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SESSION I-1 : MERGERS & ACQUISITIONS (18/12/2008 à 09h00)

Patrice Fontaine

Why Do Firms Pay Cash in Acquisitions? Evidence from a Catering Perspective

Auteurs : ZHANG Lei (INSEAD)

Intervenants : ZHANG Lei (INSEAD)

We study the means of payment in acquisitions from a catering perspective. We argue that the decision to pay cash in acquisitions is affected by the prevailing investor preferences for cash dividends. We define a measure of investor cash preferences by exploring the informational value of mutual fund flows. We call it cash popularity. We find that one standard deviation increase in cash popularity increases the probability of using cash as means of payment from 38% to 53%. The target’s bargaining position becomes weakened in cash mergers when cash popularity in the market is high. It is especially true for those targets with higher idiosyncratic volatility which is due to further deterioration in bargaining power over the bidder. The impact on offer premium has been transmitted into the market reaction of the target around the merger announcement. In terms of merger outcome we observe a lower deal withdrawal rate for cash mergers if combined with a high cash popularity. And if conditioning on completed mergers, it is more likely that the bidder is able to obtain absolute control over the target in cash mergers under higher cash popularity. In general the evidence supports a cash catering explanation on the choice of medium of exchange in mergers and acquisitions.

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Do investors reinvest dividends and tender offer proceeds?

Auteurs : KAUSTIA Markku & RANTAPUSKA Elias (Helsinki School of Economics)

Intervenants : KAUSTIA Markku (Helsinki School of Economics)

We find that households reinvest a very small proportion of corporate cash disbursements within two weeks, less than 1% of cash dividends and around 10% of tender offer proceeds. Tender offer proceeds are more likely to be reinvested even after controlling for the investor’s identity, as well as for the size and unexpected nature of the cash flow. A dividend clientele story is consistent with some of the findings, but does not fare well under a closer look. We find that the bulk of households’ reinvestment behavior is likely explained by a combination of default effects and mental accounting.

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Stock Option Grants to Target CEOs during Merger Negotiations

Auteurs : CAI Jie & FICH Eliezer & TRAN Anh L. (LeBow College of Business Drexel University)

Intervenants : TRAN Anh L. (LeBow College of Business Drexel University)

Many target CEOs receive unscheduled stock option awards during merger negotiations which become
immediately exercisable when the acquisition is completed. We find an inverse association between the size of
golden parachutes given to target CEOs and the probability that these executives receive unscheduled options
during merger negotiations. These unscheduled awards are also more likely to be issued when CEOs expect large
compensation losses if their firms are sold. Consistent with option backdating, we find that (1) grant dates are
systematically set to benefit CEOs, and (2) the grants’ post-issuance performance increases with the awards’
reporting lag. After the Sarbanes-Oxley Act promulgation, backdating episodes decline, but the exercise
premiums target CEOs realize on unscheduled options exceed the takeover premiums their shareholders receive
by over 25 percent. Our results indicate that the Act has curtailed the targets’ ability to backdate stock options, but
not their ability to favorably time these awards.

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SESSION I-2 : FINANCIAL MODELING (18/12/2008 à 09h00)

Contemporaneous Aggregation of GARCH Models and Evaluation of the Aggregation Bias

Auteurs : JONDEAU Eric (Swiss Finance Institute and University of Lausanne)

Intervenants : JONDEAU Eric (Swiss Finance Institute and University of Lausanne)

It is well known that the class of strong (Generalized) AutoRegressive Conditional Heteroskedasticity (or GARCH) processes is not closed under contemporaneous aggregation. This paper provides the dynamics followed by the aggregate process when the individual persistence parameters are drawn from the same (unknown) distribution. Assuming heterogeneity across individual parameters, the dynamics of the aggregate volatility involves additional lags that reflect the moments of the distribution of the individual persistence parameters. Then the paper describes a consistent estimator of the aggregate process, based on nonlinear least squares. A simulation study reveals that this aggregation-corrected estimator performs very well under realistic sets of parameters. Last, this approach is extended to a multi-sector context. This extension is used to evaluate the importance of the aggregation bias. Using size and book-to-market portfolios, I show that the investor is willing to pay one fifth of her expected return to switch from the standard GARCH(1,1) estimator to the aggregation-corrected estimator.

