect, investor sophistication and taxes: Some French Specificities

 

Authors: BOOLELL-GUNESH, S.; BROIHANNE, M. H.; MERLI, M.


We investigate the presence of the disposition effect for 90 244
individual investors using a unique large brokerage account database
between 1999 and 2006. Our main results show that individual investors demonstrate a strong preference for realizing their winning stocks rather than their losing ones. However, the fiscal impact in France appears to be moderate relative to the one observed in other countries. Taking French specificities such as, the way short sales are realized and the existence of tax free account (PEA account) into account, show that: a) the behavioral bias is not eliminated for sophisticated individual investors; b) the change of “tax account type” does not imply any change in investors’ behavior.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Optimism and overconfidence investors' biases: a methodological note

 

Authors: FABRE, Bruno; FRANÇOIS-HEUDE, Alain


In literature, there are little evidence about interactions and respective
roles of optimism and overconfidence on characteristic variables
of cash-flows like mean and variance [Barberis and Thaler (2003)].
The starting point of this paper consists in explaining the change between two dates of mean and variance of financial cash flows as a result of two biases: optimism and overconfidence of investors. The main conclusion of this paper is the following one: all the profiles of decision- makers and thus their change in their behavior can be described by three parameters of biases which are the degree of overconfidence.

There are few studies in the literature that study the interactions and
the respective roles of optimism and confidence on the characteristic variables of cash flows such as the mean and the variance [Barberis and Thaler (2003)]. The starting point of this paper is to explain the passage of a mean and a variance from one date to another as the result of two biases: that of overconfidence and optimism. The main conclusion of this paper is the following: all the profiles of decision-makers and therefore their change of behavior can be described by three parameters: the degree of overconfidence, that of optimism in favorable and unfavorable states. These three parameters make it possible to describe the complex relationship that links these biases as well as their consequences on investors.

In a first part, the framework of the model is presented. In a second part, the biases of overconfidence and optimism are taken into account in the model but separately. In the next section, overconfidence is combined with optimism bias in order to obtain a more realistic model of investor behavior. In a final section, we abandon the decision-maker of economic theory to focus on the case where only a portion of investors are victims of these behavioral biases.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Venture Capital Performance: The Disparity Between Europe and the United States

 

Authors: HEGE, Ulrich; PALOMINO, Frédéric; SCHWIENBACHER, Armin


This paper compares the success of venture capital investments in the United States and in Europe by analyzing individual venture-backed companies and the value generated within the stage financing process. We document that US venture capitalists generate significantly more value with their investments than their European counterparts. We find differences in contracting behavior, such as staging frequency and syndication, and evidence that they help to explain the observed performance gap and we report a substantial unexplained residual. We find that US venture funds investing in Europe do not perform better their European peers. European Common Law and Civil Law countries exhibit comparable levels of venture performance, and differences in stock market development or tax subsidies in favor of venture investments are unrelated to performance differences. European IPO exits from venture investments yield returns similar to the US, while trade sale exits weakly underperform. We attribute the overall performance gap essentially to the segment of poorly performing companies.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Calibration of options for three mixed diffusion and jump models

 

Authors: QUITTARD-PINON, François; RANDRIANARIVONY, Rivo


This article presents calibration of European options using a non-Gaussian setting. In particular, the authors consider three jump diffusion models, the classical Merton [1976] and Kou [2002] processes and another one which extends Kou to the case of multiple jumps. The pricing methodology rests on a very efficient Fourier framework, which permits calibrations in a short computational time. This is particularly advantageous in the multiple jump case. This article is an invitation to use non-Gaussian models in option pricing and calibration.

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

Transparency and market microstructure: a literature review

 

Authors: MAJOIS, Christophe

This article offers an extensive review of the market microstructure literature dealing with the issue of transparency on financial markets. We survey the theoretical, empirical and experimental contributions on both pre-trade and post-trade transparency. One section is devoted to transparency on fixed-income markets. It appears that a minimum level of transparency is necessary for the well-functioning of financial markets, but also that a certain degree of opacity may benefit market efficiency and liquidity. Those results of the literature are used to assess MiFID rules regarding transparency.

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

A modeling of the implied volatility surface by jump process

 

Authors: KERMICHE, Lamya


The aim of this paper is the study of the dynamics of CAC40 options implied volatility surface. Using a functional form of Principal Component Analysis, based on a Karhunen-Loève decomposition, we isolate and analyse principals shocks factors influencing the surface. Our results suggest different behaving for short and long term volatilities: short term volatilities are well represented by a two-factor model, while three factors are necessary for long term volatilities. We obtain an orthogonal base, in which we project the implied volatility surface. Studying the time series of the obtained factors, we show that these are well represented by jump processes, particularly the first factor, which represents the global variation of the implied volatility surface. Actually, our simulations indicate that adding a jump component significantly improve the prediction power of the model.

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

“The Calculus of Retirement Income.” Financial Models for Pension Annuities and Life Insurance »

Authors: QUITTARD-PINON

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

"The Calculus of Retirement Income. Financial Models for Pension Annuities and Life Insurance"

 

Authors: MILEVSKY, Moshe A.


The article reviews the book "The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance," by Moshe A. Milevsky.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

Errors in Canadian financial asset pricing variables and models

 

Authors: CARMICHAEL Benoît; COËN, Alain; L'HER, Jean-François


This paper sheds a new light on Fama and French (1993) and Carhart (1997) multifactor models estimation focusing on the possibility of errors-in-variables. We use monthly data for the Canadian stock market from July 1960 to December 2004. Fama and French (1997) conclude that "estimates of the cost of equity for the three-factor model of FF (1993)" are imprecise. Our results show that this imprecision is more severe in presence of measurement errors. We suggest to use Dagenais and Dagenais (1997) higher moments estimator to deal with this problem. This estimator has the advantages of being easy to compute and to require no extraneous information. We show that estimates of the cost of equity on the Canadian stock market obtained with Dagenais and Dagenais estimator sharply differ from biased OLS estimates. This approach revisits performance attribution and abnormal performance (α).

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

The Order Book: a literature review

 

Authors: MOINAS, Sophie


For a few decades, there has been a proliferation of markets organized as electronic limit order books. This development has spurred considerable interest and raises several questions about so-called order-driven markets". Providing an answer to these questions may help regulators as well as practitioners. In order to understand what is at stake, this article proposes a literature review to present the characteristics of a limit order market and its performance.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

Multiple Potential Payers and Sovereign Bond Prices

 

Authors: OOSTERLINCK, Kim; URECHE-RANGAU, Loredana


Sovereign bonds are usually priced under the assumption that only the issuer may be responsible of their repayment. In some cases however, bondholders may legitimately expect to be repaid by more than one agent. This paper first discusses the theoretical financial implications stemming from an infrequent and challenging situation, namely the existence of multiple potential payers. Then, through a historical precedent, the 1918 Russian repudiation, the paper confirms that the existence of multiple payers has a diversification effect which lowers the volatility of the bond price and increases its value. These results are strengthened by a comparison with a closely related standard case of default.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

An Evaluation of Backtesting Procedures “All is for the Best in the Best of All Worlds” (French)

 

Authors: HURLIN, Christophe; TOKPAVI, Sessi


This paper proposes an evaluation of backtests that examine the accuracy of Value-at-Risk (VaR) forecasts. It is well known that VaR backtesting procedures outlined by the Basel Committee for Banking Supervision have limited power to control the probability of accepting an incorrect VaR forecast. In this study, we propose an original approach based on the replication of these tests on six different VaR forecasts (parametric or non parametric) for a given asset. We show that backtests generally lead to not reject the accuracy of all (or most of) these different forecasts. In other words, most of VaR forecasts are likely to be considered as valid.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

Are IPOs still a Puzzle? A Survey of the Empirical Evidence from Europe

 

Authors: Emmanuel Boutron ; Jean-François Gajewski ; Carole Gresse ; Florence Labégorre


This survey aims at appraising the empirical research conducted on the European IPO markets as of the current date, and at determining to what extent IPO theories explain European IPO patterns. To that end, we first describe the going public process in Europe, its recent developments and its specificities in comparison with the organisation of American primary markets. Second, we review the empirical evidence on initial underpricing, long-term IPO performance and IPO-mechanism efficiency, based on European data, and we put it in perspective with the IPO theoretical literature.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

Business Risk Targeting and Rescheduling of Distressed Debt

 

Authors: Franck Moraux ; Patrick Navatte


This article reconsiders rescheduling of distressed debt and the period preceding the financial reorganization. It reveals that the new equity price is a quasi-concave function of the firm's assets volatility and that there exists an optimal strategy for equity holders, which consists in targeting a specific business risk level. Simulations show that the volatility shift does not necessary cause opportunity costs for creditors. We question the timing of the business risk adjustment and address the reciprocal influence of stake holders before and at the reorganization. All these extensions essentially yield the same conclusion. When debt rescheduling is possible, there exists, some time before a default, a finite business risk level valuable to target.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

The impact of admission to listing on the economic performance of companies

 

Authors: Stéphanie Serve


This article investigates the change in operating performance of 115 firms that went public on the French New Market over the period 1996-2000. A significant decline in operating performance subsequent to the Initial Public Offering (IPO) is found. Companies appears to sustain sales growth but not capital expenditure after the IPO. Additionally, there is a significant negative relation between post-IPO change in operating performance and equity retention by the original ownership.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

Credit Spreads and Interest Rates

 

Authors: Jean-Claude Gabillon


In standard risky debt models the credit spreads are, apparently, inversely related to the level of the interest rates. An increase in r tends to reduce the probability of a default because of the effect on the upward drift of the risk-neutral process for the firm value V. We show, with a cash flow approach in a one factor model and in a two factors model, that this analysis is incomplete and that, in structural models, credit spreads widen as interest rate increase, at the opposite of the empirical evidence.

Empirically, a narrowing of credit spreads generally seems to accompany an increase in interest rates. Standard structural models for valuing risky debt seem to explain this relationship quite well. The apparent reason for this result lies in the increase in the drift of the risk-neutral process caused by an increase in the interest rate. It has the effect of reducing the risk-neutral probability of default. But we show, using a cash flow approach, that an increase in the interest rate actually leaves the drift of the risk-neutral process unchanged in standard one-factor structural models. Moreover, it lowers the instantaneous value of the firm. In the end, the risk-neutral probability of default is actually increased. Standard models cannot therefore directly justify an inverse relationship between interest rates and credit spreads. We present a two-factor, cash-flow oriented model in order to analyze the problem in the presence of dual operating and interest rate risk. The conclusions are similar. The model highlights, in particular, the impact of interest rate fluctuations on drift and on the volatility of the company's value. We clarify the concept of stochastic sensitivity in this context of risky debt.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

Nonlinear dynamics of G7 stock markets: an application of STAR models

 

Authors: Fredj Jawadi; Yosra Koubbaa


One of the debates of topicality is focused around the study of the structure of stock prices dependency. The search of a specification of this dependency and a representation of underlying dynamics has been the subject of several empirical studies. These studies were primarily centered on the definition of the functional form of the process underlying the dynamics of prices. The idea consists of adapting the nonlinear oscillations theory to economic phenomena since this type of modeling coincides with the evolution of economic and financial time series. The reflection was essentially led within the time framework and few studies are related to the specification of nonlinearity through tests of market efficiency, taking into account the heterogeneity of agents and the asymmetry due to transaction costs. The answer is not obvious because the approaches linarity-nonlinearity, efficiency-inefficiency, dependence-independence are not mutually exclusive. This paper explores the stock market dynamics. For this purpose, we test the nonlinear contribution of the STAR models in modeling stock prices dynamics. To do so, we test the independence assumption versus the nonlinear dependence assumption. In particular, we propose to model the time series of stock prices in the framework of Smooth Transition Autoregressive Models (STAR). They allow to capture the nonlinearity component, by using some recent statistical and econometric tools, and to analyze the short-run dynamics of prices.

One of the current debates focuses on the study of the dependency structure of financial asset prices. The search for a specification of this dependency and a representation of the underlying dynamics has been the subject of several empirical studies. These works have essentially focused on the definition of the functional form of the process underlying price dynamics. The idea is to adapt the theory of non-linear oscillations to economic phenomena since this type of modeling coincides with the evolution of financial series. The reflection has been mainly conducted in the temporal framework and few studies have focused on the specification of non-linearity through financial market efficiency tests, taking into account the heterogeneity of agents and the asymmetry due to the presence of transaction and information costs. The answer is not obvious in itself because the linearity-non-linearity, efficiency-inefficiency, dependence-independence approaches are alternatives but exclusive. Nevertheless, this work aims to present a personal point of view on the underlying problem of stock market dynamics. More specifically, the desire to find an economic meaning to the rejection of linearity led us to test the hypothesis of independence against the alternative of non-linear dependence. To this end, we propose to model stock market series using STAR (Smooth Transition Autoregressive Models) regime-switching models in order to reproduce the nonlinearity present on average while using recent statistical tools and econometric tests to examine the dynamics of stock prices in the short term.

DATE PUBLISHED: 15/06/2007

VOLUME: 28

NUMBER: 1

Complementarity between bank debt and bond debt: an interpretation in terms of signals

 

Authors: Frédéric Lobez ; Jean-Christophe Statnik


In this work, we show how complementary bank debt and bond debt are. Banks distinguish themselves from the bond market in the sense that they are the best evaluators of firms' riskiness. Due to market power, bank rates are therefore uninformative and also more expensive than bond rates. In a context of adverse selection, firms can signal their quality to the bond market by using the size of bank debt. We show within this framework that the less risky the firm is, the larger the part of bank debt in its whole financing. Then, we study the trade-off between the previous signalling equilibrium (using both bank debt and bond debt) and an exclusive bond issue with fixed costs. We show that the exclusive bond issue is used by both the firms of best qualities and worst qualities: the first type wishing cheaper financing and the second type being reluctant to signal its quality. The firms of medium qualities prefer to negotiate mixed financing (bank debt and a bond issue).

DATE PUBLISHED: 15/06/2007

VOLUME: 28

NUMBER: 1

Anomalous Price Behavior Following Earning Surprises: Does Representativeness Cause Overreaction

 

Authors: Michael Kaestner


Behavioral finance aims to explain empirical anomalies by introducing investor psychology as a determinant of asset pricing. Two kinds of anomalies, namely underreaction and overreaction, have been established by an impressive record of empirical work. While underreaction defines a slow adjustment of prices to corporate events or announcements, overreaction deals with extreme stock price reactions to previous information or past performance. This study investigates current and past earnings surprises for listed US companies over the period 1983-1999. It provides evidence that investors exhibit long-term overreaction to past, highly unexpected, earnings surprises. Investors tend to overestimate (underestimate) future earnings after extreme positive (negative) earnings surprises. As, on average, these extreme past surprises are not confirmed by subsequent earnings figures, they are followed by a correction of the initial overreaction at the date of the subsequent earnings announcement. Moreover, the longer the similar earnings surprise series, the higher the subsequent correction, suggesting that representativeness may cause this overreaction phenomenon.

DATE PUBLISHED: 15/12/2006

VOLUME: 27

NUMBER: 2

Industry specialization and performance: a study of mutual funds

 

Authors: Burlacu, Radu; Fontaine, Patrice; Jimenez-Garces, Sonia


A significant body of literature predicts that mutual funds with higher levels of private information are more specialized and deliver superior performance. We analyze the impact of private information (informational advantages) on mutual funds' performance for 224 U.S. sector funds and 1,135 U.S. actively-managed equity funds. Using the degree of industry concentration as a proxy for private information, we find a positive and significant relation between performance and private information for sector funds. This relation is less obvious for equity funds. Our results are robust to asset pricing models and benchmark specifications.

DATE PUBLISHED: 15/12/2006

VOLUME: 27

NUMBER: 2

Stock Prices, Inflation and Stock Returns Predictability

 

Authors: Butcher, Christophe


This paper considers a new perspective on the relationship between stock prices and inflation, by estimating the common long-term trend in real stock prices, as reflected in the earning-price ratio, and both expected and realized inflation. We study the role of the transitional deviations from the common trend in the earning-price ratio and realized inflation for predicting stock market fluctuations. In particular, we find that these deviations exhibit substantial out-of-sample forecasting abilities for real stock returns. Moreover, we find that this variable provides information about future stock returns at short and intermediate horizons that is not captured by other popular forecasting variables.

In this paper, we consider the relationship between stock prices and inflation in the United States from a new perspective. We estimate the common stochastic trend between real stock prices, as captured by the Earning Price Ratio (EPR), and expected and realized inflation. In particular, we study the role of transitory deviations from the common long-run trend between EPR and realized inflation in predicting stock market fluctuations. Our results show that these temporary deviations have out-of-sample predictive power on real stock returns. Our results also indicate that the information about future real returns contained in these deviations does not appear, at short and intermediate horizons, in the variables identified so far by the literature to predict stock returns.

DATE PUBLISHED: 15/12/2006

VOLUME: 27

NUMBER: 2

The risk premium in an international context: is the exchange rate risk appreciated?

 

Authors: Arouri, Mohamed El Hedi


In this article, we investigate whether exchange rate risk is priced. We use a multivariate GARCH-in-Mean specification and test alternative conditional international CAPM versions. Our results strongly support the international asset-pricing model that includes exchange rate risk for both developed and emerging stock markets. However, there are important time and cross-country variations in the relative size and dynamics of different risk premia.

The purpose of this paper is to study the determinants and dynamics of the equity risk premium in an international setting. To do so, we use a multivariate GARCH model and test a conditional version of the international CAPM with PPP deviations. The model is estimated under the assumption of perfect financial integration and then under the assumption of partial segmentation jointly for five markets: two developed markets, two emerging markets and the global market. Our results support the CAPM and indicate that exchange rate risk is remunerated internationally. However, we find that the exchange rate premium varies considerably over time and across markets.

DATE PUBLISHED: 15/06/2006

VOLUME: 27

NUMBER: 1

The role of deposit insurance in preventing bank runs: theoretical foundations and empirical studies

 

Authors: MADIES, Philippe


This paper reviews and discusses theoretical literature on banking panics and the different methods to prevent them. Deposit coverage is compared to alternative solutions, some of which have been implemented in the past: partial or total suspension of deposit convertibility (whether or not carried out by a clearinghouse association) and narrow banking. Two major theories on bank runs stand out. On the one hand, purely self-fulfilling banking panics resulting from a coordination failure between depositors. Such runs are ineffective in so far as they may drive sound banks to bankruptcy and require a high deposit coverage to be prevented. On the other hand, "information-based runs" theory shows that depositors, being informed of upcoming difficulties regarding their bank (information on fundamentals) run preventively to withdraw their funds. Policy implications will then be different. In order to test existing theories, empirical works have focused first on historical studies about past banking panics, notably in the United States. This has slow support to the "information-based runs" theory, even if the results are discussed. However, experimental research on self-fulfilling banking panics shows that such runs are recurrent and persistent phenomena. Besides deposit insurance, only a full coverage is an effective method to prevent such panics but a partial coverage is sufficient to curb "information-based runs". Finally, empirical studies on recent banking crises find that explicit deposit insurance can have an adverse impact on bank stability, unless there exists a quality institutional environment and banking regulation.

