Working papers

  • Title
  • Author(s)


Departments: Finance, GREGHEC (CNRS)

We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers’ connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers’ clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.

Keywords: OTC markets, Interdealer trading, Inventory management.


Departments: Finance, GREGHEC (CNRS)

We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only.

Keywords: Bank compensation, risk sharing, bank risk, operating leverage


Departments: Finance, GREGHEC (CNRS)

How do resolution frameworks affect the private restructuring of distressed banks? We model a distressed bank’s shareholders and creditors negotiating a restructuring given asymmetric information about asset quality and externalities onto the government. This yields negotiation delays used to signal asset quality. We find that strict bail-in rules increase delays by worsening informational frictions and reducing bargaining surplus. We characterize optimal bail-in rules for the government. We then consider the government’s possible involvement in negotiations. We find this can lead to shorter or longer delays. Notably, the government may gin from committing not to partake in negotiations.

Keywords: Bank resolution, bail-out, bail-in, debt restructuring


Departments: Finance, GREGHEC (CNRS)

We measure demand for information prior to nonfarm payroll announcements using a novel dataset consisting of clicks on news articles. We find that when information demand is high shortly before the release of the nonfarm payroll announcement, the price response of U.S. Treasury note futures to nonfarm payroll news surprises doubles. We argue that this relationship stems from the fact that market participants have more incentive to collect information when uncertainty about asset payoffs is higher, as implied by Bayesian learning models. Thus, high information demand about macroeconomic news is a proxy for high macroeconomic uncertainty.

Keywords: Public information, Macroeconomic News, Uncertainty, U.S. Treasury futures, Investors' Attention, Information Demand, Bitly, Media Coverage


Departments: Finance, GREGHEC (CNRS)

We provide a new methodology to empirically investigate the respective roles of systematic and idiosyncratic skewness in explaining expected stock returns. Forming a risk factor that captures systematic skewness risk and forming idiosyncratic skewness sorted portfolios only require the ordering of stocks with respect to each skewness measure. Accordingly, we use a large number of predictors to forecast the cross-sectional ranks of systematic and idiosyncratic skewness which are considerably easier to predict than their actual values. Compared to other measures of ex ante systematic skewness, our forecasts create a significant spread in ex post systematic skewness. A predicted systematic skewness risk factor carries a significant risk premium that ranges from 7% to 12% per year and is robust to the inclusion of downside beta, size, value, momentum, profitability, and investment factors. In contrast to systematic skewness, the role of idiosyncratic skewness in pricing stocks is less robust. Finally, we document how the determinants of systematic skewness differ from those of idiosyncratic skewness.

Keywords: Systematic skewness, coskewness, idiosyncratic skewness, large panel regression, forecasting


Departments: Finance, GREGHEC (CNRS)

We develop a pricing model to analyze the joint impact of liquidity costs and market segmentation on asset pricing. The freely traded securities command a premium for liquidity level and global market and liquidity risk premiums, whereas securities that can be held by a subset of investors command additionally a local market and liquidity risk premiums. We find that the liquidity level premium dominates the liquidity risk premium for our sample of 24 emerging markets. The global market liquidity risk premium dramatically increases during crises and market corrections. Even though unspanned local risk is significantly priced for most markets, unspanned local liquidity risk premium is empirically small. We develop a new methodology for estimating unspanned local risk. Our results shed light on the channels through which liquidity affects asset prices in partially segmented markets and how this pricing relation changes over time.

Keywords: International asset pricing, liquidity risk, transaction cost, emerging markets, market integration


Departments: Finance, GREGHEC (CNRS)

We estimate international factor models with time-varying factor exposures and risk premia at the individual stock level using a large unbalanced panel of 58,674 stocks in 46 countries over the 1985-2017 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. The country market in excess of the world or regional market is required in addition to world or regional factors to capture the factor structure for both developed and emerging markets. We do not reject mixed CAPM models with regional and excess country market factors for 76% of the countries. We do not reject mixed multi-factor models in 80% to 94% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.

Keywords: large panel, approximate factor model, risk premium, international asset pricing, market integration


Departments: Economics & Decision Sciences, GREGHEC (CNRS), Finance

Equity crowdfunding has recently become available and is quickly expanding. Concerns have been raised that investors ('backers') may be following the crowd 'too much' and making investments ('pledges') based on past investments rather than private information. We construct a model of equilibrium rational herding where uninformed investors follow signals generated by in formed investors with private information and a public belief generated by all past pledges. We show that large investments provide positive public information about the project's quality, whereas periods of absence of investment provide negative information. An information cascade is shown to occur only if not enough positive signals are generated. We then empirically analyse a large number of pledges from a leading European equity crowdfunding platform. We show that a pledge is strongly affected by both the size of the most recent pledge, and the time elapsed since the most recent pledge. For pledges that are not adjacent in the order of arrivals, the correlation between their sizes is still positive, but after being separated by two or more intervening pledges the correlation is no longer statistically significant. The effects are strongest for less-informed investors, and in some specifications the effects are strongest at the early stage of a campaign. We find similar results in IV analysis. Results are consistent with our model and inconsistent with some alternative models

Keywords: Equity Crowdfunding, Herding


Departments: Finance, GREGHEC (CNRS)

We study the effect of demographics on innovation, arguing that a younger labor force produces more innovation. Using the native born labor force projected based on local historical births, we find that a younger age structure causes a significant increase in innovation. We confirm our finding at three levels of analysis – commuting zones, firms, and inventors – in demanding specifications that account for firm and inventor life cycles and location choices. Innovation activities reflect the innovative characteristics of younger labor forces. Our results indicate that demographics increase innovation through the labor supply channel rather than through a financing supply or consumer demand channel.

Keywords: Innovation; Demographics; Age structure; Labor markets; Firms; Inventors; Patents


Departments: Finance, GREGHEC (CNRS)

We study intergenerational risk sharing in Euro-denominated life insurance contracts. These savings products represent 80% of the life insurance market in Europe. Using regulatory and survey data for the French market, which is €1.3 trillion large, we analyze the patterns of intergenerational redistribution implemented by these products. We show that contract returns are an order of magnitude less volatile than the return of assets underlying these contracts. Contract return smoothing is achieved using reserves that absorb fluctuations in asset returns and that generate intertemporal transfers across generations of investors. We estimate the average annual amount of intergenerational transfer at 1.4% of contract value, i.e., €17 billion or 0.8% of GDP. Finally, we provide evidence that smoothing makes contract returns predictable, but inflows react only weakly to these predictable returns.

Keywords: Life insurance, intergenerational risk-sharing


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