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Hierarchical Hidden Markov Structure for Dynamic Correlations: the Hierarchical RSDC Model

Auteurs : CHARLOT Philippe (GREQAM & Université de la Méditerranée); Vêlayoudom MARIMOUTOU (GREQAM, Aix Marseille University & IFP)

Intervenants : CHARLOT Philippe (GREQAM & Université de la Méditerranée)

This paper presents a new multivariate GARCH model with time-varying conditional correlation structure which is a generalization of the Regime Switching Dynamic Correlation (RSDC) of Pelletier (2006). This model, which we name Hierarchical RSDC, is building with the hierarchical generalization of the hidden Markov model introduced by Fine et al. (1998). This can be viewed graphically as a tree-structure with different types of states. The first are called production states and they can emit observations, as in the classical Markov-Switching approach. The second are called abstract states. They can’t emit observations but establish vertical and horizontal probabilities that define the dynamic of the hidden hierarchical structure. The main gain of this approach compared to the classical Markov-Switching model is to increase the granularity of the regimes. Our model is also compared to the new Double Smooth Transition Conditional Correlation GARCH model (DSTCC), a STAR approach for dynamic correlations proposed by Silvennoinen and Teräsvirta (2007). The reason is that under certain assumptions, the DSTCC and our model represent two classical competing approaches to modelling regime switching. We also perform Monte-Carlo simulations and we apply the model to two empirical applications studying the conditional correlations of selected stock returns. Results show that the Hierarchical RSDC provides a good measure of the correlations and also has an interesting explanatory power.

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Contributions to The Estimation of Mixed-State Conditionally Heteroscedastic Latent Factor Models: A Comparative Study

Auteurs : SAIDANE Mohamed (The University of 7 November at Carthage); LAVERGNE Christian (University of Montpellier 2)

Intervenants : SAIDANE Mohamed (The University of 7 November at Carthage)

Mixed-State conditionally heteroscedastic latent factor models attempt to describe a complex nonlinear dynamic system with a succession of linear latent factor models indexed by a switching variable. Unfortunately, despite the framework's simplicity exact state and parameter estimation are still intractable because of the interdependency across the latent factor volatility processes. Recently, a broad class of learning and inference algorithms for time series models have been successfully cast in the framework of dynamic Bayesian networks (DBN). This paper describes a novel DBN-based switching conditionally heteroscedastic latent factor model. The key methodological contribution of this paper is the novel use of the Generalized Pseudo-Bayesian method GPB2, a structured variational learning approach and an approximated version of the Viterbi algorithm in conjunction with the EM algorithm for overcoming the intractability of exact inference in mixed-state latent factor model. The conditional EM algorithm that we have developed for the maximum likelihood estimation is based on an extended switching Kalman filter approach which yields inferences about the unobservable path of the common factors and their variances, and the latent variable of the state process. Extensive Monte Carlo simulations show promising results for tracking, interpolation, synthesis, and classification using learned models.

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Sweet escapes: analysts’ recommendations and the lockup period

Auteurs : MARTIN Jens (Swiss Finance Institute, University of Lugano)

Intervenants : MARTIN Jens (Swiss Finance Institute, University of Lugano)

The end of the lockup period of initial public offerings constitutes in general the first time corporate insiders sell significant numbers of shares on the market. I test the hypothesis that selling shareholders pressure analysts to support the share price until the end of the lockup period. In a sample of U.S. initial public offerings from 1996 up to 2006 I find that analysts issue too optimistic recommendations up to the end of the lockup period. I find a significant downward revision of recommendations for the whole sample of firms as soon as the lockup period ends. The market takes this analyst behavior partly into account.

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On the use of financial and extra-financial information

Auteurs : BIHR Marie-Hélène (CERAG Université Pierre Mendès France)

Intervenants : BIHR Marie-Hélène (CERAG Université Pierre Mendès France)

The goal of this work is to shed light on whether there are any differences in the financial characteristics of Socially Responsible (SR) and Non Socially Responsible (NSR) firms. We base our work on the use of extra-financial ratings provided by two of the most renowned extra-financial rating agencies: KLD for US and Vigeo for European firms. From a theoretical point of view, we look at the use and the link between financial and extra-financial information. The managerial implication is to explore the possibility of indicating whether a firm belongs to one group (SR) or another (NSR) according to financial characteristics. This would offer investors, who do not have access to specific non-financial ratings, a tool for accessing levels of Corporate Social Responsibility.

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Regulating the financial analysis industry: is the european directive effective?