This article first proposes to draw lessons from the theoretical literature on bank runs and on the means of preventing such phenomena. Deposit insurance will be compared to a certain number of alternative solutions, some of which have been observed in the past: partial or total suspension of deposit convertibility (within the framework of a clearinghouse association or not) and "narrow banking". It emerges that two conceptions of bank runs are opposed. First, bank runs can be purely self-fulfilling and result from a lack of coordination between depositors. They are inefficient in the sense that they can lead to the bankruptcy of healthy banks and require the implementation of highly protective deposit insurance to be avoided. Second, the theory of "informed runs" shows that depositors, informed of the upcoming difficulties of their bank (information on fundamentals), rush preemptively to withdraw their funds. Regulatory requirements are then different. To test competing theories, empirical work has first taken the form of historical studies conducted on past banking panics, particularly in the United States. The theory of "informed runs" emerges from this, even if the results remain controversial. However, experimental studies conducted on self-fulfilling banking panics show that these runs are recurring and persistent phenomena. To prevent such panics, deposit insurance must also offer depositors full coverage, even if high protection encourages depositors to be less vigilant and therefore leads to increased risk-taking by banks (moral hazard). On the other hand, partial coverage of depositors is a sufficient means of preventing "informed runs". Finally, empirical studies conducted on recent banking crises show that mandatory and highly protective deposit insurance can be a source of instability unless it is located in a quality institutional environment where banking supervision and banking regulation are exercised effectively. The effectiveness of the deposit guarantee cannot therefore be assessed independently of the regulatory framework in which it is inserted.

DATE PUBLISHED: 15/06/2006

VOLUME: 27

NUMBER: 1

News Intensity and Conditional Volatility on the French Stock Market

 

Authors: Cousin, Jean-Gabriel; De Launois, Tanguy


The relation between information flow and asset prices behavior is one of the key issues of modern finance. Our study investigates more closely the link between frequency of information arrivals and stock return volatility. It aims precisely to test empirically the mixture of distribution hypothesis and to check whether the stock returns distribution is driven by the frequencies of information arrivals on the Paris stock Exchange (Euronext). We analyze the impact of news on volatility at the firm-level. We opt for a model with two (Markov switching) regimes of volatility that we apply to all stocks pertaining to the CAC40 index from January 1999 to December 2003. We find a positive and significant but marginally decreasing impact of the daily frequency of information arrivals on the probability to be in a state of high volatility for each of the 40 companies considered. The subsequent model for panel data allows us to conclude that this impact crucially depends on the timing and the topic of the news release. Asymmetry and informational content issues are also investigated. Results are consistent with previous literature, although we show that any asymmetric effect disappears once the news informational content is accounted for.

Dans cet article, nous nous attachons à étudier avec précision, l'impact de l'arrivée d'informations publiques sur le processus générateur de prix des actifs financier, et plus particulièrement dans quelle mesure les changements dans le processus d'arrivée de l'information destinée aux investisseurs sont à l'origine des sauts de variances généralement observés. À l'aide d'un échantillon composé de l'ensemble des titres inclus dans l'indice CAC 40 sur la période du 01/01/1999 au 31/12/2003 et de la totalité des annonces Reuters spécifiques à ceuxci, nous répliquons dans un premier temps les travaux de Kalev, Liu, Pham et Jarnecic (2004) et démontrons que le flux d'informations publiques explique une grande partie de la persistance de la volatilité conditionnelle mise en évidence par les processus GARCH. Dans un second temps, nous introduisons les processus à changement de régime markovien afin de déterminer la probabilité qu'a le processus générateur des rentabilités de se trouver dans un régime à haute volatilité. Leur utilisation démontre alors l'impact positif et significatif, pour une grande majorité des titres étudiés, du nombre d'annonces quotidiennes sur la probabilité de se trouver dans un régime à haute volatilité. L'analyse en panel confirme ces résultats tout en contrôlant l'impact de la variance conditionnelle du portefeuille de marché et celui de l'indice sectoriel dont les titres font partie. De tels résultats confortent l'hypothèse de mélange de distributions de Clark (1973), et plus particulièrement l'intuition de Roll (1984) affirmant que le processus des rentabilités est un mélange de distributions guidé par la fréquence de l'arrivée d'informations. En divisant notre échantillon par catégorie de sujet d'annonces ou par la période durant laquelle elles sont publiées, nous mettons également en évidence le fait que les informations tombées durant les heures de cotation ont un impact plus important que celles publiées durant les heures de non cotation. Concernant le contenu de ces annonces, celles traitant des politiques gouvernementales ou de régulations sont celles ayant le plus d'impact sur la volatilité conditionnelle des titres, viennent ensuite les prévisions de résultats, et plus particulièrement les recommandations et commentaires d'analystes. Et enfin les annonces concernant les fusions et acquisitions qui paraissent bien, elles aussi, affecter significativement la volatilité des actions. Enfin, nous examinons également les effets asymétriques mis en évidence dans la littérature. Les résultats sont globalement identiques aux précédents travaux et les annonces négatives semblent, en moyenne, se situer de manière plus probable que les positives, dans le régime à forte volatilité. Néanmoins, une fois pris en compte le contenu informationnel moyen de l'ensemble des annonces publiées, cette asymétrie disparaît.

DATE PUBLISHED: 15/06/2006

VOLUME: 27

NUMBER: 1

Internal Capital Market Efficiency of Belgian Holding Companies

 

Authors: Gautier, Axel; Hamadi, Malika


In this paper, we raise the following two questions. (1) Do Belgian holding companies operate an internal capital market to transfer financial resources amongst their subsidiaries? And if yes, (2) is the internal capital market efficient? To answer the first question, we check if group cash flow is a determinant of the group members investment spending. The answer is positive if the holding company's subsidiary is affiliated to a coordination center and negative otherwise. To answer the second question, we evaluate if internal transfers are driven by efficiency. From our estimations, we cannot conclude that Belgian Holding companies have an efficient internal capital market.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

Is automotive leasing a risky business?

 

Authors: Schmit, Mathias


This paper is devoted to credit risk modelling issues of lease portfolios. It presents results on the default and loss given default performance of automotive leases and proposes specific solutions dealing with their most important characteristics including their large size, the ownership of leased assets by lessors and limited availability of information about lessees' financial situation. Probability density function of losses and VaR measures are estimated on the basis of a private database comprising a unique set of 35,861 individual automotive lease contracts issued between 1990 and 2000 by a major European financial institution. Results show that recovery rates in the automotive lease industry are high and further confirm that leasing is a relatively low-risk activity. A comparison with capital requirements stemming from the Basel Committee's proposed new framework also show that a wider recognition of physical collateral under Basel II would not only allow to better reflect the risk profile of automotive lease exposures but would also contribute to reduce the significant gap in capital requirements stemming from the different approaches of the proposed framework.

Cet article se consacre à la question de la modélisafion du risque de crédit pour les portefeuilles de crédit-bail automobile. Il expose les résultats relatifs aux performances des contrats de crédit-bail en termes de probabilité de défaut et de perte en cas de défaillance, et propose des solutions spécifiques tenant compte des caractéristiques les plus saillantes de ces portefeuilles : leur grande taille, le fait que la propriété des actifs reste aux bailleurs et le niveau limité d'informations disponibles quant à la situation financière des locataires. La fonction de densité des probabilités de pertes et les mesures VaR sont estimées grâce à une base de données privée comprenant un ensemble unique de 35.861 contrats de crédit-bail automobiles émis entre 1990 et 2000 par une importante institution financière européenne. Les résultats montrent que les taux de recouvrement observés dans l'industrie du crédit-bail automobile sont élevés et confirment le fait que cette activité est relativement peu risquée. Une comparaison avec des exigences en capital telles que dictées par la proposition du Comité de Bâle montre également qu'une plus large reconnaissance des collatéraux physiques sous Bâle II permettrait non seulement de mieux refléter le profil de risque des contrats de crédit-bail automobiles mais aussi de réduire l'écart significatif qui existe entre les exigences en capital des différentes approches de l'accord-cadre proposé par le Comité de Bâle.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

The dynamics of very high frequency volatility of long euro rates

 

Authors: Lespagnol, Charlotte; Teïletche, Jérôme


The aim of this text is to analyse the dynamics of European longrate volatility, as measured at various frequencies (intraday, daily). We identify and quantify the dimension of the diverse components of volatility: long memory and ARCH effects, seasonal effects, news announcements. Among the news, we highlight the role played by the US employment report and ECB announcements. The analysis is based on nearly two years of observations on the Euro Notionnel contract, sampled every five minutes. The comparison of the results with those obtained on the Euro Bund contract shows that results do not depend on competition problems of MATIF with EUREX.

L'objet de ce texte est d'analyser la dynamique de la volatilité des taux longs européens à différentes fréquences (intra-journaliers, quotidiens). Nous identifions et quantifions l'ampleur des différentes composantes de la volatilité : mémoire longue et effet ARCH, effets saisonniers, annonces de nouvelles économiques. Parmi ces dernières, nous mettons notamment en évidence le rôle joué par le rapport sur l'emploi américain et les annonces de la BCE. L'analyse est basée sur près de deux ans d'observations du contrat Euro Notionnel, échantillonnées toutes les cinq minutes. La comparaison des résultats avec ceux obtenus sur le contrat Euro Bund montre leur absence de dépendance aux problèmes concurrentiels du MATIF face à l'EUREX.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

On the use of nearest neighbors in finance

 

Authors: Guégan, Dominique; Huck, Nicolas

Nearest Neighbors is a nonlinear and nonparametric forecasting method regularly used in finance. This article questions how this method is used in the literature. We observe that the methods of selecting the size and number of neighbors by reconstruction of the phase space or by forecasting in the sample lead to altering the idea that founds the Nearest Neighbors method. Proposals for a better use are put forward.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

Fair value assessment of participatory contracts

 

Authors: Bernard, Carole; Le Courtois, Olivier; Quittard-Pinon, François


This study is dedicated to the valuation, in the presence of stochastic interest rates and default risk, of participating contracts guaranteeing the growth of an initial capital at a given interest rate and maturity. The participating contracts considered here are typical in the actuarial literature; yet, we can claim these are financial contracts, and indeed, they can be decomposed into sums of standard exotic options. To price them under a term structure of interest rates, we ground ourselves on the method elaborated by Collin-Dufresne and Goldstein [2001]; we display the interest and adequacy of this method by comparing our results with those obtained by means of Monte-Carlo simulations.

Cette étude est dédiée à l'évaluation, en présence de taux stochastiques et de risque de défaut, de contrats participatifs garantissant la rémunération d'un capital initial à un taux d'intérêt et à une échéance fixés au préalable. Les contrats participatifs considérés ici sont des contrats typiques au sein de la littérature actuarielle, mais l'on peut tout aussi bien considérer que ce sont des contrats financiers, et, en tout état de cause, ils se décomposent en sommes d'options exotiques standard. Afin de les évaluer en présence de taux stochastiques, nous nous fondons sur la méthode élaborée par Collin-Dufresne et Goldstein [2001] ; nous montrons l'intérêt et la justesse de cette méthode par comparaison avec des résultats obtenus par simulations de Monte-Carlo.

 

DATE PUBLISHED: 15/06/2005

VOLUME: 26

NUMBER: 1

Portfolio Insurance Strategies: OBPI versus CPPI

 

Authors: Bertrand, Philippe; Prigent, Jean-Luc


Portfolio insurance allows investors to recover, at maturity, a given percentage of their initial capital. This limits downside risk in falling markets and allows some participation in rising markets. Therefore, these properties prove the importance of such portfolio strategies. The two standard portfolio insurance methods are the Option Based Portfolio Insurance (OBPI) and the Constant Proportion Portfolio Insurance (CPPI). The paper analyzes and compares their performances and risk characteristics by means of various criteria such as some of their quantiles. We introduce in particular the comparison when both expected returns are equal and for that case, we provide the value of the corresponding multiple. Their dynamic hedging properties are also examined in the Black and Scholes framework. In particular, the paper shows that the insured percentage of the initial capital plays a key role. It is also proved that OBPI is a generalized CPPI.

L' assurance de portefeuille donne la possibilité aux investisseurs de récupérer à maturité un pourcentage donné de leur investissement initial. Ceci permet de limiter les risques de perte lorsque le marché financier baisse sensiblement tout en permettant de profiter des hausses éventuelles de ce dernier. Ces deux propriétés montrent en conséquence l'importance de telles stratégies de gestion de portefeuille. Les deux méthodes les plus usuelles sont la méthode à base d'options (OBPI) et celle fondée sur le coussin (CPPI). Le présent article analyse et compare leurs performances et leurs caractéristiques de risque au moyen de critères variés tels que ceux basés sur l'utilisation des quantiles. Nous introduisons en particulier la comparaison de ces deux méthodes lorsque leurs deux espérances de rendement sont égales et calculons dans ce cas le multiple correspondant. Leurs propriétés de couverture dynamique sont également examinées dans le contexte de Black et Scholes. Nous soulignons en particulier le rôle important joué par le pourcentage de capital initial garanti. Nous montrons également que la stratégie OBPI est une généralisation de la stratégie CPPI.

DATE PUBLISHED: 15/06/2005

VOLUME: 26

NUMBER: 1

Relevance of detecting outliers in GARCH models for modeling and forecasting financial data

 

Authors: Charles, Amélie; Darné, Olivier


In this study we apply an outlier detection procedure in a GARCH model to nine daily stock market indexes. We identify outliers for all the series and attempt to associate them to economic and financial events. We show that the detected outliers affect the normality coefficients, and mostly, the evidence for non-normality is reduced after correcting for outliers. We also find that GARCH models for outlier corrected series yield substantial forecasting improvement over GARCH models for the original returns.

Dans cette étude nous appliquons une procédure d'identification des outliers dans un modèle GARCH à neuf séries journalières d'indices boursiers. Des outliers sont identifiés dans toutes les chroniques et sont associés à des événements économiques et financiers. En outre, ces outliers affectent les coefficients de normalité, et leur correction permet d'une part de réduire, le plus souvent, la présence de non normalité, et d'autre part d'améliorer les prévisions de la volatilité lors d'une modélisation GARCH.

DATE PUBLISHED: 15/06/2005

VOLUME: 26

NUMBER: 1

An accurate analytical approximation for the price of a European-style arithmetic Asian option

 

Authors: Vyncke, David; Goovaerts, Marc; Dhaene, Jan


For discrete arithmetic Asian options the payoff depend on the price average of the underlying asset. Due to the dependence structure between the prices of the underlying asset, no simple exact pricing formula exists, not even in a Black and Scholes setting. In the recent literature, several approximations and bounds for the price of this type of options are proposed. One of these approximations consists of replacing the distribution of the stochastic price average by an ad hoc distribution (e.g Lognormal or Inverse Gaussian) with the same first and second moment. In this paper we use a different approach and combine a lower and upper bound into a new analytical approximation. This approximation can be calculated efficiently, turns out to be very accurate and moreover, it has the correct first and second moment. Since the approximation is analytical, we can also calculate the corresponding hedging Greeks and construct a replicating strategy.

Pour les options asiatiques arithmétiques discrètes le solde à l'échéance dépend d'une moyenne de cours de l'actif support. A raison de la structure de dépendance des prix de l'actif sous-jacent, il n'y a pas de formule simple pour l'évaluation de ces options même dans le cadre des hypothèses du modèle de Black et Scholes. La littérature récente fournit plusieurs approximations et bornes pour le prix de ces options. L'une de ces approximations consiste à remplacer la distribution de la moyenne des cours par une distribution ad hoc (i.e. lognormale ou gaussienne inverse) ayant le même couple : espérance, moment du second ordre. Dans cet article une approche différente est utilisée, elle combine une borne inférieure et une borne supérieure dans une nouvelle approximation analytique. Cette approximation, qui peut être calculée efficacement, se révèle très précise et, de plus, possède les vrais premier et second moments. Du fait de l'analycité de l'approximation il est possible de calculer les Grecs et de construire une stratégie de duplication.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Changes of probability measurement in finance and insurance: A synthesis.

 

Authors: Le Courtois, Olivier; Quittard-Pinon, François

This paper studies various ways of changing probability measures with applications to Finance and Insurance. Changes of numéraire and Esscher transforms are considered, just as pricing kernels which are, in a complementary direction, a mean of keeping a privileged probability measure. These approaches are compared and new insights on them are given. This article gives a unifying point of view and makes a synthesis on the subject.

Cet article présente diverses manières d'effectuer des changements de mesures de probabilité et leurs applications en finance et assurance. Les changements de numéraire et les transformées d'Esscher sont considérés, de même que les noyaux d'évaluation qui, de façon complémentaire, donnent les moyens de conserver une mesure privilégiée. Ces approches sont comparées et de nouvelles perspectives sont tracées. Cet article adopte un point de vue unitaire et réalise une synthèse sur ce sujet.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Deflators, Actuarial Discounting and Fair Values

 

Authors: Devolder, Pierre; Dominguez-Fabian, Inmaculada


The aim of this paper is on the one hand to present a self-contained and rigorous approach to deflators with explicit formulations for some classical financial environments and on the other hand to show how deflators can be applied to fair valuation of insurance liabitities. Deflators technnique is presented in discrete time models (single versus multiple periods, complete versus incomplete models) as well as in continuous time models (Black and Scholes model, Poisson models with jumps). As example of actuarial application, deflator concept is used to compute fair value of annuities where liabilities are linked to the financial performance of underlying assets.

Le but de cet article est d'une part de présenter une approche autonome et rigoureuse des déflateurs avec des formulations explicites pour quelques environnements financiers classiques, d'autre part de montrer comment les déflateurs peuvent être appliqués à l'évaluation équitable (fair value) des engagements des compagnies d'assurances. La technique des déflateurs est exposée aussi bien dans des modèles à temps discret (mono/multipériodes, complets/incomplets) que dans des modèles en temps continu (Black et Scholes, Poisson avec sauts). Comme exemple d'application actuarielle, le concept de déflateur est utilisé pour calculer la valeur équitable d'annuités où les engagements sont liés à la performance financière d'actifs supports.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Double impact: Credit risk assessment and collateral value.

 

Authors: Chabaane, Ali; Laurent, Jean-Paul; Salomon, Julien


This paper deals with credit portfolio risk analysis. The benchmark Basel II IRB approach relies on the independence between losses given defaults and default events. Nevertheless, empirical evidence shows that recorded values are likely to be lower when the number of defaults increases, such as in recession periods. We consider a model embedding Basel II that allows to deal with dependence between recovery rates and default events. We then study loss distribution for large credit portfolios. We show that both expected credit losses and standard risk measures such as credit VaR or Expected Shortfall tend to increase compared with the Basel II approach.

Cet article étudie l'influence du risque de collatéral dans la quantification du risque d'un portefeuille de crédits. L'approche IRB du Comité de Bâle constitue la référence en la matière et repose sur l'hypothèse d'indépendance entre taux de défaut et taux de perte, alors qu'on constate pourtant que ces deux quantités ont tendance à augmenter concomitamment. Nous proposons donc un modèle qui englobe le modèle réglementaire et permet la prise en compte de ces effets de corrélation. Dans ce cadre, l'étude de la distribution de perte d'un portefeuille homogène de grande taille montre que l'approche réglementaire a tendance à sous-estimer et la perte moyenne et la charge de risque quantifiée par mesures de risque (Vatue-at-Risk, Expected Shortfall).

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Introduction to Special Issue on “Insurance and Finance.”

 

Authors: Gerber, Hans; Quittard-Pinon, François


The article discusses various reports published within the issue including one by Hans Bühlmann on multidimensional actuarial valuation and another by Pauline Barrieu and Nicole El Karoui on one type of hybrid derivative and the pricing and hedging of non-tradable risks on financial markets.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Multidimensional valuation

 

Authors: Bühlmann, Hans


The first part of the text is devoted to explaining the nature of insurance losses, technical as well as financial losses based on the technique of Multidimensional Valuation. The principle tool derived in this part is the Valuation Portfolio. The financial risk is then treated as the difference between the Portfolio of Assets and the Valuation Portfolio. One possibilty is to assess the financial risk by option pricing (Margrabe Option fo switch the Asset Portfolio for the Valuation Portfolio). The standard approach to cope with financial risk, Capital at Risk, is also studied.

