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Patrick Navatte (Université de Rennes 1)

The Choice of ADRs

Auteurs : BOUBAKRI Narjess, COSSET Jean-Claude and SAMET Anis (Hec Montréal) Email:

Intervenants : SAMET Anis (Hec Montréal)

Rapporteurs : FRESARD Laurent (University of Neuchâtel)

We study the determinants of a firm’s decision to issue one of the four available ADR
programs (Level I, Level II, Level III, and Rule 144A). We find that the firm's attributes
(size, income, asset growth, leverage, privatization, ownership structure, and country-
of-origin) and the firm's home-country institutional variables (accounting rating and
legal protection of minority shareholders) condition this choice. We also examine the
issuing activity and the determinants of the ADR choice before and after the enactment
of the Sarbanes-Oxley (SOX) Act. Following this structural change, we provide evidence
of a reallocation between ADR programs. Compared to the pre-SOX period, we find that,
after SOX, firms from emerging markets and those from countries with weak legal protection
of minority shareholders show an increased probability of choosing Rule 144A and Level
III, respectively.

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Rare Disasters and Exchange Rates: A Theory of the Forward Premium Puzzle

Auteurs : FARHI Emmanuel (Harvard University) and GABAIX Xavier (New York University) Email :

Intervenants : FARHI Emmanuel (Harvard University)

Rapporteurs : SCHROEDER David (Bonn Graduate School of Economics)

We propose a new theory of the forward premium puzzle for exchange rates. Our
explanation combines two ingredients: the possibility of rare economic disasters, and
an asset view of the exchange rate. Our model is frictionless and has complete markets.
In the model, rare worldwide disasters can occur and affect each country’s productivity.
Each country’s exposure to disaster risk varies over time according to a mean-reverting
process. Risky countries command high risk premia: they feature a low exchange rate
and a high interest rate. As their risk premium reverts to the mean, their exchange rate
appreciates. Therefore, the currencies of high interest rate countries appreciate on average.
This provides an explanation for the forward premium puzzle (a.k.a. uncovered interest rate
parity puzzle). We then extend the framework to incorporate two factors: a slow moving
productivity factor, and a fast mean-reverting disaster risk factor. We calibrate the model
and obtain quantitatively realistic values for the volatility of the exchange rate, the forward
premium puzzle regression coefficients, and near-random 1 walk exchange rate dynamics.
Finally, we work out a model of the stock market, which allows us to make a series of
predictions about the joint behaviour of exchange rates, bonds, options and stocks across

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International stock market correlations: A sectoral approach

Auteurs : FASNACHT Philipp and LOUBERGÉ Henri (University of Geneva) Email :

Intervenants : FASNACHT Philipp (University of Geneva)

Rapporteurs : FARHI Emmanuel (Harvard University)

A lot of studies dealing with international correlations look only at correlations at the market
level and often use its time-varying nature as motivation for their work. However, why and
how market correlations change is a point that is still not very well understood. As the market
is composed of different sectors, we propose to look into this question by studying the behavior
of equity correlations at the sectoral level. We show how sectoral correlation coefficients
determine the market correlation coefficient and decompose the latter into two parts ; one
that represents country factors and one that represents industry factors. This decomposition
allows us to get a clear idea on how and why market correlations change over time. We also
get some interesting insights such as market level correlations are higher on average than
sectoral correlations as well as that sectoral correlations between countries tend to do be
more stable over time than market level correlations and sectoral correlations within countries.
Finally, we present evidence that a few sector correlations related to Financial, Industrial and
Consumer Services segments drive the evolution of the market level correlation.

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