Auteurs : DUBOIS Michel (University of Neuchâtel); DUMONTIER Pascal (University of Geneva)

Intervenants : DUBOIS Michel (University of Neuchâtel)

Recent years have witnessed the adoption of new laws regulating the financial analyst profession in the US. The EU followed by passing the Market Abuse Directive and two subsequent Directives in 2003. Were these Directives necessary and did they reach their target? We first analyze whether analysts changed the distribution of the recommendations levels. Then, we examine how the stock price impact of recommendations changed after the directives were passed. Finally, we check whether the EU regulation was useful given the anteriority of the US regulation. We use recommendations issued on firms of thirteen European countries from 1997 to 2007. We find that favourable recommendations significantly decreased and, to a lesser extend, that the proportion of “Sell” recommendations increased after MAD was passed. MAD did not completely eliminate optimistic recommendations issued by financial institutions facing conflicts of interest. We confirm that financial institutions with a reputation capital at stake are less prone to optimism. Due to differences in investor’s protection, we document that CARs were different across countries before MAD and that the market reaction was stronger for upgrades and positive initiations afterwards. Conflicts of interest did not affect significantly cumulated abnormal returns around “Upgrades” and positive initiations, either pre-MAD or post-MAD. Conversely, “Downgrades” issued by analysts facing conflicts of interest generate more negative abnormal returns either pre-MAD or post-MAD. Considered together, these results suggest that investors were able to discount optimistic recommendations. We also find that reputation act as a factor moderating conflicts of interest either before or after MAD. Finally, the proportion of positive (negative) recommendations issued on European firms decreased (increased) after the US laws were passed. However, cumulated abnormal returns did not change until MAD was adopted.

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SESSION II-2 : FINANCIAL MARKETS (18/12/2008 à 11h00)

A market for weather risk? Worlds in conflicts and compromising

Auteurs : HUAULT Isabelle (University Paris Dauphine, DRM-DMSP); RAINELLI Hélène (University Paris I Pantheon Sorbonne)

Intervenants : RAINELLI Hélène (University Paris I Pantheon Sorbonne)

In this paper we study the development of the market for weather derivatives in Europe. We show that weather derivatives conceived as financial products by their promoters have difficulties finding end-users. We describe the attempts of market promoters using a framework drawn from economic sociology, namely the theory provided by Boltanski and Thevenot’s Economy of Worth. We derive some conclusions about the potential future of the market.

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Contagion as Domino Effect in Global Stock Markets

Auteurs : VAN DIJK Dick; KOLE Erik; MARKWAT Thijs (Econometric Institute, Erasmus University Rotterdam)

Intervenants : MARKWAT Thijs (Econometric Institute, Erasmus University Rotterdam)

This paper proposes a new approach for modeling extreme dependence between global stock markets. We explicitly define local, regional and global crashes and model the evolution of these crashes with an ordered logit model. Applying our approach to daily stock market returns of emerging and developed markets we find evidence for interdependence as well as contagion effects. Particularly, we find that interest rates, bond returns and volatility are important factors for the probabilities of observing the different types of stock market crashes. Contagion, on the other hand can be characterized as a domino effect, where local emerging market crashes evolve into regional or even global crashes. From a practical point of view, we show that an ordered logit model, including local and regional crashes, is able to predict global crashes better than a binary logit model for global crashes only.

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A Jump-Diffusion Nominal Short Rate Model

Auteurs : ATTAOUI Sami (Rouen School of Management); SIX Pierre (University of Paris 1-Sorbonne)

Intervenants : ATTAOUI Sami (Rouen School of Management)

This paper extends the monetary equilibrium approach of Lioui and Poncet (2004) to a jump-diffusion setting. We show that in the presence of jumps money non-neutrality is preserved and the jump component of the inflation risk premium is affected, in addition to technology factors, by monetary policy variables. Finally, we derive the jump-diffusion dynamics of a nominal short interest rate.

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SESSION III-1 : CORPORATE FINANCE I (18/12/2008 à 14h00)

Stock Price and Systematic Risk Effects of Discontinuation of Corporate R&D Programs

Auteurs : SAAD Mohsen (American University of Sharjah) ; ZANTOUT Zaher ( American University of Sharjah)

Intervenants : SAAD Mohsen (American University of Sharjah)

We extend the evidence on whether investors impound efficiently into stock prices new disclosures about corporate R&D programs. We find firms that disclose the discontinuation of some of their R&D programs experience a significant negative announcement-period stock price response which is worse for growth stocks, for small-size firms, and for firms with low operating cash flow. We find no evidence that R&D-discontinuing firms experience an event-induced change in their systematic risk. We find evidence of a one-year-long price reversal; however, it is not robust to controlling for possible risk dimensions for firms with R&D capital that the three-factor model does not capture. Evidently, investors’ initial response at disclosures of discontinuation of corporate R&D programs is efficient.