La première partie de cet article explique la nature des pertes rencontrées en assurance, qu'elles soient techniques ou financières, en se fondant sur la technique de l'évaluation multidimensionnelle. L'outil principal utilisé dans cette partie est le portefeuille d'évaluation. Le risque financier est alors traité comme la différence entre le portefeuille d'actifs et le portefeuille d'évaluation. Une possibilité est d'évaluer le risque financier en utilisant la théorie de l'évaluation des options (Option de Margrabe permettant d'échanger le portefeuille d'actifs contre le portefeuille d'évaluation). L'approche standard consistant à aborder le risque financier par le Capital at Risk est également étudiée.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Optimal risk transfer

 

Authors: Barrieu, Pauline; El Karoui, Nicole


This article develops a methodology to optimally design a financial issue to hedge non-tradable risk on financial markets, in the general framework of convex risk measures. The modelling involves a minimization of the risk borne by issuer given the constraint imposed by a buyer who enters the transaction if and only if her risk remains below a given threshold. Both agents have also the opportunity to invest all their residual wealth on financial markets but may not have the same access to financial investments.

Cet article développe une méthodologie pour traiter de façon optimale de la couverture d'un risque non négociable sur les marchés financiers, dans le cadre général des mesures convexes du risque. La modélisation comprend une minimisation du risque supporté par l'émetteur étant donné la contrainte imposée par l'acheteur qui ne s'engagera dans la transaction que si et seulement si son risque demeure en deçà d'un seuil prédéterminé. Les deux agents ont également la possibilité d'investir toute la richesse résiduelle sur les marchés financiers mais peuvent ne pas y avoir le même accès.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Pricing insurance via stochastic control: Optimal consumption and terminal wealth

 

Authors: Young, Virginia R.; Zariphopoulou, Thaleia


An expected utility approach was recently introduced by Young and Zariphopoulou (2001) for the pricing of dynamic insurance risks. The valuation method is based on comparing the maximal expected utility functions with and without incorporating the insurance product; it is the dynamic analog to the principle of equivalent utility used in pricing static risks. In this paper, we generalize this work in two directions. First, instead of simply maximizing the expected utility of terminal wealth, we also allow for maximizing consumption during the investment period. The investment period is either fixed or random until the time of death of the insured. When making financial decisions, individual who wishes to consume more might spend less on insurance, but on the other hand, she might actually spend more in the future. Second, instead of considering a risky asset follows a geometric Brownian motion, we allow for risky assets that follow a diffusion process with general dynamics, as in Zariphopoulou (1999). This more general structure allows for models of statement stochastic volatility and mean-reverting processes.

Une approche de type utilité espérée a été récemment introduite par Young et Zariphopoulou (2001) pour l'évaluation du risque assurantiel. La méthode d'évaluation est basée sur la comparaison des utilités espérées maximales obtenues en incorporant ou non le produit d'assurance. C'est la version dynamique du principe de l'équivalent certain utilisée dans l'analyse mono-périodique du risque. Dans cet article cette extension est faite dans deux directions. D'abord, au lieu de considérer simplement la maximisation de l'utilité espérée de la richesse finale, celle de la consommation durant la période d'investissement est également prise en compte. L'horizon de gestion peut être soit certain soit aléatoire. En matière de décisions financières les individus mettent en balance des demandes concurrentes : par exemple, un individu qui désire consommer davantage pourrait dépenser moins pour s'assurer, mais, d'un autre côté, pourrait aussi augmenter ses assurances afin de protéger ses actifs pour pouvoir consommer plus dans le futur. Ensuite, au lieu de modéliser les prix des actifs par des mouvements browniens géométriques, des diffusions générales sont considérées. Ce cadre permet d'incorporer des modèles à volatilité stochastique et de considérer des processus avec retour vers la moyenne.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Some applications of Lévy processes in insurance and finance

 

Authors: Chan, Terence


The purpose of this paper is to review some problems related to exit times from a one-sided interval by Lévy processes, which arise in the context of models in insurance and finance which give rise to essentially the same mathematical question: first, the problem of calculating the probability of ruin in a risk model and second, the problem of pricing an American put option. Some results presented here have been known for some time, while others are new.

L'objet de cet article est d'examiner quelques problèmes liés au temps d'atteinte de certains processus de Lévy qui apparaissent dans des modèles de l'assurance et de la finance. Ils soulèvent fondamentalement la même question mathématique, mais prennent les deux formes suivantes selon qu'il s'agit d'un problème de finance ou d'un problème d'assurance : d'abord, comment calculer la probabilité de ruine dans le modèle assurantiel de risque, ensuite comment évaluer une option de vente américaine. Quelques-uns des résultats présentés ici sont déjà connus mais d'autres sont nouveaux.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Diversification and Capital Structure of Multinational Enterprises: A Model of Regime Change

 

Authors: Imed Chakir

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

Estimation of margins on the auction of Treasury securities: the case of OATs over the period 1992-1997

 

Authors: Raphaële Préget

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

The catch basin algorithm applied to option valuation

 

Authors: Dominique Pujal et Patrick Saint-Pierre

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

Decision making in the pari-mutuel betting market: an empirical test

 

Authors: Marie-Hélène Broihanne

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

Asset Pricing with asymmetric information: The case of conditionally Gaussian information structures

 

Authors: Detemple, Jérôme B.


This paper generalizes J. Detemple (2002) to economies with conditionally gaussian information structures. Our setting allows for stochastic volatility in the information technology, stochastic volatility of dividends, stochastic coefficients in the evolution of the drift of the dividend process and correlation between the dividend growth rate and changes in its drift. In this context we show the existence of a partially revealing rational expectations equilibrium. The equilibrium stock price is a function of publicly observed dividends and therefore fails to reveal any private information. The equilibrium interest rate reveals a noisy translation of the private information signal. Full revelation fails because uninformed agents are unable to distinguish private information from a private preference parameter of informed agents. In the partially-revealing equilibrium consumption and wealth are nonnegative at all times. We examine the informational efficiency of the bond market and the sources of interest rate volatility.

Cet article généralise les résultats de J. Detemple (2002) à une économie à structure d'information conditionnellement gaussienne. Le cadre d'analyse adopté permet de prendre en compte des volatilités stochastique dans la technologie d'information et dans le processus de dividendes, des coefficients stochastiques dans l'évolution de la dérive du processus de dividendes, et une corrélation entre le taux de croissance des dividendes et leur dérive. L'existence d'un équilibre à anticipations rationnelles partiellement révélateur est démontrée. Le prix d'équilibre des actions est une fonction des dividendes, dont les réalisations sont d'information publique, et en conséquence ne révèle aucune information privilégiée. Le taux d'intérêt d'équilibre, en revanche, révèle un signal bruité de l'information privée. La révélation incomplète provient du fait que les agents non informés ne sont pas capables de séparer l'information privée d'un paramètre non observé dans les préférences des agents informés. Dans l'équilibre à révélation partielle la consommation et la richesse sont non négatives à tout instant. L'efficience informationnelle du marché des titres obligataires et les sources de variabilité dans les taux courts sont étudiées.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Optimal employee shareholding contract and information asymmetries

 

Authors: De la Bruslerie, Hubert; Deffains-Crapsky, Catherine


The new French regulation on employee stock ownership plans gives a strong incentive to the awarding of stock to employees using a tax subsidy. The purpose of the article is to analyze conditions of a joint optimal contract between employees and shareholders. The setting of the optimal contract is based on the existence of an effort made by stimulated employees to increase the economic cash-flow of the firm once they are awarded stocks though an ownership plan. Two variables are outlined : the percentage of new stocks awarded to the employees and the discount in the issue price of theses stocks compared to the market price. We show that a process of negotiation is necessary between the employees and the managers acting for the shareholders. Two different situations are successively analyzed. In a risk neutral framework, the conclusion of an optimal joint incentive contract which creates wealth for both parties is not evidenced. Then, we have to take in account different sources of information asymmetries. Theses elements are necessary to converge to an optimal equilibrium in a more realistic framework including risk aversion. A process of negotiation leads to the partial disclosure of private information from one party to the other. The meaning of this equilibrium is not only based on the economic sharing of the new wealth but also on a process of mutual exchange of trustable and true economic information on both the effort possibilities and the profitability of the investment projects in the firm.

L'introduction du nouveau régime juridique d'épargne salariale (le Plan partenarial d'épargne salariale volontaire) incite fortement au développement de l'actionnariat salarié. L'objet de la recherche présente est de déterminer les conditions de la réalisation d'un contrat optimal d'actionnariat salarié. L'étude se situe dans le cadre de la théorie de l'incitation en privilégiant la relation d'agence entre actionnaires et salariés. La définition du contrat optimal prend en compte l'existence d'une fonction d'effort réelle conduisant à augmenter le cash-flow de l'entreprise après l'adoption d'un plan d'actionnariat salarié. Deux variables apparaissent centrales, le taux d'ouverture du capital aux salariés et le prix d'émission des nouvelles actions. On constate alors que la conclusion d'un plan d'actionnariat salarié s'inscrit dans un processus itératif de négociation entre dirigeants, représentant les actionnaires, et salariés. Deux situations sont analysées. On montre tout d'abord que, dans un cadre d'information partagée avec neutralité au risque, rien ne garantit la conclusion d'un contrat d'actionnariat salarié créateur de richesse. Aussi, les asymétries d'information entre actionnaires et salariés ne doivent pas être écartées. Au contraire, on montre qu'elles permettent de restaurer la possibilité d'un équilibre économique conjoint dans une situation d'aversion au risque. En effet, la négociation permet alors de révéler une information au profit des deux parties. L'équilibre est non Seulement un équilibre de répartition et d'optimisation de richesses créées entre les parties, mais aussi un équilibre en termes d'informations, fondé sur la délivrance de certaines données et le maintien d'une crédibilité.

 

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

High speed of learning in financial markets

 

Authors: Germain, Laurent


We analyze the role of liquidity and collection of information in order to measure the speed of revelation of information during the preopening of order-driven markets. We extend Vives (1995) model to the case where risk averse traders receive a new private signal before each round of quotation of the preopening. We show that price discovery takes place at high speed which is consistent with the empirical studies of Biais, Hillion and Spatt (1999).

Nous analysons le rôle de la liquidité et de l'arrivée d'informations dans la mesure de la vitesse de convergence des prix durant la préouverture de marchés gouvernés par les ordres. Nous étendons le modèle de Vives (1995) au cas où des agents averses au risque reçoivent une nouvelle information avant chaque tour de cotation. Nous montrons que la vitesse de convergence est plus rapide et qu'elle est validée par les études empiriques de Biais, Hillion et Spatt (1999).

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Information sharing, liquidity and transaction costs

 

Authors: Foucault, Thierry; Lescourret, Laurence


We consider information sharing between traders who possess different types of information, namely information on the payoff of a risky security or information on the volume of liquidity trading in this security. We identify conditions under which these informed traders are better off sharing information. We also show that information sharing fosters price discovery and reduces volatility. Information sharing can improve or impair the depth of the market, depending on the values of the parameters but it always reduces liquidity traders' aggregate trading costs. Overall the analysis suggests that facilitating informations sharing among market participants can improve market quality.

Nous analysons te partage d'information entre des opérateurs boursiers possédant des informations de nature différentes: (i) des informations sur la valeur fondamentale d'un actif risqué ou (ii) des informations sur le volume des ordres émanant d'investisseurs échangeant pour des raisons de liquidité dans le marché de cet actif risqué. Nous montrons qu'il existe des cas dans lesquels ces opérateurs peuvent augmenter teur profit moyen en mettant en commun leur information. Nous montrons également que ce partage d'information augmente toujours l'efficience informationnelle du marché et réduit sa volatilité. Il peut diminuer ou augmenter la liquidité du marché mais dans tous les cas il réduit les coûts de transactions des investisseurs échangeant pour des raisons de liquidité. Notre analyse suggère donc que les mécanismes facilitant le partage d'information entre les opérateurs boursiers peuvent améliorer la qualité du marché.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Introduction to Information and Finance

 

Authors: Mellios, Constantin; Prigent, Jean-Luc


The article discusses various reports published within the issue including "Information sharing, liquidity and transaction costs," "High speed of learning in financial markets," and "Optimal employee stock ownership plans and asymmetric information."

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

The information content of financial reorganization contracts

 

Authors: Martel, Jocelyn


This article proposes a signaling model of financial reorganization in which the firms use the structure of the reorganization proposal, in particular the mix of cash and deferred payments, to signal their viability to uninformed unsecured creditors. The main prediction of the model is that the proportion of cash payments increase with the firm's type. A sample of 393 firms in financial reorganization under the Canadian Bankruptcy Act is used to examine the structure of contracts and their impact on the outcome of reorganization. The statistical and econometric analysis show that the probability of success in reorganization increases with the proportion of short term cash payments to unsecured creditors, when controlling for the fact that firms are cash constrained.

Cet article propose un modèle de signal dans le cadre d'une réorganisation financière d'entreprises en difficultés. Dans ce contexte, la structure du contrat de réorganisation, c'est-à-dire, la combinaison paiements comptants / paiements différés, est utilisée par les entreprises comme mécanisme de signal envers les créanciers non garantis sur leur viabilité financière. Sur la base du modèle, la proportion des paiements comptants augmentent avec la qualité de l'entreprise. Les prédictions du modèle sont ensuite testées à l'aide d'une banque de données comprenant 393 entreprises canadiennes en réorganisation judiciaire. Les analyses statistique et économétrique montrent que la probabilité de succès en réorganisation augmente avec la proportion de paiements comptants, tout en contrôlant le fait que les entreprises font face à des contraintes de liquidités et de financement.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

The takeover process revisited: An emphasis on the incumbent manager role

 

Authors: Chauveau, Thierry; Phelizon, Constance


Recent literature on the takeover process widely emphasizes the extent to which the capital market acts as a disciplinary device by inciting firms to behave in a profit-maximizing fashion. However, existing theoretical work does not consider the probability of takeover to increase with the target firm underestimation. We suggest that the theory may be incomplete and introduce an explicit link between the target firm value and the amount of private benefits extracted by the incumbent manager. We thus underline the responsibility -- often neglected in previous work -- of the incumbent manager in the takeover process.

On considère souvent que les OPA sont une conséquence du pouvoir disciplinaire du marché : la création de valeur associée aux offres publiques correspond alors à la résolution des problèmes d'agence entre actionnaires et dirigeants. Néanmoins, dans les modèles existants, la valeur de la cible est indépendante des profits prélevés par le dirigeant de sorte que la probabilité d'une offre publique n'y augmente pas avec la sous-évaluation de l'entreprise. Nous tentons de combler cette lacune, en présentant un modèle d'offres publiques dans lequel les valeurs ex ante et ex post de la cible sont exprimées en fonction des profits privés, ce qui nous permet de mettre en valeur le rôle -- souvent négligé -- du dirigeant sortant.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Bank Financing Strategies, Diversification and Securitization

 

Authors: Martel, Jocelyn; Mokrane, Mahdi


This article follows from Diamond and Dybvig (1983) in the analysis of the role of a bank as a financial intermediary in project financing and risk sharing. In an environment where risk averse depositors face two types of risk (liquidity and macroeconomic risks) and a profit maximizing bank which must decide on whether or not to finance a “new” risky investment, we show that the optimal solution depends on the information revealed by the bank and the depositors level of relative risk aversion. As an alternative to a pure deposit strategy, we show that securitization leads to overinvestment since the bank cannot follow a separating strategy which would trigger a bank run. Finally, we describe one possible method to achieve the first best solution with a pure deposit contract.

This paper is in line with the work of Diamond and Dybvig (1983) on the role of a bank as a financial intermediary in project financing and risk sharing. We show that in an environment characterized by risk-averse depositors facing two types of risk (liquidity risk and macroeconomic risk) and by a bank having to choose between financing or not a "new" investment project with the objective of maximizing its profits, the optimal solution is a function of the information revealed by the bank and the degree of relative risk aversion of the depositors. In addition, we show that securitization, as an alternative to a deposit contract strategy, generates overinvestment on the part of the bank because there then appears a risk of bank panic. Finally, we describe a possible method to find the first-best optimum.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

Valuation of options in the presence of one or more default risks

 

Authors: Augros, Jean-Claude; Djamen, Idriss Tchapda


Within the framework of a default intensity model, this paper proposes an analytic valuation methodology for interest-rate and stock derivatives securities in presence of one, or more than one, credit risk. The neutral forward default measure, introduced by Augros and Tchapda (2000), is generalized in the case where default risk and interest rate are correlated. This approach is compatible as much with the recovery at default date as with the recovery at maturity of the security (or contract) subject to credit risk. Applications of the model are proposed for vulnerable options valuation, first in the case where just the seller of the option is subject to credit risk, secondly when the seller of the option as well as the issuer of the underlying option asset may default.

Dans le cadre d'un modèle d'intensité de défaut, cet article propose une méthode analytique d'évaluation d'actifs dérivés de taux ou d'action en présence d'un ou plusieurs risques de contrepartie. La mesure forward-neutre de défaut, introduite par Augros et Tchapda (2000), est généralisée au cas où il existe une corrélation entre les risques de défaut considérés et les taux d'intérêt. L'approche développée est compatible aussi bien avec le mode de recouvrement à la date de défaut qu'avec celui à l'échéance du titre (ou contrat) soumis au risque de contrepartie. Une application du modèle est proposée pour évaluer des options vulnérables, d'abord dans le cas où seul le vendeur de l'option peut faire défaut, puis dans celui où à la fois le vendeur de l'option et l'émetteur du sous-jacent de l'option peuvent être défaillants.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

Indexed Executive Stock Options with a Ratchet Mechanism and Average Prices

 

Authors: Jian Wu; Wei Yu


In this article, we present a new type of executive stock option, dubbed the indexed stock option with a ratchet mechanism and average prices. We also derive its pricing model and investigate its incentive implications. Like an indexed option, the proposed option links its strike price to a benchmark, so as to eliminate common risks beyond the reach of the executive's control and reinforce the option's incentive effect. With the ratchet mechanism, the proposed option enables its holder to enjoy a series of compensations spread over a period of time, thereby developing the executive's loyalty towards the firm. Furthermore, in order to minimize impacts of a rough market movement and those of a possible price manipulation, average prices are taken into account in the payoff of the proposed option.

Nous proposons dans cet article un nouveau type de stock-option non traditionnel: les stock-options indexées à cliquets sur moyenne. Comme les stock-options indexées, les options proposées éliminent les facteurs exogènes conséquents à l'évolution globale du marché financier, ce qui permet de renforcer le caractère incitatif du plan. Grâce au mécanisme à cliquets, les cadres bénéficiaires ont la possibilité d'accumuler périodiquement les surperformances boursières réalisées par la société, ce qui permet d'accroître l'effet de fidétisation auprès des salariés. Afin d'éviter une éventuelle manipulation du marché boursier, la moyenne géométrique du cours de l'action et celle de l'indice sont prises en compte dans le calcul de la rémunération.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

A Reexamination of the Relationship Between Return and Risk in Canadian Equities

 

Authors: L'her, Jean-François; Sy, Oumar; Vencatachellum, Désiré


We use two classes of specifications to examine the risk-return relationship in Canada from January 1966 to December 1995. The first class of specifications does not distinguish between up- and down-markers, whereas the second does it on an ex post basis. Two test procedures are performed: on the one hand, the two-pass test developed by Fama and MacBeth (1973), on the other hand, tests based on panel data using OLS and GLS. We find a systematic relationship between data and return when we distinguish these two states of nature: the risk premium is positive (negative) when the market is up (down). The size effect if caused by extreme observations but is significant in January and when the market is down. Finally, there is a significant positive, January effect.

We examine the return-risk relationship in Canada from January 1966 to December 1995 using two categories of specifications: the first does not distinguish between periods when the stock market is rising or falling, while the second does so on an ex post basis. Two testing procedures are also used: the first is based on the two-pass test of Fama and MacBeth (1973), the second on panel data (OLS and GLM). Our results show a systematic relationship between return and beta when both states of nature are taken into account: the risk premium associated with beta is positive (negative) in periods of bull (bear) markets. The size effect is largely induced by extreme observations, but remains significant for the month of January and in periods of bear markets. Finally, returns in January are significantly higher than those in other months.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

An introduction to utility maximization with partial observation

 

Authors: Lefèvre, David


We give an overview of the theory and methods involved in portfolio optimization problems with partial observation. By "partial observation", we mean that the drift process and the driving Brownian motion appearing in the stochastic differential equation for the asset prices are not directly observable for investors in the market. The history of asset prices is assumed to constitute the only information available to investors and the investment processes are then required to be adapted to the natural filtration of the price processes. In a complete market case, we obtain explicit formulae for the optimal wealth process in a "Bayesian" context, when the drift vector is an unobserved random variable with known prior distribution; explicit representations for the optimal investment process are only derived when the stock drift is modelled as a Gaussian process. We also consider the case of an incomplete market and characterize the optimal investment policies when the price processes of the risky assets follow a stochastic volatility model.

Nous donnons un aperçu de la théorie et des méthodes relatifs aux problèmes d'optimisation de portefeuilles en observation partielle. Par « observation partielle », nous entendons que le processus de dérive et le mouvement Brownien apparaissant dans l'équation différentielle stochastique pour les prix des actifs risqués ne sont pas directement observables par les investisseurs dans le marché. L'historique des prix des actifs risqués est supposé constituer la seule information disponible aux investisseurs et on exige des procesus d'investissement qu'ils soient adaptés à la filtration engendrée par le processus des prix. Dans le cas d'un marché complet, nous obtenons des formulas explicites pour le processus de richesse optimale dans le contexte d'un investisseur Bayésien, lorsque la dérive est une variable aléatoire de loi initiable connue ; des formulas explicites pour le processus d'investissement optimal ne sont présentées que lorsque la dérive est modélisée par un processus Gaussien. Nous considérons aussi le cas d'un marché incomplet et caractérisons les politiques d'investissement optimales lorsque le processus de prix actifs risqués suit un modèle de volatilité stochastique.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Choosing the cheapest to deliver: a useful shortcut

 

Authors: Lacoste, Vincent


This paper presents a simple method for choosing the cheapest to deliver for notional bond future contracts. A proof is given that the cheapest to deliver is the bond within the delivery pool with longest (resp. shortest) duration when actual rates are superior (resp. inferior) to the coupon rate of the notional bond. A valuation formula is then provided for the contract, first considered as a forward contract, and later on extended to a future contract by taking into account the day-to-day margin call mechanism.

Cet article propose une méthode simple de calcul de la moins chère à livrer pour un future sur notionnel. On démontre en particulier le résultat selon lequel la moins chère à livrer est l'obligation du panier de plus longue (resp. plus courte) duration lorsque tes taux actuariels sont supérieurs (resp. inférieurs) au taux facial de l'obligation notionnelle. On propose par la suite une formule d'évaluation du prix future avec option de changement de cheapest, en considérant d'abord le contrat future comme un forward, puis en ajustant la formule pour prendre en compte l'impact sur le prix du système d'appels de marge.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

The Business Cycle and Default Risk

 

Authors: Gatfaoui, Hayette; Radacal, François


This paper's goal is to take into account the relationship between business cycle and default risk to determine probabilities of deterioration of firms' financial state. Following this view, we attempt to characterize the influence of macroeconomic and/or micro-economic indicators on risky bonds issued by private firms. Our study considers credit spreads related to three different economic sectors and belonging to two rating classes. We compute these credit spreads as the difference between risky bonds' yields and corresponding Treasury yields. Then, we apply a binary or trinomial Probit model to monthly variations of credit spreads. This methodology allows us to estimate probabilities of deterioration of firms' financial state for a given economic sector and for specified rating and maturity.

The purpose of the article is to exploit the relationship between the economic cycle and default risk to determine probabilities of deterioration of the financial situation of companies. In this perspective, we attempt to characterize the influence of macroeconomic and/or microeconomic indicators on risky bonds issued by private companies. For our study, we consider the credit spreads of bonds belonging to three different economic sectors and which can belong to two rating classes. We calculate these credit spreads as the difference between the yields of risky bonds and the corresponding Treasury rates. Then, we apply a binary or trinomial choice model of the Probit type to the monthly variations of credit spreads, which then allows us to estimate probabilities of deterioration of the financial situation of companies in a given economic sector, for a fixed rating and maturity.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Utility functions and the informational advantage of higher order moments: application to option hedging

 

Authors: Selmi, Farhat; Bellalah, Mondher


We study in this paper the possibility of considering the high orders moments in the expected utility decision criterion. The traditional "mean-variance" model considers only the two first moments and it becomes a particular case from a generalized approach that accounts for the asymmetric and the heavy tails of the wealth distribution. To show the informational content of the high order moments, we consider the case of an option writer who seeks to maximize his expected utility applied to his terminal wealth.

Ce papier étudie la possibilité d'intégrer les moments d'ordre supérieurs dans le critère de décision basé sur l'approche de la maximisation de l'utilité espérée. Le modèle traditionnel de la « moyenne-variance » relève dès lors d'une approche plus générale qui intègre les effets de l'asymétrie et des queues épaisses de la distribution de la richesse de l'investisseur. Pour illustrer l'apport informationnel des moments d'ordre élevés, on étudie le cas d'un investisseur qui, via le critère de l'utilité espérée, cherche à couvrir une position courte d'une option d'achat.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

On cumulative Parisian options

 

Authors: Moraux, Franck


This article examines the pricing of cumulative parisian options. These options are knocked in/knocked out when the total time spent by the underlying asset beyond a known barrier exceeds a prescribed value. Analytical valuation of occupation time derivatives have early been studied by Chesney-Jeanblanc-Yor (1997) and Hugonnier (1999). Here one follows Hugonnier (1999)'s approach and derives new pricing formulae.

Cet article s'intéresse à l'évaluation des options parisiennes cumulatives. Ces options s'activent ou se désactivent dès que le temps total de séjour de l'actif sous-jacent au-delà d'une barrière connue excède une durée prescrite. L'évaluation analytique des dérivés du temps d'occupation a déjà été étudiée par Chesney-Jeanblanc-Yor (1997) et Hugonnier (1999). On revient ici sur l'approche de Hugonnier (1999) et on fournit de nouvelles formules.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Options and optimal coverage of extreme risks

 

Authors: Selmi, Farhat


As soon as one accepts to abandon the zero-risk paradigm of Black-Scholes, very interesting issues concerning risk control arise because different definitions of the risk become unequivalent (in the Black-Scholes world, the risk is zero, whatever the definition of risk!). Optimal hedges then depend on the quantity one wishes to minimize. We study here the possibility of considering the fourth moment as a risk measure, since it's more sensitive to "fat-tailed" distributions of the underlying security than the quadratic criteria (variance). Compared to the variance risk-minimization approach (Bouchaud and Sornette (1994), Schweizer (1995), etc.) and a Δ-hedge d la Black-Scholes, we show that a definition of the risk more sensitive to the extreme events generically leads to a decrease both of the probability of extreme losses and of the sensitivity of the hedge on the price of the underlying (the "Gamma"). Therefore, the transaction costs and the impact of hedging on the price dynamics of the underlying are reduced. By reducing the sensitivity of the hedge on the price of the underlying, one can also hope to reduce the destabilizing effects in the market.

Au fur et à mesure que l'on abandonne la théorie de risque zéro de Black-Scholes, plusieurs choix de contrôle de risque s'offrent désormais, compte tenu du fait que différentes définitions de risque ne sont plus équivalentes (dans la théorie de Black-Scholes, le risque est nul quelque soit la définition du risque !). Dans ce cas, la couverture optimale dépend de la quantité du risque à minimiser. Dans le cadre des options, on considère dans ce papier le moment d'ordre quatre comme une nouvelle mesure du risque puisqu'il est plus sensible aux grandes fluctuations que le critère quadratique (variance). Comparée à l'optimisation de la variance (Bouchaud et Sornette, 1994; Schweizer, 1995, etc.) et la couverture en Δ à la Black-Scholes, la stratégie optimale, qui minimise le moment d'ordre quatre, permet de diminuer la sensibilité de la couverture par rapport au cours du sous-jacent. Ceci est de nature à réduire les coûts de transaction associés. De plus, la minimisation « quartique » à l'avantage de réduire la probabilité des pertes importantes, et, de manière générale, elle pourrait réduire les effets déstabilisants sur le marché, via la réduction de la sensibilité de la couverture par rapport à la dynamique du sous-jacent.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Super-replication problem in a jumping financial market

 

Authors: Brunel, Vivien

Incomplete markets are known to worry theorists because not every contingent claim is replicable; however, if one can afford it, it is possible to super-replicate. This paper deals with the super-replication problem of any European contingent claim when stock prices and/or volatilities may jump at random dates. We explore a subset of all the equivalent martingale measures that correspond to markovian changes of probability. On this subset, we show that the maximum price for a contingent claim is the viscosity solution of some non linear Hamilton-Jacobi-Bellman equation that can be solved in most cases and we obtain non trivial bounds of the super-replication price in the other boxes.

Incomplete markets are an important problem in theoretical finance because not all contingent assets can be hedged from market assets; however, it is always possible to over-hedge them. This paper addresses the problem of over-hedging European options when risky asset prices and/or volatility can jump at random dates. We explore a subset of the set of equivalent martingale measures that correspond to Markovian probability changes. On this subset of equivalent martingale measures, we show that the maximum price for contingent assets is a solution (in the sense of viscosity) of a nonlinear Hamilton-Jacobi-Bellman equation. We solve this equation in many cases and exhibit non-trivial price bounds when an explicit analytical solution cannot be found.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Building a Financial Richter Scale to Assess the Gravity of a Financial Crisis: The Case of 1998

 

Authors: Legras, Jérôme


We apply extreme value theory to financial data. Analysing the 1998 financial turmoil, we estimate the average waiting times of some price variations and show that the crisis must be considered a severe one. We then propose a new scale to quantify extreme financial movements, inspired from geophysics: the Financial Richter Scale, designed to measure the information flow on the market. We also show how to measure the contagion effects that were observed on the emerging markets at the end of August 1998. We give numerical examples on stock markets, Brady bonds markets, interest rate markets and foreign exchange (FX) markets.

Dans cet article, nous appliquons la théorie des valeurs extrêmes à la grave crise financière survenue en 1998. Nous estimons les temps de retour de certaines des variations de prix observées alors et montrons que cette crise peut être qualifiée d'exceptionnelle. Nous proposons ensuite une nouvelle échelle de mesure des crises financières, échelle que nous dénommons échelle de Richter financière, par analogie avec son équivalent issu de la géophysique. Nous analysons et quantifions également les effets de contagion observés notamment sur les marchés émergents à la fin de l'été 1998. Enfin, nous menons des études empiriques sur les marchés de taux, de change et d'action ainsi que sur la dette obligataire des pays émergents.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Introduction to Extreme Events in Finance

 

Authors: Longin, François

The article discusses various reports published within the issue including "The leptokurtic phenomenon in financial markets," by Christian Walter and "Extreme Values and Risk Appreciation Changes at the Paris Stock Exchange over the Period 1802-2000," by Pedro Arbulu and Georges Gallais-Hamonno.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

The Leptokurtic Phenomenon in Financial Markets

 

Authors: Walter, Christian


The non-normality of returns is become a well documented stylized fact which appears in almost all the financial markets time series. The aim of this paper is to review the issue of leptokurtosis, with special emphasis on certain aspects still relatively unexplored. 1 / It starts with a review of the old financial literature, exhibiting the age of this phenomenon and its hidden existence, because of a lack of strong recognition by academics and practitioners. 2 / It goes on to emphasize the irrelevance of the statistical concept of the « average » for the purpose of professional risk management in case of leptokurtosis, and presents a new type of model risk : the shape risk. 3 / A new relationship between investment processes and the distribution of returns is proposed, with a conjecture on the revaluation of bottom up approaches as a result of the leptokurtic phenomenon. 4 / Lastly, the paper provides a synoptic view of the different understandings of the non-normality, with special emphasis on the distinction between exogenous information and endogenous information, to introduce some thoughts related to market microstructure and time measure.

La non-normalité des distributions des variations boursières est devenue un fait d'expérience omniprésent dans la finance de marché. Le but de cet article est de présenter un état de la question en mettant en évidence certains aspects de la non-normalité encore peu explicités. On montre que le phénomène leptokurtique a toujours été présent dans les travaux de recherche sur les fluctuations boursières, mais qu'il n'a acquis que récemment une reconnaissance institutionnelle. On fait apparaître la perte de pertinence de la notion de moyenne dans les pratiques professionnelles de couverture et de gestion du risque, en présentant un nouveau type de risque de modèle. On montre la relation existant entre la forme des processus d'investissement dans la gestion d'actifs avec la forme des distributions des rentabilités, en présentant une conjecture sur la revalorisation de l'importance des choix de titres comme conséquence du phénomène leptokurtique. On résume enfin les différentes compréhensions actuelles de la non-normalité en proposant un point de vue distinguant l'information exogène de l'information endogène, pour introduire des considérations sur la microstructure des marchés et la mesure du temps.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Multivariate Extremes at Work for Portfolio Risk Measurement

 

Authors: Bouyé, Éric


This paper proposes a methodology to provide risk measures for portfolios during extreme events. The approach is based on splitting the multivariate extreme value distribution of the assets of the portfolio into two parts: the distributions of each asset and their dependence function -- named copula. The estimation problem is also investigated. A trivariate empirical application for market indices portfolios (US, German and Japanese stock markets) is provided. Then, stress-testing values and Monte-Carlo based risk measures -- Value-at-Risk and Expected Shortfall -- are computed.

Cet article propose une méthodologie permettant d'obtenir des mesures du risque d'un portefeuille lors des événements de marché rares. Notre approche se fonde sur la séparation du problème de l'estimation multivariée des extrêmes en deux parties : (i) l'étude des distributions des marges; et, (ii) la caractéfisation de leur fonction de dépendance appelée copule. Le problème d'estimation est appréhendé. Nous fournissons un exemple empirique trivarié pour des portefeuilles (indices) du marché action (États-Unis, Allemagne et Japon). Finalement, nous calculons des valeurs de scénarios de stress et des indicateurs de risque (valeur en risque et perte moyenne au-delà de celle-ci) obtenus par méthode de Monte-Carlo.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Portfolio Insurance: The Extreme Value Approach to the CPPI Method

 

Authors: Bertrand, P.; Prigent, J.-L.


This paper applies the extreme value theory to the Constant Proportion Portfolio Insurance (CPPI). A quantile hedging approach is introduced, which provides an upper bound on the standard multiple m. This bound is statistically estimated from the behaviour of extreme variations in rates of asset returns. Moreover, we introduce the distributions of interarrival times of these extreme movements and show their impact on the portfolio insurance. We illustrate these results on S&P 500 data.

Dans cet article, nous proposons une application de la théorie des valeurs extrêmes à la méthode du coussin. Une approche en termes de couverture par quantile nous permet de donner une borne supérieure au multiple, m. Cette borne est estimée à partir des variations extrêmes des rentabilités des actifs. De plus, nous introduisons les distributions des instants d'arrivée de ces variations extrêmes et nous montrons leur impact sur le portefeuille garanti. Les résultats sont illustrés à partir de données sur le S&P 500.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

The Role of REIT's in Asset Allocation

 

Authors: Booth, G. Geoffrey; Broussard, John Paul


We explore the risk of large losses in the context of the asset allocation decision involving real estate investment trust (REIT) stocks and a well-diversified portfolio of stocks proxied by the S&P 500 stock index. We examine the performance of 11 different portfolios. Our statistical framework measures return in the conventional manner but uses lower partial moments with probabilities estimated by extreme value theory to measure risk. We confirm the traditional finding that REIT returns are tess volatile and document that REITs enhance portfolio performance by providing the investor with protection against downside risk associated with extreme negative returns.

Dans cet article, nous explorons le risque de grande perte dans le contexte de l'allocation d'actifs. L'univers d'investissement comprend un portefeuille d'actions bien diversifié (l'indice S&P 500) et des fonds investis dans des actifs immobiliers aux États-Unis (real estate investment trust ou REIT). Nous examinons la performance de 11 portefeuilles différents. Notre cadre d'analyse statistique reprend les mesures classiques pour analyser les rentabilités mais utilise les moments partiels avec des probabilités estimées à l'aide de la théorie des valeurs extrêmes pour mesurer le risque. Nous confirmons les résultats traditionnels que les fonds investis dans des actifs immobiliers sont moins volatiles et documentons que ces actifs améliorent la performance des portefeuilles en fournissant à l'investisseur une protection contre le risque de baisse associé à des rentabilités extrêmes négatives.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Extreme values ​​and changes in risk assessment on the Paris Stock Exchange over two centuries, 1802-2000

 

Authors: Arbulu, Pedro; Gallais-Hamonno, Georges


This research is empirically based on a new index of monthly returns of stocks prices at the Paris Stock-Exchange covering two centuries, from 1802 to 2000. Extreme values are categorized into two kinds : « maximum variation » to which no direct cause can be attributed and « exogenous » ones, which are caused by a direct event, generally political or linked with a war. Thirty six extreme values are found, of which twelve (33 %) are « maximum variations » and twenty four (67 %) are « exogenous ». A original methodology using the jumps in averaged volatility shows that these two hundred years have been made of seven sub-periods, during which the Parisien market had a specific level of volatility, i.e. a specific assessment of total risk. An historical analysis shows that this statistical result brings out relevant sub-periods.

Ce travail utilise un indice inédit de l'évolution mensuelle du cours des actions à la Bourse de Paris sur deux cents ans, de 1802 à 2000. Une typologie des « valeurs extrêmes » en deux catégories est proposée: les « variations maximales » dues à un emballement momentané du marché, sans cause précise; les valeurs « exogènes » entraînées par un événement majeur, généralement d'ordre politique ou lié à un conflit. Trente-six valeurs extrêmes sont trouvées, douze (33 %) variations maximales et vingt-quatre (67 %) valeurs exogènes. Une méthode originale, qui utilise les sauts de la volatilité glissante, met en lumière l'existence de sept sous-périodes caractérisées par un niveau spécifique de volatilité, c'est-à-dire d'appréciation du risque par le marché. L'analyse historique confirme la pertinence de ce découpage d'origine statistique.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Heterogeneous expectations and stock market returns: the case of the French market

 

Authors: Levasseur, Michel; L'her, Jean-François; Suret, Jean-Marc


This study empirically examines the relationships between stock returns and financial analysts' earnings forecasts distributed by IBES (Institutional Brokers Estimate System) over the March 1987 - June 1995 period on the French stock market. Changes in mean and dispersion in one-year horizon earnings forecasts are associated with a positive and a negative impact on stock prices respectively. Our main results are as follows : 1 / The largest variation in consensus forecasts (in absolute terms) corresponds to the largest variation in dispersion (in absolute terms). 2 / Variation in consensus and dispersion of financial analysts' forecasts are positively and negatively related to stock returns. Due to the lag between the production and the dissemination of forecasts, the price adjustment largely occurs before the public announcement of changes in forecasts. 3 / The effect of consensus revisions on stock returns changes dominates the effects of dispersion variation. Apparently, the impact of new information on stock prices not only depends on the direction and the magnitude of the consensus revision, but also on its impact on the dispersion of financial analysts' forecasts.