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Multiple Large Shareholders, Control Contests, and Implied Cost of Equity

Auteurs : ATTIG Najah (Saint Mary’s University); GUEDHAMI Omrane (University of South Carolina); MISHRA Dev (University of Saskatchewan)

Intervenants : MISHRA Dev (University of Saskatchewan)

In this paper, we examine whether the presence of multiple large shareholders alleviates firm’s agency costs and information asymmetry embedded in ultimate ownership structures. We extend extant corporate governance research by addressing the effects of multiple large shareholders on firm’s cost of equity capital—a proxy for firm’s information quality. Using data for 1,165 listed corporations from 8 East Asian and 13 Western European countries, we find evidence that the implied cost of equity decreases in the presence of large shareholders beyond the controlling owner. We also find that the voting rights, the relative voting size (vis-à-vis the first largest shareholder) and the number of blockholders reduces firm’s cost of equity. Interestingly, we uncover that the presence of multiple controlling shareholders with comparable voting power lowers firm’s cost of equity. We also find that the identity of the second largest shareholder is important in determining the risk of corporate expropriation in family-controlled firms. Our regional analysis reveals that, mainly in East Asian firms, multiple large shareholders structures exert an internal governance role in curbing private benefits and reducing information asymmetry evident in cost of equity financing, perhaps to sidestep deficiencies in the external institutional environment.

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The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms

Auteurs : BEN NASR Hamdi (Université Laval); BOUBAKRI Narjess & COSSET Jean-Claude (HEC Montréal)

Intervenants : COSSET Jean-Claude (HEC Montréal)

We investigate the impact of government control and political characteristics of the privatizing government on the cost of equity of newly privatized firms. Using cost of equity estimates implied in current stock prices and analysts’ earnings forecasts for a sample of 126 privatized firms from 25 countries between 1987 and 2003, we find strong, robust evidence that the cost of equity is increasing in government control, while controlling for other determinants of the cost of equity. We also find that the cost of equity is significantly related to the political system and government tenure (stability). Furthermore, we find that while the cost of equity is increasing in government control, this effect is less pronounced in countries with democratic and more stable governments. Our core findings persist after controlling for the institutional environment.

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SESSION III-2 : EMPIRICAL FINANCE (18/12/2008 à 14h00)

Conditional Skewness of Aggregate Market Returns

Auteurs : CHAROENROOK Anchada (Vanderbilt University); DAOUK Hazem (Cornell University)

Intervenants : DAOUK Hazem (Cornell University)

The skewness of the conditional return distribution plays a significant role in financial theory and practice. This paper examines whether conditional skewness of daily aggregate market returns is predictable and investigates the economic mechanisms underlying this predictability. In both developed and emerging markets, there is strong evidence that lagged returns predict skewness; returns are more negatively skewed following an increase in stock prices and returns are more positively skewed following a decrease in stock prices. The empirical evidence shows that the traditional explanations such as the leverage effect, the volatility feedback effect, the stock bubble model (Blanchard and Watson, 1982), and the fluctuating uncertainty theory (Veronesi, 1999) are not driving the predictability of conditional skewness at the market level. The relation between skewness and lagged returns is more consistent with the Cao, Coval, and Hirshleifer (2002) model. Our findings have implications for future theoretical and empirical models of time-varying market return distributions, optimal asset allocation, and risk management.

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Understanding Stock Return Volatility

Auteurs : OSAMBELA Emilio (Swiss Finance Institute & University of Lausanne)

Intervenants : OSAMBELA Emilio (Swiss Finance Institute & University of Lausanne)

This article studies the effect of limited commitment on stock return volatility in a dynamic general equilibrium economy populated by investors with heterogeneous beliefs. Due to heterogeneity of beliefs investors disagree about the fundamentals, introducing an additional risk factor denoted sentiment risk. Limited commitment introduces an endogenous solvency constraint which scales up sentiment risk every time it binds, which is labelled solvency risk. The equilibrium market price of risk which drives the short-run stock return volatility is conformed by three components: endowment risk, sentiment risk, and solvency risk. The three components are persistent, in line with volatility clustering or GARCH effects. The solvency risk component in the market price of risk is novel, and it is the main contribution of the paper. It is related to the optimal exercise boundary of an American-style contingent claim, and exhibits a markedly different pattern with transient persistence according to the binding of solvency constraints. This is consistent with two-component volatility models. Due to solvency risk, the correlation between stock return volatility and stock expected returns depends on the direction of disagreement of the population facing limited commitment, which may be relatively optimistic (positive correlation) or relatively pessimistic (negative correlation). This may explain the conflicting empirical evidence in the correlation between stock return volatility and stock expected returns.