Cette étude examine empiriquement les relations entre le rendement des actions françaises et les révisions des prévisions de bénéfice par action réalisées par les analystes financiers et transmises par IBES (Institutional Brokers Estimate System) durant la période de mars 1987 à juin 1995. Les variations de la moyenne et de la dispersion des anticipations des analystes portant sur un horizon de un an ont respectivement un effet positif et négatif sur le prix des titres. Les principaux résultats sont les suivants : 1 / Les variations les plus importantes du consensus (en valeur absolue) correspondent aux variations les plus importantes (en valeur absolue) de la dispersion des prévisions d'analystes. 2 / Les changements dans le consensus et la dispersion des prévisions sont liés positivement et négativement aux rendements des actions. En raison du décalage entre la réalisation et la diffusion des prévisions, une part importante de l'ajustement de prix a lieu avant la diffusion publique des changements dans les prévisions. 3 / L'effet des variations du consensus sur le rendement des titres domine l'effet des variations de la dispersion des prévisions. Il semble donc que l'impact de l'arrivée d'information sur le prix des titres ne dépende pas uniquement du sens et de l'ampleur de la révision moyenne des anticipations, mais aussi de son impact sur la dispersion des anticipations.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

Valuation, in a forward-neutral universe, of interest rate products subject to default

 

Authors: Augros, Jean-Claude; Djamen, Idriss Tchapda


The aim of this paper is to give a methodology for pricing interest rates derivatives subject to default risk. The valuation is operated in an environment different of the riskneutral world adapted to default risk. Prices of financial securities are then expressed in new numeraires represented by zero-coupon defaultable bonds for which the recovery rate is not zero in case of default. With this methodology, we obtain the same valuation formula of a european option on a zero-coupon defaultable bond as that of Jarrow and Turnbull (1995). The advantage of the new probability measure, qualified as « default forward-neutral », is highlighted when we are pricing options on more complicated financial assets such as a defaultable coupon bearing bond.

Cet article propose une méthode d'évaluation d'instruments de taux d'intérêt, contingents ou non, soumis à un risque de défaut. L'évaluation s'opère dans un univers différent de l'univers risque neutre et qui s'apparente à un univers forward-neutre adapté pour le risque de défaut. Dans cet univers, les prix des actifs financiers sont exprimés dans de nouveaux numéraires représentés par des obligations zéro-coupon risquées pour lesquelles le taux de recouvrement en cas de faillite n'est pas nul. La méthode présentée conduit à la même formule d'évaluation d'une option d'achat européenne sur une obligation zéro-coupon risquée que celle proposée par Jarrow et Turnbull (1995). L'avantage de la nouvelle mesure de probabilité proposée, qualifiée de « forward-neutre de défaut » est mis en évidence lors de l'évaluation de produits plus complexes tels qu'une option sur obligation couponnée risquée.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

The impact of reputation effects on banks' incentives to support unviable firms

 

Authors: Vilanova, Laurent


We try to explain why some banks delay voluntarily the liquidation of non-viable firms. The model is based on the strategic interaction between the bank and the non-equity stakeholders (customers, suppliers...) of the distressed firm. The bank decides to support (or not) a distressed firm according to the expected payoff associated to the continuation of business. This payoff depends on the reaction of non-equity stakeholders that decide to continue or to stop their collaboration with the firm after having observed the bank's decision. In this context, there exists a risk of collusion between the bank and the non-viable firm. Both agents can decide to misrepresent the actual situation of the non-viable firm in order to expropriate non-equity stakeholders. However, this incentive to delay the liquidation of non-viable is reduced when banks are long-term players in the debt market. We show that the banks' desire to acquire a reputation of « toughness » increases the credibility of bank decisions. As a consequence, reputation effects increase the incentives of nonequity-stakeholders to support distressed firms and reduce the liquidation of viable firms.

Cet article met en évidence l'impact des effets de réputation sur l'incitation des banques à retarder sciemment la liquidation d'emprunteurs non viables. Le modèle repose sur l'interaction stratégique entre la banque et les autres partenaires externes (clients, fournisseurs...) de l'entreprise en difficulté. La banque décide de soutenir (ou de ne pas soutenir) l'emprunteur en fonction de son anticipation sur les revenus issus d'une continuation de l'activité. Or, ces revenus dépendent de la réaction des partenaires externes qui, après avoir observé la décision de renouvellement de la banque, décident de continuer (ou de cesser) leur collaboration avec l'emprunteur. Dans ce contexte, il existe un risque de collusion entre la banque et l'entreprise condamnée. Ces deux agents peuvent en effet décider de créer une apparence trompeuse de solvabilité afin d'exproprier une partie des fonds investis par les partenaires externes dans le redressement de l'entreprise. Nous montrons que ce risque est réduit lorsque les banques sont des joueurs à long terme sur le marché du crédit. Ces dernières peuvent en effet être incitées à développer une réputation de « liquidateur inflexible ». Ces effets de réputation, en augmentant la crédibilité du soutien bancaire, encouragent les autres partenaires à collaborer au redressement des entreprises et permettent d'éviter la liquidation d'emprunteurs viables.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

Modeling coupon bonds in the presence of default risk

 

Authors: Belhaj, Riadh


This paper presents a model for valuing coupon bonds when there is default risk. Default occurs at the first time the value of the finn's assets falls below a critical level. This critical level is defined as the total value of the debt faced by the finn. In case of default, the bondholder receives a constant fraction of the bond value in case of no-default. We develop a model displaying the features of the one factor interest rate model of Cox, Ingersoll and Ross (1985) and the explicit finite difference method as developped by Hull et White (1990). Our model makes possible the study of the evolution of default spread as function of the variance of the finn's assets, the level of the short-term interest rate and the rate of loss in case of default. Lastly, we apply the model to the empirical study of the french bond market.

Ce papier présente un modèle d'évaluation des obligations à coupons sujettes à un risque de défaut de la part de l'émetteur. L'événement de défaut est modélisé comme la première date où la valeur des actifs de la firme passe au-dessous de la valeur faciale de la totalité des dettes de la firme. En cas de défaut, le détenteur de l'obligation reçoit une fraction fixée de la valeur qu'aurait eue l'obligation en cas de non-défaut. Le modèle repose à la fois sur le modèle de taux de Cox, Ingersoll et Ross (1985) à un seul facteur et sur la méthode des différences finies explicite, développée par Hull et White (1990). Notre modèle permet d'étudier l'évolution du spread de défaut en fonction de l'écart type du rendement des actifs de la firme, du quasi-ratio d'endettement, du taux d'intérêt sans risque et du taux de perte en cas de défaut. Enfin, nous appliquons le modèle à l'étude empirique du marché obligataire français.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

Evaluation of Some Quantos Instruments

 

Authors: Bensaid, Bernard; Bottazzi, Jean-Marc


In this article we price a few interest rate quanto instruments capitalising on the two country model of Amin and Jarrow (1991) and general term structure methodology : Heath, Jarrow and Morton (1992). We derive explicit pricing formula for common interest rate quanto instruments : Diff-Swap, CAT options and option on intercountry yield spread.

Afin de constituer un cadre général d'étude et d'évaluation d'une série d'instruments mêlant à la fois risque de taux d'intérët et de change, on explicite les relations entre les diverses évolutions de courbe des taux et de taux de change sous l'hypothèse d'absence d'opportunité d'arbitrage (cf. Heath-Jarrow-Morton, 1992). Nous appliquons ensuite ces relations pour valoriser des instruments dérivés de taux d'intérêt et taux de change. Dans le cas gaussien, des formules explicites sont obtenues.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

IPO, Signal and Issues of New Shares on the French Secondary Market

 

Authors: Faugeron-Crouzet, Anne-Marie; Ginglinger, Édith


The purpose of this study is to test the empirical implications of the signalling-based models of IPOs underpricing. These models suggest that high-quality firms underprice their IPOs so that they can subsequently issue seasoned equity at more favourable prices. We test this suggestion for 292 French firms that made an initial public offering during 1983-1994. We find a positive relation between IPO underpricing and the probability of subsequent equity offerings. Underpricing is lower when the primary shareholder sells a large part of his shares at the initial offering. Our results are consistent with some of the implications of the signalling hypotheses, especially for small and family-controlled firms.

Cette étude propose un test empirique des modèles de signal pour les introductions en bourse sur le second marché français. Ces modèles envisagent une sous-évaluation délibérée des actions introduites en bourse par les firmes de bonne qualité, afin d'obtenir un prix plus élevé lors des émissions d'actions ultérieures. Nous validons certaines des prédictions de ces modèles sur un échantillon de 292 introductions en bourse réalisées de 1983 à 1994 sur le second marché français, suivies de 71 émissions d'actions de 1983 à 1998. La sousévaluation initiale est significativement plus élevée pour les firmes procédant à une augmentation de capital ultérieure et décroît lorsque les actionnaires principaux se désengagent. Sur le marché français, le mécanisme de signal paraît plus adapté aux firmes les plus petites et les plus familiales.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

Mean-Variance Asset Allocation for Long Horizon

 

Authors: Bajeux-Besnainou, Isabelle; Jordan, James V.


We investigate whether mean-variance portfolio theory can produce the conventional wisdom that investors with long horizons should make a large initial allocation to stocks and then decrease the allocation as time passes. For the case of a risk-free asset and a stock index following geometric brownian motion, we derive closed-form solutions for the meanvariance portfolio problem allowing continuous rebalancing based on realized prices and wealth (called a stochastic strategy). This optimal stochastic strategy is in general a conventional wisdom strategy as it involves large initial allocation to stocks which then decreases with time. We relate this strategy to the concave strategies described by Perold and Sharpe and explain the role played by relative risk aversion in this result. We also derive the optimal deterministic strategy (predetermined schedule of weights, independent of new price and wealth realizations) and find it to be a constant-weight strategy.

Does mean-variance portfolio theory explain the financial adage that an investor with a long horizon should initially invest a large allocation in stocks and then gradually reduce it? We find explicit solutions to the mean-variance portfolio problem when dynamic continuous-time management based on new price and wealth realizations (called stochastic strategy) is allowed and the traded assets consist of a risk-free asset and a market index whose price is assumed to satisfy a geometric Brownian motion. The optimal stochastic strategy follows the usual financial advice, starting with a large initial allocation to stocks, decreasing over time. We associate this strategy with concave strategies as described in the Perold and Sharpe paper and explain the role played by the relative coefficient of risk aversion in this result. We also explain the deterministic optimal strategy (corresponding to weights expressed as deterministic functions, independent of new price and wealth realizations) and we prove that it is a constant weight strategy.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

Valuation of Options on Bond Spreads Involving Two Currencies

 

Authors: Mellios, Constantine; Poncet, Patrice


The pay-off of a bond price (or yield) spread option depends on the difference between two underlying bond prices (or yields) and a strike price. Its value is equal to the double integral of its discounted pay-off over the risk-neutral joint distribution of the terminal prices (or yields) of the two underlying bonds. In this paper, European options on bond price spreads, on bond yield spreads and on bond futures and forward price spreads are evaluated when the two underlying bonds involved in the spread are denominated in two different currencies. In an international economy a la Amin and Jarrow (1991), foreign and domestic interest rates obey the stochastic processes postulated by Heath, Jarrow and Morton (t992) in which the volatility of forward rates is deterministic but otherwise arbitrary. In this framework, using the “risk-neutral” then the “forward-neutral” probability measures, we show that the value of a bond price spread option reduces to a simple integral. The latter can easily be solved either by numerical methods, or, as here, approximated by using a Taylor's series expansion about the forward or future prices. Bond yield spread options are simpler to evaluate and a closed-form solution for their prices is derived.

The terminal value of a bond price (or interest rate) spread option depends on the difference between the prices (or yields) of two underlying bonds and a strike price. Its value before maturity is given by the double integral of its discounted terminal value over the joint risk-neutral distribution of the terminal prices (or yields) of the two underlying bonds. We value European options on price spreads, interest rate spreads, and forward and future price spreads when the two bonds concerned are denominated in two different currencies. In an international economy à la Amin and Jarrow (1991), domestic and foreign interest rates are governed by the stochastic processes postulated by Heath, Jarrow, and Morton (1992) for which the volatility of instantaneous forward rates is deterministic but arbitrary. Using the "risk-neutral" and "forward-neutral" probability measures, we show that the value of a bond spread option reduces to a simple integral. This is easily calculated numerically, or, as here, can be approximated from a Taylor series expansion around the forward or futures price. Bond yield spread options are simpler to value because they lend themselves to explicit formulas.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

Moral hazard, bank debt financing and the leniency of the corporate failure law

 

Authors: Recasens, Gilles


The game between the manager-owner, the bank and the judge is analyzed. Assuming the existence of a moral hazard problem between the bank and the manager, their different interests can lead to a conflict in some states of the world. In case of financial distress, the manager can be deterred to produce the necessary effort for the project success. Anticipating this problem the bank can decide to refuse to finance the project. The link between these problems and the level of softness of the bankruptcy law is analyzed. On the one hand, a soft law avoids ex-post inefficient liquidations. On the other hand, the law must not be too soft so as to encourage ex-ante the manager to provide the necessary effort in case of financial distress. Finally, the degree of softness of the law influences the ability to reach an informal workout which leads to an increase in efficiency. In fact, the optimal law acts so as to give to the manager and to the bank incentives for undertaking the project ex-ante and to bargain in case of financial distress, by balancing their chances of seeing their interests respected, in case of failure, by the ex-post judge's decision to reorganize or to liquidate.

L'objectif de cette recherche est d'analyser le jeu qui met aux prises le dirigeantpropriétaire, la banque et le juge. En supposant l'existence d'un problème d'aléa moral entre la banque et le dirigeant, leurs intérêts peuvent, dans certains états du monde, entrer en conflit. Le dirigeant pourrait être incité, en cas de détresse financière, à ne pas fournir tous les efforts nécessaires à la réussite de son projet. Anticipant cette éventualité, la banque pourrait refuser de financer le projet du dirigeant. On analyse alors le lien entre ces problèmes et le degré de clémence de la loi sur les défaillances d'entreprises. En effet, si une loi clémente permet d'éviter ex post la disparition de l'entreprise, elle risque, ex ante, de ne pas inciter suffisamment le dirigeant à fournir des efforts supplémentaires en cas de difficultés. Le degré de clémence de la loi influe sur la possibilité de parvenir à un règlement amiable des difficultés qui entraîne des gains d'efficience. En réalité, la loi optimale agit de manière à rétablir les incitations de la banque et du dirigeant à mettre en œuvre le projet ex ante et à conduire une renégociation en cas de difficultés, en rééquilibrant leurs chances de voir leurs intérëts respectés, dans l'éventualité d'une défaillance, par la décision de réorganisation ou de liquidation du juge ex post.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Experimental market finance: a literature review

 

Authors: Pouget, Sébastien


This paper surveys the literature on experimental financial markets. The interest of the experimental method in finance is underlined which is linked to the control of the environment, to the control of market institutions and to the access to individual behavior and characteristics. The main fields of research in experimental finance are discussed : tests of the CAPM and of the informational efficiency of markets, microstructure and market rationality.

Cet article propose une synthèse de la littérature sur les marchés financiers expérimentaux. Il souligne l'intérêt de la méthode expérimentate en finance lié au contrôle de l'environnement, au contrôle des institutions de marché et à l'observabilité des comportements et des caractéristiques individuels. Les principaux thèmes de la recherche en finance expérimentale sont abordés : les tests du MEDAF et de l'efficience informationnelle des marchés, la microstructure et la rationalité des marchés.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Portfolio management with guarantee: the optimal allocation in derivative assets

 

Authors: Bertrand, P.; Lesne, J.-P.; Prigent, J.-L.


In this paper, we study the problem of optimal portfolio selection under an insurance constraint. We assume that investors are not allowed to modify their portfolio composition between initial and terminal date. More precisely, we are interested in the problem of characterizing an optimal payoff function under insurance constraint. We show how derivative securities must be taken into account by investors who maximize expected utility. Especially, we study the effect of risk aversion. We generalize prior results without insurance constraint by Brennan-Solanki (1981) and Carr-Madan (1997). Finally, we consider the problem of optimal portfolio selection when investors can only trade in a finite number of securities. As an illustration, we consider the case of a portfolio invested in a bond, a risky asset and a put on it.

We study the problem of optimal portfolio allocation under a collateral constraint, when the investor has no possibility to modify his management strategy between the initial and terminal dates. For this particular type of portfolio insurance problem, we show how derivative assets should be taken into account in order to maximize the investor's expected utility. In particular, we study the role of his risk aversion. This study, which focuses on the search for an optimal payment under a collateral constraint, generalizes the previous results of the unconstrained model of Brennan-Solanki (1981) and Carr-Madan (1999). We also examine the problem of portfolio insurance when the investor has a priori only a finite number of derivative assets: for this, we examine the case of a portfolio constituted only from a bond, a risky asset and a put on this risky asset.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Operational and stock market performance of IPOs: the French case 1991-1995

 

Authors: Feels, Patrick


We investigate the short-run underpricing, the long-run performance and the operating performance of recent initial public offering firms in a sample of 61 French firms from 1991-1995. In accordance with the findings for other markets, the average initial returns for French initial public offering firms are significantly positive (9.2%). However, contrary to American studies, we do not find significant underperformance compared with some major market indices (SBF 250, CAC 40, MIDCAC) and compared with matching firms (matching is done by industry and by market capitalization). Morever, a weak significant decline in operating performance subsequent to the initial public offering is found. In general, underpricing is unrelated to long-run performance neither to operating performance.

The financial performance of French companies that go public are addressed through the simultaneous study of undervaluation, long-term stock market performance and operational performance of these companies. A sample consists of 61 French companies that went public in the period 1991-1995. The initial returns calculated at the time of the IPO are significantly positive (9.2%), indicating a pronounced undervaluation of the companies in the sample. However, unlike American studies, companies that go public do not exhibit significantly negative abnormal long-term performance compared to the main indices (SBF 250, CAC 40, MIDCAC) and compared to benchmark companies (the control sample consists of companies with a market capitalization and sector of activity similar to those of the companies in the initial sample). Moreover, a weakly significant decline in operating performance after the IPO is observed for the companies in our sample. In general, the undervaluation observed initially is not related to long-term stock market performance or even to operational performance.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Asset Substitution, Debt Pricing, Optimal Leverage and Maturity

 

Authors: Ericsson, Jan

I suggest a continuous time model for debt and equity valuation where leverage and maturity structure are chosen optimally by the firm's management. The capital structure decision involves trading off the tax benefits of leverage, financial distress costs and the agency costs associated with risk shifting incentives. Closed form solutions for the values of corporate securities, the levered firm and agency costs are obtained. I provide quantitative illustrations of how the capital structure decision is influenced by the potential for asset substitution. I show that in a typical scenario, a firm could afford to take on an additional 20% of leverage and use distinctly longer term debt maturity if asset substitution were ruled out. Furthermore I show that when deviations from the Absolute Priority Rule in bankruptcy are present, management is encouraged to increase risk ex post but will compensate ex ante by reducing leverage and using shorter maturity debt.

Je propose un modèle d'évaluation des actifs financiers d'une entreprise en temps continu. L'endettement et la maturité des obligations émises sont choisis par les gestionnaires qui agissent dans l'intérêt des actionnaires. La décision de structure financière comprend un équilibre entre les bénéfices de l'endettement, les coûts de détresse financière et les coûts d'agence liés au problème de substitution d'actifs. Le modèle permet l'obtention de solutions analytiques pour la valeur de la dette et des actions, ainsi que pour les coûts d'agence et la valeur agrégée de l'entreprise. Je développe des illustrations quantitatives de l'impact sur la structure financière du potentiel de substitution d'actifs. Dans l'absence de problèmes d'agence, une entreprise typique pourrait se permettre d'augmenter l'endettement de 20 % et émettre des obligations de maturité nettement plus longue. En outre, je montre que lorsque la règle de priorité absolue des détenteurs de dette sur les détenteurs d'actions n'est pas respectée, les gestionnaires ont tendance à augmenter le risque ex post mais compenseront ceci par un endettement plus bas ex ante.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Bankruptcy Costs, Ex Post Renegotiation and Gambling for Resurrection

 

Authors: Décamps, Jean-Paul; Faure-Grimaud, Antoine


This paper investigates the consequences of bankruptcy costs and debt renegotiation on the incentives of equityholders to engage in excessive continuation of the firm's activities. We show that bankruptcy costs and renegotiation may sometimes exacerbate this gamble for resurrection, but that they may also lead to excessive exit in other cases. We also examine the impact of the allocation of the bargaining power between different claimholders on these results.

Nous étudions dans cet article le rôle joué par les coûts de faillite et la renégociation de la dette dans la décision des actionnaires de continuer ou d'arrêter l'activité de la firme. Nous proposons une mesure de la destruction de la valeur de la firme endettée due à une décision inefficiente des actionnaires de continuer ou d'arrêter l'activité de firme. Nous expliquons pourquoi coûts de banqueroute et renégociation peuvent conduire, soit à une décision inefficiente de poursuivre l'activité de la firme, soit à une décision inefficiente de liquider la firme. Nous analysons également l'impact du pouvoir de renégociation sur nos résultats.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Bargaining Power and Optimal Leverage

 

Authors: Hege, Ulrich; Mella-Barral, Pierre


We consider the optimal capital structure of a firm in the presence of a tax advantage of debt and costly liquidation. We construct a continuous time model which allows for dynamic debt renegotiation prior to liquidation and for the full transfer of tax loss. We distinguish the case in which strong creditors decide to forgive their debt, from the one where strong opportunistic debtors force them to do so. We establish that the balance of bargaining power between debtors and creditors in ex-post renegotiations is a major determinant of the ex-ante optimal leverage of the firm. We show that for reasonable parameter values, it is modified by a quarter.

Nous considérons la structure optimale de capital d'une entreprise, en présence de taxes et coûts de liquidation. Nous construisons un modèle en temps continu qui autorise la renégociation dynamique de la dette avant liquidation et le transfert illimité des avoirs fiscaux en cas de redressement. Nous distinguons le cas où les créanciers décident d'éliminer leur propre dette, de celui où ils sont poussés à le faire par leurs débiteurs. Nous établissons que le rapport des forces entre débiteurs et créanciers est un des principaux déterminants de la quantité optimale de dette, puisque pour des valeurs de paramètres raisonnables, celle-ci est modifiée d'un quart.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Corporate Bond Yield Spreads and the Term Structure

 

Authors: Anderson, Ronald W.; Yonghua Pan; Sundaresan, Suresh


This paper develops a structural model in continuous-time setting for design and valuation of corporate securities. We assume two underlying state variables follow exogenously given stochastic processes: the value of the assets of the firm and the riskless short term interest rate. Our model is flexible enough to cover many corporate securities including straight bonds, callable bonds, convertible bonds or other hybrids. The interest rate process is modeled such that it can be fitted to market data of yield curve. The model also integrates strategic service in corporate debt to address the issue of security design. We implement the model using the stochastic term structure model of Black, Derman and Toy. After calibrating the model to observed term structures we study the problem of design of securities and identify circumstances when callability and convertibility features are particularly attractive.

Nous présentons un modèle structurel en temps continu permettant l'évaluation et la structuration de titres en risque de défaillance. Nous supposons deux processus stochastiques sous-jacents : la valeur de l'actif de l'entreprise et le taux d'intérêt sans risque court terme. Notre modèle peut s'accommoder aux diverses formes de titres -- l'obligation à remboursement in fine, l'obligation avec option de rachat ou l'obligation convertible. Le processus du taux sans risque peut être calibré à la structure par terme de marché. Nous tenons compte de la possibilité de défaut stratégique par la modélisation de banqueroute à la façon de Anderson et Sundaresan. Dans une application concrète, nous utitisons le modèle de taux de Black, Derman et Toy. Après avoir calibré le processus de taux sans risque, nous explorons le problème de la structuration des titres. Nous mettons en évidence les conditions pour lesquelles une option de rachat ou la convertibilité en action sont particulièrement indiquées.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Estimation of default risk by stochastic balance sheet modeling: Application to French industrial firms

 

Authors: Redone, Catherine


This paper proposes to estimate corporate default risk and to predict bankruptcy via an Asset Liability Management (ALM) method of risk estimation, which is an alternative to multivariate models such as multiple discriminant analysis or neural networks. The method is based on corporate bond valuation models. Whereas ALM is almost exclusively used by banks and insurance companies, we assess probabilities of default for French manufacturing firms. Following Janssen [1992], we suppose that the dynamics for the total assets and the total liabilities can be described by geometric Brownian motions. The probability of insolvency -- ie the probability that net worth is negative -- is then estimated and analyzed as the probability of default. Firms are partitioned into two groups, based on the computed probabilities and a threshold level. The rate of correct classification is assessed from bootstrap samples and compared to other business failure prediction models. The assessed probabilities provide a good indicator of corporate bankruptcy risk for one to three years prior to failure.

An alternative methodology to multi-criteria models based on the economic and financial study of the firm is proposed in order to estimate the default risk of companies and to develop an indicator of the risk of bankruptcy. We use an asset-liability management method for estimating risks inspired by financial asset pricing models. While ALM is almost exclusively applied to banks and insurance companies, we estimate the default probabilities of industrial firms. We have accounting data from French companies of which we know whether they have filed for bankruptcy. Applying the Janssen model [1992], we assume that the net assets and liabilities of equity follow geometric Brownian processes. We then determine the probability of insolvency -- the probability that equity becomes negative -- which we analyze as the probability of default. A classification of companies into two groups -- healthy companies and vulnerable companies -- is carried out from the default probabilities and a threshold probability. This classification is compared to the reality of companies in order to calculate a rate of good classifications. The bootstrap method is used to validate our results. A comparison is made with the results of studies relating to the prediction of bankruptcy; the estimated default probabilities constitute a good indicator of the risk of bankruptcy from one to three years before the filing for bankruptcy.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Introduction to “Valuation and corporate finance.”

 

Authors: Hege, Ulrich; Mella-Barral, Pierre


The article discusses various reports published within the issue including one on debt restructuring and another on asset substitution

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

The Timing of Arbitrage: An Options Approach

 

Authors: Lambrecht, Bart M.


The paper presents a continuous-time model for the timing of riskless arbitrage when the mispricing between two equivalent portfolios follows a jump-diffusion process and when there is a persistent prospect that the arbitrage bubble can "burst". The model endows the arbitrageur with n options to do arbitrage. When endogenously determined arbitrage bounds are violated one or more arbitrage trades bring asset prices back within the bounds. The model is extended to the case where there are two competing arbitrageurs who have incomplete information about each other's opinion on the expected lifetime of the arbitrage bubble. The optimal arbitrage rule is determined by a trade-off between the benefit of waiting and the cost of being preempted due to this delay.

Le papier présente un modèle à temps continu pour calculer le point optimal d'arbitrage quand la marge d'erreur entre les prix de deux portefeuilles équivalents suit un processus de saut-diffusion et quand il y a une possibilité permanente que la bulle puisse éclater. Dans le modèle, chaque arbitrageur a n options d'arbitrage. Les frontières d'arbitrage sont déterminées endogènement, et quand elles sont violées, une ou plusieurs transactions d'arbitrage rendent de nouveau les prix des portefeuilles dans la marge d'erreur. Puis te modèle est élargi pour inclure le cas où il y a deux arbitrageurs concurrents qui ont de l'information incomplète sur l'opinion de leur adversaire concernant la durée moyenne de la bulle d'arbitrage. Le point optimal d'arbitrage balance le bénéfice d'attendre contre le coût de préemption à cause de ce retard.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

A decision theoretical approach to bid-ask spreads: A note

 

Authors: Roger, Patrick


In this short note, we present an alternative approach to the analysis of bid-ask spreads provided by Kast and Lapied (1997). In the framework of a Choquet expected utility model, in the spirit of Schmeidler (1989), we show that the spread not only depends on the payment of the risky asset but also on the random wealth of the dealer before and after a trade. This approach integrates in a simple way the inventory component of the bid-ask spread. We illustrate this point in the special case of the dual theory of Yaari.

Dans cette note, nous présentons une approche alternative à l'analyse des bid-ask spreads présentée par Kast et Lapied (1997). Dans le cadre d'une espérance d'utilité exprimée comme une intégrale de Choquet, dans l'esprit de Schmeidler (1989), nous montrons que le spread dépend non seulement des paiements de l'actif mais aussi de la richesse du market-maker, avant et après la transaction. Cette approche intègre la composante d'inventaire contenue dans le spread. Nous illustrons ce point dans le cadre spécifique de la théorie duale de Yaari.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Behavior and performance in a bank-centric financial system: a trading game approach

 

Authors: Guigou, Jean-Daniel


Based on Weinstein and Yafeh (1995, 1998) works and japanese main bank relationships, this paper analyses the effects of banking influence on firms behavior and performance in strategic contexts. We develop a model in which decision making in a firm is described as a bargaining problem between the shareholders and the bank. Bargaining provides the firm with an objective different from that of pure profit maximization. As the interest rate used in the objective function is lower than the true interest rate, the firm derives a strategic advantage and behaves more fiercely on the product market. But a firm will borrow more and pay higher than the average interest rate when under banking influence than when independant. The costs of banking influence are such that it may be profitable for each firm in the market to borrow from a non-influencial bank. These results can be used to explain the erosion phenomenom of principal bank relationships observed in Japan since the liberalisation of financial markets in the early 1980's.

À la lumière des travaux de Weinstein et Yafeh (1995, 1998), cet article met en valeur l'incidence de l'influence bancaire sur le comportement et les performances d'entreprises en situation d'interaction stratégique. Nous développons un modèle dans lequel les décisions sont prises suivant un processus de négociations entre les actionnaires et la banque créancière de l'entreprise. La négociation conduit à retenir un objectif différent de la stricte maximisation du profit. Par ailleurs, le taux d'intérêt pris en compte dans la fonction objectif est inférieur à son niveau effectif. La firme devient plus agressive sur le marché du produit et obtient un avantage stratégique. Mais une firme emprunte davantage et paie des intérêts à un taux supérieur en se plaçant sous l'influence d'une banque qu'en restant indépendante. Les coûts sont tels qu'il peut être profitable pour chaque entreprise de ne pas se placer sous influence bancaire. Ces résultats permettent d'expliquer le phénomène d'érosion des relations de banque principale constaté au Japon depuis le mouvement récent de libéralisation des marchés financiers.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Measuring the risk-return ratio from the Eurocurrency market

 

Authors: Jondeau, Éric


In this paper, we study the reward-to-risk ratio, using monthly euro-dollar, euro-mark and euro-franc term structures between 1975 and 1997. We test the relationship between excess holding return and volatility in an ARCH-in-Mean framework. We first obtain that the conditional volatility displays a non-stationary pattern, that there is no asymmetric effects from shocks to volatility, and that the conditional density is well represented by a student's t distribution for the euro-dollar and by a GED for the euro-mark and the euro-franc. We then find that the best relation between excess return and risk is obtained when the risk is represented by the logarithm of the conditional volatility. Last the estimates of the reward-to-risk ratio are lower than to those obtained in previous empirical studies on stock returns but similar to those obtained on monetary and bond returns.

Nous étudions dans cet article la relation entre le rendement et le risque pour les marchés de taux sur l'euro-dollar, l'euro-mark et l'euro-franc, de 1975 à 1997. Nous testons la relation entre l'excès de rendement de portage et la volatilité à partir d'une modélisation ARCH-in-Mean. Nous trouvons tout d'abord que la variance conditionnelle évolue selon une dynamique non stationnaire, qu'il n'existe pas d'effets d'asymétrie des chocs de rendement sur la variance et que la distribution conditionnelle la plus adaptée est la loi de Student pour l'euro-dollar et la GED pour l'euro-mark et l'euro-franc. Nous obtenons alors que la meilleure relation entre l'excès de rendement et le risque est obtenue lorsque le risque est représenté par le logarithme de la volatilité pour les trois marchés. Finalement, les estimations du ratio rendement-risque sont plus faibles que celles obtenues à partir des rendements boursiers, mais du même ordre que celles issues de rendements antérieurement monétaires et obligataires.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Practice and theories of financing: the case of France

 

Authors: Carpentier, Cecile; Suret, Jean-Marc


This study proposes and tests an empirical model of financial choices of large French firms. It differs from previous works by focusing on the medium term behaviors measured by the variation of the debt level between 1987 and 1996. Following the path opened by Fama and French (1997) and Opler and Titman (1996), financial choices are simultaneously explained by variables issued from the two main conceptual framework, the Static Tradeoff Theory and the Pecking Order Theory. We consider that these two conceptual models should be integrated and not opposed to understanding the firm's decisions. In this context, the firm defines a target ratio and the financial choices are linked with the gap between the actual and the target ratio. We empirically find that this gap is significantly associated with the financing decisions, but the hypotheses of a significant impact of POT linked variables on these decisions cannot be rejected. In particular, profitability and size strongly influence the process of return toward the target. Moreover the hypothesis of large significant decrease of leverage of French firms over the period can be rejected.

This study proposes and tests an empirical model of medium-term financial behavior of large French companies. It differs from previous studies by adopting a medium-term dynamic perspective: the explained variable is the variation in debt, measured from 1987 to 1996. It also proposes an explanation of financing choices based on the superposition of the two proposed conceptual frameworks, namely the Static Tradeoff Theory and the Pecking Order Theory, rather than on their opposition. In this respect, this study is in line with the studies of Fama and French (1997) and Opler and Titman (1996). In this framework, companies base their financing decisions on their situation in relation to the target debt ratio, estimated here by the sector average. The deviation from this target is an important and significant explanatory element of financing decisions, but the variables linked to the Pecking Order Theory also guide the financing behavior of companies in France. Profitability and size significantly influence financing choices and condition the process of returning to the target. The study also allows us to invalidate the hypotheses of overall debt reduction of companies in France during this period.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Agency theory and hedging policy

 

Authors: Jokung N., Octave; Levasseur, Michel


Through this paper we analyze the demand for hedging in presence of agency problems. The desirability of coverage in order to reduce agency costs is pointed out and the fact that the size of hedge purchased depends not only on the level of risk-aversion of the decision maker, but also on the incentivity of the contract between the principal and the agent.

La demande de couverture est analysée à partir d'un modèle Principal-Agent. Nous montrons que le recours à la couverture peut permettre de réduire les coûts d'agence et surtout que le niveau de couverture n'est pas uniquement fonction du risque et de l'attitude des agents face au risque, mais aussi de l'incitation de ceux-ci à fournir un effort.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

A New Approach to Check the Free Boundary of Single Factor Interest Rate Put Option

 

Authors: W. Allegretto, G. Barone-Adesi, E. Dinenis, Y. Lin, G. Sorwar

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Analysis and Valuation of Exotic and Real Options: a Survey of Important Results

 

Authors: M. Bellalah

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Asian Options in a Market driven by a Discontinuous Process

 

Authors: N. Bellamy

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Lookback and Barrier Options: a Comparison between Black-Scholes and ACB Pricing

 

Authors: J.L. Prigent, O. Renault, O. Scaillet

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Noisy Information and Investment Decisions: a Note

 

Authors: L. Gauthier, E. Morellec

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Exotic Options

 

Authors:  N. El Karoui, M. Jeanblanc

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Sovereign Debt Discounts and the Unwillingness to Pay

 

Authors: E. Clark, A. Zenaïdi

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

A case of 'Hybrid' Rate and Share Options: Performance Complement Options

 

Authors: E. Valezy, N. Caillat

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Valuation of Options on the Maximum/Minimum of Multiple Assets, Discrete Lookback Options and Equity-Indexed Annuities

 

Authors: X. Sheldon Lin

DATE PUBLISHED: 15/07/1999

VOLUME: 20

NUMBER: 2

Yield Option Pricing in the Generalized Cox-Ingersoll-Ross Model

 

Authors: G. Deelstra

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Comparison of methods for extracting information from Franc-Deutschemark exchange options: the case of the French market

 

Authors: Jondeau, Éric; Rockinger, Michael


The estimation of risk neutral densities yields a precious tool for market participants eager to learn about other investor's expectations. By using FRF/DEM option data surrounding the 1997 snap election we compare various existing methods. These methods are the mixture of log-normal densities, the Hermite approximation of Madan and Milne, the Edgeworth expansion of Jarrow and Rudd as well as the structural model of Malz who assumes a jump-diffusion for the underlying process, and eventually of Heston who uses a stochastic volatility model. Models allowing for skewness and kurtosis in excess of the lognormal one yield improved volatility estimates. The mixture of log-normals provides a good description for the data at hand. Malz' jump diffusion model should be used in parallel because of its ease to provide interpretable parameters. A political event is shown to strongly affect expectations.

L'estimation des densités neutres au risque fournit un outil précieux pour étudier les anticipations des investisseurs. Nous utilisons des données d'option FRF/DEM pour la période encadrant les élections anticipées de 1997 pour comparer diverses méthodes d'estimation de ces densités. Les méthodes étudiées sont le mélange de lois log-normales, l'approximation par les polynômes d'Hermite de Madan et Milne, ou par les expansions d'Edgeworth de Jarrow et Rudd, le modèle structurel de Malz, qui suppose que le sous-jacent suit une diffusion avec saut, et finalement celui de Heston qui autorise une volatilité stochastique. De façon générale, les modèles qui autorisent une skewness et une kurtosis plus larges que celles de la loi log-normale fournissent une estimation moins biaisée du paramètre de volatilité que le modèle log-normal usuel. Le mélange de lois log-normales fournit une bonne description des données. L'utilisation du modèle de diffusion avec saut, dont les paramètres sont aisément interprétables, peut aussi être recommandée. Nous montrons également qu'un événement politique affecte fortement les anticipations.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

Default risk in asset pricing

 

Authors: Mella-Barral, Pierre; Tychon, Pierre


This paper provides an analytical solution for the impact of default risk on the valuation of realistically intricate claims on time dependent uncertain income streams. It can be used to price defaultable bonds and credit derivatives. Its modular structure allows us to adjust the set of assumptions concerning the event of default to the specificity of the environment which surrounds the asset. The importance of such a flexibility is illustrated in the context of corporate debt, examining the case of finite lived coupon paying corporate bonds with principal repayment at maturity. The magnitude of risk premia, as well as the term structure of credit spreads, are largely determined by the assumed default scenario.

Cet article propose une solution analytique au problème de l'évaluation de l'impact du risque de défaut sur la valeur d'actifs. Les actifs sont ici définis comme la réalisation d'une suite complexe de revenus incertains et variables dans le temps. Cette solution peut être employée pour évaluer des obligations ainsi que des produits dérivés comportant un risque de défaut. Sa structure modulaire permet d'ajuster les suppositions concernant l'événement de défaut aux spécificités de l'environnement. L'importance d'une telle flexibilité est illustrée dans le contexte de la dette d'entreprise, en examinant le cas d'une obligation payant une suite de coupons et assortie d'un remboursement du principal à maturité. L'ampleur de la prime de risque ainsi que sa structure dans le temps apparaissent comme étant largement déterminées par le scénario de défaut supposé.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

FIGARCH modeling applied to the analysis of the term structure of interest rates

 

Authors: Lardic, Sandrine; Mignon, Valérie


The purpose of this paper is to analyse the dependence structure of the volatility of interest rates term premia series. More specifically, our object is to test whether long-term dependent processes are appropriated for modelling volatility series. To this end, we apply various methods, which are based on the estimation of FIGARCH processes, in order to detect the presence, if any, of long-term memory. Results suggest that the considered series are characterized by a strong dependent structure, which indicate that shocks to volatility have persistent consequences.

L'objet de cet article est de tester le type de la structure de dépendance de la volatilité des primes de terme calculées à partir des séries de taux d'intérêt. Plus spécifiquement, ce travail a pour objectif de déterminer si les séries de volatilité peuvent être caractérisées par un processus fortement dépendant. A cette fin ont été mises en œuvre diverses procédures de détection de la mémoire longue basées sur l'estimation des processus GARCH fractionnairement intégrés (FIGARCH). Les résultats obtenus suggèrent que les séries considérées sont caractérisées par la présence d'un tel phénomène, témoignant ainsi de conséquences durables des chocs sur la volatilité.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

Default probability and interest rate spreads: an empirical study of the French market

 

Authors: Merli, Maxine; Roger, Patrick


In this paper, we propose a simple methodology to build the term structure of default probabilities for risky coupon bearing bonds. The actuarial interpolated spread is often used by professionals to value the default probability. We propose an alternative measure based on the difference between the price of a bond and its riskless equivalent. The last section is dedicated to an empirical investigation of a sample of French bonds. We show that the typology induced by ratings is not reproduced in the default spreads. Only four classes of risk are necessary to describe the risky bond market.

Dans cet article, nous proposons une méthodologie simple de construction de la structure par termes des probabilités de défaut pour des obligations couponnées à taux fixe. Le spread actuariel interpolé est généralement utilisé dans les salles de marché à cette fin. Nous définissons une mesure basée sur les écarts de prix entre une obligation et son équivalent sans risque. Cette méthode est utilisée sur un échantillon d'une centaine d'obligations en francs, et nous montrons que le classement opéré par les ratings ne se retrouve pas dans les spreads de défaut, sauf à regrouper ces notes en quatre grandes classes.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

Estimation of a Linear Gaussian Model

 

Authors: Danesi, Vladimir; Genon-Catalot, Valentine; Laurent, Jean-Paul


We address the problem of estimating parameters of the two factors linear Gaussian Heath-Jarrow-Morton model, with time homogeneous volatilities. Since the market prices for risk are not specified, the likelihood of observed data cannot be computed. We thus derive the usual estimators (ME, GMM) based on an auxiliary model where the drifts are set to zero. We show the consistency of these estimators and study their asymptotic properties when the time interval between two observations tends to zero. The approach is applied to interest rates from the French money market, and terms to maturity range between one day and five years. The estimates can be used to measure interest rate sensitivities of a portfolio of assets, in an Asset and Liability Management perspective.

Nous nous intéressons au problème d'estimation des paramètres d'un modèle linéaire gaussien à deux facteurs à la Heath-Jarrow-Morton, avec des volatilités homogènes dans le temps. Comme les prix de marché ne sont pas spécifiés, la vraisemblance ne peut être calculée. Nous dérivons alors les estimateurs usuels (maximum de vraisemblance, moments généralisés) avec un modèle auxiliaire, où les effets de translation sont mis à zéro. Nous montrons la convergence de ces estimateurs et étudions leurs propriétés asymptoliques, lorsque l'intervalle de temps entre observations tend vers zéro. L'approche est appliquée à l'analyse des taux d'intérêt sur le marché monétaire français avec des maturités de un jour à cinq ans. Les estimations peuvent être utilisées pour évaluer la sensibilité d'un portefeuille d'actifs aux variations de taux dans une optique de gestion actif-passif.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Market Volatility Index and Maximum Likelihood Estimation of Stochastic Volatility Models

 

Authors: Moraux, Franck; Navatte, Patrick; Villa, Christophe


Practical use of stochastic volatility models requires a preliminary estimation of the parameters of the unobservable latent volatility process. First, we present in the stochastic volatility framework of Hull-White [1987]the Renault-Touzi [1996]'s statistical iterative procedure of filtering (of the latent volatility process) and estimation (of its parameters). Second, we apply this procedure to a time series of a Market Volatility Index. Empirical evidence from the French Market Volatility Index shows that this procedure failed to provide estimates of the parameters of the unobservable latent volatility process. We suggest, however to exploit Feinstein [1992] research that demonstrates that the implied volatility approximates the market expectation of the average volatility over the life of the option. In this case, implied volatility is used in the same spirit as yield to maturity on the bonds market and a direct maximum likelihood statistical inference as Pearson-Sun [1994] and Duan [1994] do in the case of interest rate can be applied. Third, this result is extended to the correlated risks case since a negative correlation between the underlying index return and its market volatility index variation, the so-called leverage effect, is observed.

L'utilisation de modèles à volatilité stochastique demande une estimation préliminaire des paramètres du processus latent de volatilité non observable. Nous commençons, dans le contexte du modèle de Hull-White, par présenter la procédure de filtrage itérative développée par Renault-Touzi (1996) pour prévoir le processus de volatilité et la méthode d'estimation associée. Nous appliquons cette approche à une série d'indice de volatilité de marché. L'évidence empirique pour le tas français suggère que la procédure ne permet pas d'obtenir de bons estimateurs des paramètres sous-jacents du modèle de volatilité. Pour résoudre cette difficulté, nous suggérons d'exploiter un résultat de Feldstein (1992), qui montre que la volatilité implicite approche l'anticipation de la volatilité moyennée sur la vie de l'option. Par analogie avec la pratique développée sur les marchés obligatoires, nous pouvons alors appliquer une méthode du maximum de vraisemblance directe comme dans Pearson-Sun (1994) et Duan (1994). Le résultat est étendu au cas de risques corrélés, vu la corrélation négative observée entre le rendement de l'indice sous-jacent et la variation de l'indice de volatilité.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

The very high frequency dynamics of the CAC 40 index

 

Authors: Teiletche, Jérôme


Using ultra-high frequency on the CAC 40 index, we study the statistical properties of the index for various sampling frequencies. First, we estimate the tail indices of the distribution. Then, we study the intra-daily and intra-weekly patterns of the returns and the volatility. We show that the beginning and the end of the trading day are concerned with an increase of the volatility. The same phenomenon is observable during the release of us macroeconomic news and the opening of foreign stock exchanges. Those seasonalities affect the correlation structure of the volatility. After an appropriate time deformation, the seasonalities disappear and we show the presence of a long memory of the volatility.

A partir de données enregistrées à très haute fréquence (toutes les cinq minutes) sur l'indice CAC 40, nous étudions les propriétés statistiques de l'indice selon la fréquence d'échantillonnage. Après avoir estimé les índices de queue de la distribution, nous nous intéressons à l'évolution intra-journalière et intra-hebdomadaire des rendements et de la volatilité. Nous mettons ainsi en évidence que chaque journée d'échange est caractérisée par une volatilité plus forte en début et en fin de journée, mais aussi par une hausse de la volatilité à l'annonce des principales statistiques macro-économiques américaines et au moment de l'ouverture des bourses étrangères. Cette saisonnalité de la volatilité affecte sa structure corrélative. Après une déformation appropriée du temps, la saisonnalité disparaît et la structure corrélative des rendements fait apparaître une mémoire longue.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Extreme movements of high-frequency financial series

 

Authors: Robert, Christian Yann


This article presents a study of extreme price movements of Alcatel stock over 1 minute, 5 minutes and 30 minutes time intervals during a trading section. This movements are encountered after the opening, at lunch time around 12:30 a.m. and before the closing. According to extreme value theory, the form of the distribution of extreme movements is precisely known; empirically, the extreme price variations obey the Gumbel distribution. Moreover, we observe that the larger the time interval, the thinner the distribution tails.

Cet article présente une étude des mouvements extrêmes de l'action Alcatel sur des intervalles de temps de une minute, cinq minutes et trente minutes à l'intérieur d'une journée de cotation. Ces mouvements ont lieu généralement en début de matinée, vers midi et en fin d'après-midi. La théorie des valeurs extrêmes nous donne la forme de la distribution des variations de prix extrêmes ; empiriquement, il apparaît que ces variations extrêmes obéissent à la loi de Gumbel. Enfin, l'étude montre que les queues de distribution deviennent de moins en moins épaisses au fur et à mesure que le pas d'échantillonnage s'accroît.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Multiregime Term Structure Models

 

Authors: Gouriéroux, C.; Scaillet, O.


The Ho and Lee model is the analogue for the study of the term structure of interest rates of the binomial tree introduced by Cox, Ross and Rubinstein in the one risky asset case. This model allows only for a small number of deformations of the term structure between two successive dates, and is therefore incompatible with available data. We propose here to reconcile tree approaches and statistical inference. We consider switching regime models for which the deformation of the term structure may behave randomly in each regime. Question about constraints induced by no arbitrage are also addressed in a context of asymmetric information between traders and the econometrician in charge with the estimation.

Le modèle de Ho et Lee est pour l'étude de la structure par terme des taux d'intérêt l'analogue de l'arbre binomial introduit par Cox, Ross et Rubinstein pour le cas d'un seul actif risqué. Ce modèle ne permet cependant qu'un petit nombre de déformations de la structure par terme entre deux dates, ce qui le rend incompatible avec les données disponibles. Nous nous proposons de réconcilier les approches par arbre et l'inférence statistique. Pour cela nous considérons des modèles à régimes, où la déformation de la structure par terme peut dans chaque régime avoir une certaine variabilité. Les questions de contraintes provenant de l'absence d'opportunité d'arbitrage sont analysées dans un contexte d'information asymétrique entre les intervenants du marché et l'économètre chargé de l'étude.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Persistence in Intertrade Durations

 

Authors: Jasiak, Joanna


This paper examines long-term dependence in times between trades on financial markets. The autocorrelation functions of several intertrade duration series show a slow, hyperbolic rate of decay typical for long memory processes. For example, a shock to times between trades of the Alcatel stock on the Paris Stock Exchange (SBF Paris Bourse) may persist in the transactions time for a long period of 1,000 or 2,000 ticks. With an average duration of 52 seconds between transactions, this may amount to sixteen or thirty-two hours in calendar time. This paper introduces a fractionally integrated autoregressive conditional duration (FIACD) model for intertrade duration series. It also examines transformed duration processes representing times between consecutive returns to states of null, positive or negative returns. This approach captures the relationship between the duration persistence and return dynamics. The times elapsed between returns to various states feature very similar autocorrelation patterns and do not possess the long memory property. The persistence in durations is also determined by the times spent within specific states of returns. The average visiting time is state dependent, features intraday variation and may be considered as an instantaneous measure of state persistance. The long memory patterns are examined in data on the Alcatel and IBM stocks traded on the Paris Bourse and NYSE, respectively.

Cet article s'intéresse à la dépendance à long terme des durées entre transactions sur les marchés financiers. Les fonctions d'autocorrélation de telles durées présentent en effet des décroissances lentes typiques des processus à mémoire longue. Pour les traiter, nous introduisons des modèles de durée autorégressifs fractionnaires (FIACD). Ils sont appliqués à l'étude des durées entre les changements de sens d'évolution de prix (rendements positifs, négatifs ou nuls), et aux durées passées dans les divers états. Ces phénomènes de mémoire longue sont étudiés empiriquement sur des données des titres Alcaltel et IBM, échangés respectivement sur les bourses de Paris et de New York.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Time-varying Market Price of Risk in the CAPM. Approaches, Empirical Evidence and Implications

 

Authors: Hafner, Christian M.; Herwartz, Helmut


Times-varying risk premia traditionally have been associated with the empirical fact that conditional second order moments are time-varying. This paper additionally examines another possible source for time-varying risk premia, namely the market price of risk (lambda). For utility functions that do not imply constant risk aversion measures, the market price of risk will in general change over time. We provide empirical evidence for the German stock market in a bivariate GARCH-M framework using alternative specifications for lambda. The results indicate that a model with lambda being a function of typical volatility measures performs best for most series. To facilitate the interpretation of the results, we plot impulse response functions of the risk premia.

Des primes de risque évolutives ont traditionnellement été reliées aux volatilités évolutives observées empiriquement. Ce papier examine une autre source possible de dépendance temporelle de la prime. Pour des fonctions d'utilité qui n'impliquent pas des aversions constantes, le prix de marché du risque (lambda) change généralement avec le temps. Nous mettons empiriquement en évidence ce fait pour le marché d'actions allemand par l'intermédiaire d'un modèle GARCH-M bivarié permettant diverses spécifications de ce prix lambda. Nous montrons qu'un modèle où lambda dépend de mesures de volatilités fournit de meilleurs ajustements pour la plupart des séries. Pour faciliter l'interprétation des résultats, nous effectuons une analyse par fonction réponse de la prime de risque.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Transparency and Market Interactions

 

Authors: Boyer, Cécile


In this paper, we use a sequential continuous time model to examine how privately informed agents choose where to trade when two markets with different degrees of transparency are opened, like Paris and London for example, with abstraction of the exchange rate. We suppose that all past and current orders are observable on the first market whereas only the current buy or sell orders are available to public on the second one. We show that the informed agents sometimes adopt mixed strategies in their market choices and derive the properties of liquidity. The absence of orders will be informative for the market makers and hence the system converges to the state of perfect information as if only the transparent market existed.

On étudie un modèle séquentiel en temps continu où des agents détenant de l'information privée peuvent choisir d'échanger sur deux marchés se distinguant par des degrés de transparence différents : tous les ordres présents et passés sont visibles sur le premier marché et seul l'ordre à servir l'est sur le second. Dans ces conditions, les informés peuvent adopter des stratégies mixtes dans le choix du marché où échanger et nous en déduisons des propriétés concernant la liquidité. De plus, l'absence d'ordre est elle-même informative pour les teneurs de marché, ce qui implique une convergence du système vers son état d'information parfaite, comme s'il n'existait que le marché transparent.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

The ex ante and ex post effectiveness of a hedge. The contract on the MATIF CAC 40 index

 

Authors: Boveroux, Philippe; Minguet, Albert


The analysis concerns the hedging of market risk on an equity portfolio. The objective is to estimate hedge ratios using MATIF's future on CAC 40 index. As usual, the optimal hedge ratio is defined as the risk-minimizing ratio of the covered position, with the short position on future balancing the long position on equity portfolio. First, several econometric methods to estimate risk-minimizing hedge ratios are being compared. Next, the hedging effectiveness of these different methods is measured by comparing the performance for an out-of-sample period. The analysis is also extended to other dynamic strategies.

L'étude porte sur la couverture du risque de marché lié à un portefeuille d'actions. Elle vise à estimer des rapports de couverture au moyen du contrat à terme ferme portant sur l'indice CAC 40, négocié sur le MATIE L'objectif consiste à comparer différentes techniques de détermination du rapport de couverture minimisant la variance de la position couverte, définie comme la somme de la position occupée sur un portefeuille d'actions et de celle occupée en contrepartie sur le contrat à terme. Dans une seconde phase, on envisage l'efficacité d'une protection hors de l'échantillon basée sur diverses estimations du rapport de couverture. Différentes variantes en matière de stratégies font également l'objet de comparaison.

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Valuation model for an asset contingent on interest rates and two risky assets.

 

Authors: Augros, Jean-Claude; Queruel, Michel


L'objet du modèle présenté dans cet article est de permettre l'évaluation d'un actif contingent à la fois aux taux d'intérêt et à deux actifs risqués. Il repose sur la combinaison de deux modèles de base, celui de Ho et Lee généralisé, développé par Bonnassieux et Brunel (1993) pour modéliser l'évolution de la structure des taux, et celui de Cox, Ross et Rubinstein (1979) pour la modélisation du prix des actifs risqués. La démarche séquentielle proposée constitue une généralisation du modéle de Kishimoto [1989]. Cette approche octonomiale permet de prendre en compte la corrélation des variations du prix des deux actifs risqués sous-jacents avec les taux d'intérêt. En outre, à la différence du modèle de Kishimoto, le modèle développé ici permet de différencier la volatilité des taux d'intérêt en fonction de la maturité à laquelle ils se rapportent. Une application à l'évaluation d'une option sur le maximum (ou le minimum) de deux actifs, en présence de taux d'intérêt stochastiques, est proposée.

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Diffusion processes and discretization bias: an empirical analysis by indirect inference applied to interest rates.

 

Authors: De Winne, Rudy


This paper compares different continuous-time specifications for the short-term interest rate dynamics on five European markets. Firstly, a classical maximum likelihood approach is used in order to estimate the parameters of nine diffusion processes. The results show the superiority of very simple models like the Ornstein-Uhlenbeck process of Vasicek (1977) or the « Square Root » process of Cox, Ingersoll & Ross (1985). Then we focus on the discretization bias and the indirect inference method is used to account for it. Our results confirm the existence of this bias. Finally, this simulation-based methodology is applied in order to estimate the parameters of two correlated diffusion processes.

Cet article a pour objet la comparaison de divers processus de diffusion de taux d'intérêt à court terme dans un cadre européen. L'estimation par la méthode du maximum de vraisemblance des paramètres des versions discrètes approchées de ces processus nous conduit à accorder la préférence à des processus simples et classiques tels que le processus d'Ornstein-Uhlenbeck de Vasicek (1977) ou le processus « Racine Carrée » de Cox, Ingersoll & Ross (1985). Nous nous focalisons ensuite sur le biais de discrétisation et nous proposons de corriger ce biais par le recours à la méthode d'inférence indirecte. La confrontation des résultats obtenus à partir des deux méthodologies confirme l'existence de ce biais de discrétisation et l'aptitude de la méthode d'inférence indirecte à corriger celui-ci. Finalement, nous montrons que cette méthodologie est applicable dans le cadre de l'estimation des paramètres de deux processus de diffusion corrélés.

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Trading volume and autocorrelation of returns: a Canadian study of contrarian strategies

 

Authors: Boies, Dominique; Lalancette, Simon; Lavallée, Mario


Recent theoretical contributions have demonstrated the existence of a significant relation between lagged variations in the transaction volume and the first-order autocorrelation of stock returns. Contrarian strategies may generate superior performance as they benefit from an indicator that may be capable of economically forecasting the reversion in stock prices. This approach is empirically tested in a Canadian context by forming winner and loser portfolios whose attributes are driven by the magnitude of lagged volume changes. The impact of the price anomaly on the performance of the contrarian strategy is accounted. Finally, superior performance is assessed in a risk-return framework by resorting to statistical bivariate and multivariate tests that compare Sharpe ratios of winner and looser portfolios to that of a reference stock market index.

Certains travaux menés sur le comportement excessif des opérateurs des marchés financiers ont identifié un lien prévisionnel entre un accroissement du volume des transactions des titres négociés en bourse et l'autocorrélation subséquente de leur rentabilité. Cette hypothèse enrichit l'application des stratégies contraires d'un moyen de prévoir les mouvements inverses de prix des titres. Nous évaluons empiriquement, à l'aide d'une méthodologie articulée sur la formation de portefeuilles dits « gagnants » et « perdants » selon l0es variations du volume des transactions, la relation volume-autocorrélation des rentabilités sur le marché canadien. Les tests empiriques évaluent, entre autres, l'influence de l'effet de prix sur la relation. Finalement, nous analysons la performance des stratégies contraires dans un cadre risquerentabilité par le biais de tests statistiques bivariés et multivariés qui comparent les ratios de Sharpe des portefeuilles contraires et d'un indice boursier de référence

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Debt contract and optional forms of action

 

Authors: Francois, Pascal


Because of shareholders' limited liability, an equity stock has an optional form. The exercise rule of this option depends on the conditions under which default is declared. The area of ​​this paper is to establish, in a systematic way, the correspondence, initially suggested by Merton (1974), between the debt contract chosen by the firm and the optional form of the stock resulting from it. This optional form is an important stake of the negotiations between bond- and stock-holders when writing the debt contract, in order to reduce the stockholders' incentive to take risks. Commonly used debt provisions as well as common ways of circumventing the debt contract are studied, making the stock a more or less complex option.

Due to the limited liability of shareholders, the action has an optional character. The rules for exercising this option depend on the conditions under which the default situation occurs. The objective of this work is thus to systematically establish the correspondence, initially suggested by Merton (1974), between the type of debt contract chosen by the firm and the optional form of the action that results from it. This optional form is a stake in negotiations between bondholders and shareholders at the time of drafting the debt contract, in order to limit the incentive that the latter have to take risks. We study different commonly encountered bond clauses, as well as certain means available to shareholders to divert the debt contract, which make the action a more or less complex option.

DATE PUBLISHED: 15/12/1996

VOLUME: 17

NUMBER: 2

Convergence or divergence between European currencies and international financial equilibrium

 

Authors: Artus, Patrick


We examine under which circumstances disturbances affecting the international financial equilibrium (in particular resulting from changes in the situation of the United States: monetary policy, current account balance...) can modify the cross parities of European currencies (specially of strong currencies: Deutschmark, vis à vis weaker currencies: lira...). One can indeed observe that changes in the parity of the dollar (due to changes in interest rates in the us, or in the us trade deficit) sometimes have significant effects of exchange rates between European currencies and sometimes have not. One has therefore to identify the causes of such a non-permanent asymetry.

Nous nous demandons dans quelles circonstances des chocs affectant l'équilibre financier international (et en particulier résultant de modifications de la situation américaine : politique monétaire, balance courante...) peuvent modifier les parités des monnaies européennes les unes vis-à-vis des autres (spécialement des monnaies fortes : mark, par rapport aux monnaies plus faibles : lire...). On a en effet observé à certaines périodes que les mouvements du dollar (induits par des modifications des taux d'intérêt américains, du déficit extérieur américain) avaient de forts effets sur les taux de change en Europe, et à d'autres périodes au contraire que ce n'était pas le cas. Il faut donc identifier les causes de cette asymétrie intermittente.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 2

The impact of divestment operations on shareholder wealth: an information asymmetry approach

 

Authors: Feels, Patrick


This paper presents findings suggesting that sell-off announcement and transaction price disclosure convey information on the quality of the firm. The asset sell-off is studied in the framework of Myers and Majluf (1984) model. We show that an asset sell-off allows a parent firm to avoid some situations of under-investment. Further, in some cases, under-investment incentives are eliminated by an over-divestment. In this framework, we predict that the good firms disclose transaction price. The stockholder's gain to divestiture is positively related to lack of financial slack and degree of undervaluation. The empirical investigation uses diving French companies sample. Price disclosure has a decisive impact on stockmarket reaction. There is also evidence that sell-off announcements with price declaration are more dramatically preceded by a period of significant negative returns than sell-off announcements without price declaration. In addition, we find degree of financial slack prior to divestment to be inversely related to abnormal return. These findings support our empirical predictions.

This paper presents research suggesting that divestment and transaction price announcements convey information about firm quality. The divestment transaction is studied within the analytical framework of Myers and Majluf (1984). We show that divestment allows the firm to avoid underinvestment situations. These underinvestment situations can sometimes be eliminated by over-divestment. Furthermore, good quality firms disclose the transaction price to the financial market; shareholder gains resulting from divestment are positively related to the lack of financial slack and the degree of undervaluation of the firm. The empirical study is conducted using a sample of French divestment companies. The price announcement has a decisive impact on the stock price. It also appears that companies that announced the transaction price experience a period of weaker stock market performance before the divestment transaction compared to companies that did not announce the price. Moreover, we find that the degree of financial slack is inversely related to abnormal returns. Together, these results tend to confirm the empirical implications related to the information asymmetry hypothesis.

DATE PUBLISHED: 15/12/1996

VOLUME: 17

NUMBER: 2

Measuring liquidity: an application to the Chicago options market (CBOE)

 

Authors: Poincelot, J. Dominique


This study aims to measure liquidity of the Chicago Board Options Exchange for January and February 1988. A market is liquid if investors could buy or sell immediately without loss. With continuous cotation, the bid ask spread is the cost of immediacy. This structure implies two measures of the liquidity: the spread and the market's depth. The spread is difference between ask and bid prices quoted in the book. For 36 options selected, we find a spread equal to 18,51 cents. But more than 24 % of trades occurs between the bid ask spread decreasing the cost of immediacy. This study is completed by an investigation of spread's factors. We find tree factors: option's price, trading activity and the nature of options (« in » or « out the money »). Market's detph is the ability of a market to absorb increases in trading volume. A low detph implies importants effects on prices. For 264 blocks, we find no effect on bid and ask prices and no spend of price's adjustment. For this period, CBOE has a excellent depth.

Cette étude a pour objectif d'évaluer la liquidité du marché des options de Chicago (CBOE) pour les mois de janvier et février 1988. Un marché est liquide si l'investisseur peut échanger un actif instantanément et sans perte de valeur. Sur le CBOE où les cotations sont continues, c'est l'existence de la fourchette de prix qui garantit l'instantanéité de l'échange impliquant un coût. Dans ce contexte, nous nous intéressons aux deux mesures classiques qui sont la marge de prix et la profondeur. La marge de prix est la différence entre les deux prix de la fourchette cotés à tout instant. Pour les 36 options retenues, nous constatons une marge cotée de 18,51 « cents ». Toutefois, plus de 24 % des transactions sont réalisés au sein de la fourchette réduisant le coût de la liquidité. L'analyse est complétée par la recherche des déterminants de la marge cotée. Nous mettons en évidence trois déterminants : le prix de l'option, l'activité du marché et la nature de l'option (option « en dedans » ou « en dehors »). La profondeur est la capacité du marché à absorber les transactions de toute taille. Si le marché est peu profond, les échanges de blocs d'options auront une incidence sur les fourchettes de prix du marché. Pour les 264 blocs retenus, nous montrons l'absence d'effet sur les deux prix de la fourchette et concluons par l'absence de vitesse d'ajustement des prix. Pour la période, le CBOE présente une excellente profondeur.

DATE PUBLISHED: 15/12/1996

VOLUME: 17

NUMBER: 2

Empirical determination of factors influencing European banking sector stocks; an approach based on international APT

 

Authors: Seiler, Robert


This study focuses on the factors generating the monthly returns of 128 stocks of the european banking industry (12 countries are represented, including Switzerland). Using Solnik's International APT, we have submitted 50 pre-specified economic and financial variables to an iterative process (forward selection). The results, obtained over the 1988-1995 period, show that 5 IAPT-factors have been identified. Two are linked to interest rates, and three are linked to the trade balance.

Cette étude cherche à identifier la structure factorielle IAPT générant les rentabilités de 128 titres bancaires européens (12 pays, dont la Suisse, sont représentés). Les 50 variables économiques et financières pré-spécifiées sont soumises à un processus itératif (forward selection) qui identifie les facteurs pertinents comme étant ceux qui présentent, notamment, une prime de risque IAPT significative. Les résultats, obtenus sur la période 1988-1995, montrent que 5 facteurs expliquent les variations des portefeuilles bancaires européens : deux sont liés aux taux d'intérêt, et trois à la balance commerciale.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Wealth effect and information effect in the term structure of interest rates

 

Authors: Bisière, Christophe


Using a discrete time general equilibrium model of the term structure of interest rates, we seek to determine the sign of the liquidity and solidity premiums -- which jointly characterize the term structure -- depending on the nature and structure of the uncertainty. We choose to study two different structures. In the first one, associated with a wealth effect, the messages that the agents can receive only reveal the present state of the economy. In the second one, associated with an information effect, the messages bring an information about the futur state of the economy. We define a polarized information as an information which can be unambiguously viewed as a good or a bad news. We study these effects in different types of economy -- from an exchange economy to a production economy -- using some quite general assumptions on the individuals' preferences. In doing so, we reexamine and extend the work of Woodward (1983), and of Benninga and Protopapadakis (1986). In particular, using the concept of polarized information, we show that the comparison between the short and long bonds, from the point of view of risk management, does not strongly depend on the availability of a production technology.

Dans le cadre d'un modèle discret d'équilibre Général de la structure des taux, nous cherchons à déterminer le signe des primes de liquidité et de solidité -- qui caractérisent conjointement la hiérarchie des taux -- en fonction de la nature et de la structure de l'incertitude qui affecte l'économie. Nous choisissons d'étudier séparément deux structures. Dans la première, associée à un effet richesse, les messages qui sont susceptibles de parvenir jusqu'aux individus leur révèlent leur situation présente. Dans la seconde, associée à un effet information, ces messages leur apportent une information sur la situation future de l'économie. Nous définissons une information polarisée comme une information pouvant sans ambiguïté être interprétée comme une bonne ou une mauvaise nouvelle. Nous analysons ces effets dans divers types d'économie -- de l'économie d'échange à l'économie de production --, en conservant des hypothèses assez générales concernant les préférences individuelles. Ce faisant, nous réexaminons et étendons les études de Woodward (1983) et de Benninga et Protopapadakis (1986). En particulier, utilisant le concept d'information polarisée, nous montrons que les caractéristiques comparées des bons courts et longs, du point de vue de la gestion du risque, ne dépendent pas crucialement de la présence d'une technologie de production.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Optional study of an international call for tenders: an approach to economic risk

 

Authors: Rouzeau, Étienne


This paper proposes a model for the determination of optimal bids in a two-firm international call for tenders. The construction of this model requires basic notions in game theory and quanto options pricing techniques. An original approach to economic exposure (defined as the sensitivity of a firm's competitivity to exchange rates variations) is also developed.

Cet article présente une méthode de détermination des offres de prix optimales de deux firmes en concurrence dans un appel d'offres duopolistique international. Cette méthode repose sur des notions élémentaires de théorie des jeux ainsi que sur des techniques d'évaluation d'options quanto. Cette modélisation permet une approche originale du risque de change économique (défini comme la sensibilité de la compétitivité de la firme aux variations de taux de change) auquel peuvent se retrouver exposées les deux firmes concurrentes.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Valuation of interest rate swaps: an application of the Sundaresan (1991) approach to the case where the instantaneous interest rate follows an Ornstein-Uhlenbeck process

 

Authors: Rainelli-Le Montagner, Hélène


In this paper we use Sundaresan's approach (1991) to obtain closed form solutions for the valuation of interest rate swaps under Vasicek's term structure model (1977). Besides its contribution to our insight into an already highly studied model, the main interest of this paper lies in the methodology we use. We show in particular that applying the partial derivative equation (PDE) approach in Vasicek's framework results in solutions that are fully consistant with the formulae obtained via the martingale approach by El Karoui and Geman (1993) under the hypothesis of the linear gaussian model.

Cet article traite de la question de l'évaluation des swaps de taux sans risque de défaut. Reprenant l'approche de Sundaresan (1991), il donne des formules originales pour le taux d'équilibre de nombreux swaps dans le cadre du modèle de la structure par terme des taux proposé par Vasicek (1977). Outre la contribution qu'il apporte à l'exploitation d'un modèle très étudié, ce papier présente l'intérêt avant tout méthodologique, de montrer comment il est possible, en utilisant la méthode des équations aux dérivées partielles (EDP), d'obtenir, dans le cadre du premier des modèles gaussiens, des résultats en parfaite cohérence avec ceux dérivés au moyen de la méthode des changements de probabilités par El Karoui et Geman (1993) sous les hypothèses du modèle linéaire gaussien dit « de Vasicek étendu ».

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Estimation of the rental value of apartments: an empirical study on the Bordeaux agglomeration

 

Authors: Hoesli, Martin; Thion, Bernard


According to Lancaster (1966), characteristics of goods rather than goods themselves bring satisfaction to individuals. Thus, the rent charged for housing depends on the characteristics of this housing. The aim of this paper is to define a methodology allowing to identify characteristics affecting rental levels. This methodology, called the hedonic approach, is then applied to apartments in the Bordeaux area. The results of this research can be concretely used to estimate the appropriate rent for an apartment, based on the characteristics of this apartment. This should prove most useful for both landlords and tenants and also in order to estimate the value of a property on the basis of the income approach value.

Selon Lancaster (1966), ce n'est pas un bien en lui-même qui procure de la satisfaction aux individus mais plutôt les caractéristiques de ce bien. Le loyer d'un logement dépend par conséquent des caractéristiques de ce logement. Le but de cet article est précisément de présenter une méthodologie qui permet d'identifier les caractéristiques ayant une influence sur le niveau des loyers. Cette méthodologie, appelée approche hédoniste, est ensuite appliquée au cas des appartements de l'agglomération bordelaise. Les résultats de cette recherche peuvent concrètement être utilisés pour estimer le loyer d'un appartement à partir des caractéristiques de cet appartement. Ceci devrait s'avérer très utile tant pour les propriétaires que pour les locataires, mais aussi pour évaluer les biens immobiliers à partir de la méthode dite de capitalisation des loyers.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

The capital structure of Tunisian companies: an econometric study based on simultaneous equations

 

Authors: Shabou, Ridha


This article examines the capital structure of a sample of Tunisian firms. Based on the study of Bill, Hillion and Malecot (1991) in the french context, a system of simultaneous equations modelling three debt variables (financial debts, commercial debts and other debts) is proposed. Several capital structure theories and particularly the agency theory of Jensen and Fama (1983) are discussed in relation to their implications on the three debt variables previously selected. Empirical tests are further conducted on three samples of Tunisian corporations. The results show that financial debts, commercial debts and other debts are substitutes and suggest a hierarchic order in debt financing peculiar to each category of firm.

Cet article a pour objectif d'examiner la structure du capital d'entreprises tunisiennes. En se référant à l'étude de Bill, Hillion et Malécot (1991) effectuée dans le contexte français, un système d'équations simultanées modélisant conjointement trois variables d'endettement (dettes financières, dettes commerciales et autres dettes) est proposé. Plusieurs théories de la structure du capital et particulièrement la théorie de l'agence de Jensen et Fama (1983) sont discutées en fonction de leurs implications sur les trois variables sélectionnées d'endettement précédentes. Des tests empiriques sont ensuite conduits sur trois échantillons d'entreprises tunisiennes. Les résultats montrent que les dettes financières, commerciales et les autres dettes sont des substituts et suggèrent un ordre hiérarchique dans le financement par endettement propre à chaque catégorie de société.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

Choosing the Law of Financial Asset Returns: Extreme Values ​​Can Help

 

Authors: Longin, François


Many statistical distributions have been proposed to model the statistical behavior of asset returns: the unconditional normal distribution, a mixture of normal variables, stable Paretian laws, Student-t variables, ARCH processes... This paper shows that extreme returns can be used to discriminate among these non-nested models. An application to the French equity market shows that the Student-t and the ARCH process can be chosen to model the behavior of daily stock market returns.

La loi normale, les mélanges de lois normales, les lois de Student, les lois stables de Pareto-Lévy, les processus de diffusion avec sauts et les processus ARCH sont des modèles utilisés en finance pour décrire le comportement statistique des rentabilités boursières. Cet article montre comment les observations de variations extrêmes de prix peuvent être utilisées pour différencier ces modèles qui ne sont pas imbriqués les uns dans les autres. Une application au marché boursier français montre que les lois de Student non conditionnelles et les processus conditionnels ARCH peuvent être choisis pour modéliser le comportement des cours. Ce sont les deux seuls modèles compatibles avec la loi de Fréchet obtenue comme loi limite des extrêmes.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

Decline in credit distribution: demand effect or supply effect?

 

Authors: Artus, Patrick


During the last three years, the credit distributed to french firms has regularly decreased, and the amount outstanding is now diminishing in nominal terms. Corporate investment being very low and the spread between the interest rate on credit and the interest rate on public bonds having widened, it is not clear if it is a decrease in credit demand or in credit supply (or in both) that has led to the observed evolutions. We adress that issue first by analysing the recent data and by using a simple theoretical model of the lender-borrower relationships in the case of bankruptcy risk.

Depuis trois ans, le crédit distribué aux entreprises françaises diminue régulièrement, au point que l'encours de crédit recule maintenant. Parallèlement, l'investissement des entreprises est très faible, et l'écart de taux d'intérêt entre le crédit aux entreprises et les emprunts d'État augmente. Le phénomène observé peut donc provenir soit d'une chute de la demande de crédit, soit d'une chute de l'offre de crédit (soit des deux). Nous essayons d'analyser cette question d'une part en examinant les évolutions récentes, d'autre part en utilisant un modèle théorique simple des relations entre prêteur et emprunteur avec risque de faillite.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

Estimation of the rate structure by simplex and smoothing of forward rates

 

Authors: Roger, P.; Rossiensky, N.


The estimation of the term structure of interest rates is generally based on zero-coupon prices or on coupon bond prices when the former are illiquid or not transacted on a financial market. We propose two estimation methods, the first being realized by using the simplex algorithm and the second is aimed to smooth the forward rates curve. The two methods are then tested, first on simulated data and then on real prices of treasury bonds. The results are compared to those obtained with a simplified version of the Vasicek-Fong procedure.

L'estimation d'une structure par termes de taux d'intérêt est généralement réalisée à partir de prix de zéro-coupons ou d'obligations couponnées lorsque les premiers sont insuffisamment liquides ou ne sont pas échangés sur un marché. Nous proposons deux méthodes d'estimation de cette structure par termes fondées sur la méthode du simplexe, pour la première et sur le lissage des taux forward pour la seconde. Ces méthodes sont testées sur données réelles et sur données simulées et sont comparées à une version simplifiée du modèle de Vasicek et Fong.

DATE PUBLISHED: 15/07/1995

VOLUME: 16

NUMBER: 1

Neural networks in finance Principles and literature review

 

Authors: De Bodt, Eric; Cottrell, Marie; Levasseur, Michel


Computer tools used by the financial community have undergone a fantastic evolution during last years. It has stressed the need for a development of new information processing methods. After Expert Systems, originated from works in the field of artificial intelligence, neural networks come now to light. The first part of this review proposes an introduction to these new tools. We show that neural networks (at least some kinds of it) can be seen as an natural extension of regression models, already well-known by the financial community. The second part presents about thirty applications in finance, published during those last years and grouped in four domains: portfolio management, business forecasting, bankruptcy prediction and credit approval. Tables are presented which allow an easy comparison of data and method used as well as results obtained.

Les outils informatiques mis à la disposition de la communauté financière ont connu un développement sans précédent durant ces deux dernières décennies. Cette évolution s'est accompagnée d'un besoin important de développement des méthodes de traitement de l'information. Après les systèmes experts, issus des travaux de l'intelligence artificielle, les réseaux de neurones nous sont aujourd'hui proposés. La première partie de cette revue de la littérature introduit ces nouveaux outils. Les auteurs montrent que certains réseaux de neurones peuvent être analysés comme une extension naturelle des modèles de régression, déjà largement diffusés dans la communauté financière. La seconde partie présente une trentaine d'applications en finance publiées ces dernières années et regroupées en quatre domaines: la gestion de portefeuille, le « Business Forecasting », la prévision de faillite et l'octroi de crédit. Les auteurs présentent des tableaux synoptiques qui permettent une comparaison aisée des données et méthodes utilisées ainsi que des résultats obtenus.

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