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The Conditional Relation between Fama-French Betas and Return

Auteurs : KOCH Stefan & WESTHEIDE Christian(University of Bonn)

Intervenants : WESTHEIDE Christian (University of Bonn)

Although the CAPM has been empirically rejected, many previous papers find a conditional relation between market beta and return. In this study, we apply the conditional approach to the predominant model in asset pricing, the Fama-French three-factor model. Our results reveal that the size and book-to-market betas retain their explanatory power once the conditional nature of the relation between betas and return is taken into account. While other papers stop their analysis at this point, we derive a procedure to test if beta risk is priced within the conditional approach and show that the adjusted test leads to qualitatively identical results to the widely used Fama-MacBeth test.

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Stock Market Comovements and Industrial Structure

Auteurs : DUTT Pushan (INSEAD); MIHOV Ilian (INSEAD and CEPR)

Intervenants : DUTT Pushan (INSEAD)

We use monthly stock market indices for 58 countries to construct pairwise correlations of returns and to explain these correlations with differences in the industrial structure across these countries. We find that countries with similar industries have stock markets that exhibit high correlation of returns. The results are robust to the inclusion of other regressors like differences in income per capita, stock market capitalizations, measures of institutions, as well as various fixed time, country and country-pair effects. We also find that differences in the structure of exports explain stock market correlations quite well. Our results are consistent with an aggregate returns model in which the impact of each industry-specific shock is proportional to the share of this industry in the overall industrial output of the country. We also show that differences in production structures have higher explanatory power for segmented markets rather than for markets that are integrated.

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Long-Horizon Consumption Risk and the Cross-Section of Returns: New Tests and International Evidence

Auteurs : GRAMMIG Joachim (University of Tubingen); SCHRIMPF Andreas (CEER); SCHUPPLI Michael (University of Munster)

Intervenants : SCHUPPLI Michael (University of Munster)

This paper investigates the explanatory power of the long-horizon Consumption CAPM (LH-CCAPM) to explain size and value premia in major international stock markets (US, UK and Germany). We modify the estimation approach by Parker and Julliard (2005) taking commonalities in size and book-to-market sorted portfolios into account. Our findings suggest that the long-horizon CCAPM typically delivers more plausible estimates (i.e. lower estimates of risk aversion) than the standard CCAPM. However, contrary to the results by Parker and Julliard, we find that the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. This result holds true for all stock markets considered.

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Welfare Implications of Exchange Rate Changes

Auteurs : MARQUES Luis (The Johns Hopkins University)

Intervenants : MARQUES Luis (The Johns Hopkins University)

This paper measures the welfare implications of a depreciation of the US dollar against the euro using a dynamic equilibrium model. I calibrate a simple two-country stochastic endowment economy with trade in goods and financial assets and exogenous variations in the exchange rate. The model displays both a trade channel effect and an asset channel effect after a change in the value of the exchange rate. The welfare loss coming from the trade channel translates into the relatively higher price that consumers have to pay for imports. The asset channel effect arises from three sources. One is the traditional valuation effect associated with US debt being denominated mostly in dollars. The other two novel effects are: (1) the dollar value of investors net worth, mostly denominated in local currency, increases more in Europe than in the US; (2) asset prices change, causing a portfolio rebalancing effect which results in a fall in the share of world assets owned by the US. I show that a dollar depreciation has potentially large negative welfare effects as measured by the net present value of future consumption. After a temporary 10% depreciation of the dollar, with a half-life of one year, I calculate a 0.25% decrease in lifetime aggregate consumption for the US consumer.

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Common Risk Factors in Currency Markets

Auteurs : LUSTIG Hanno (UCLA Anderson and NBER); ROUSSANOV Nick (Wharton); VERDELHAN Adrien (Boston University)

Intervenants : VERDELHAN Adrien (Boston University)

We show that risk premia in currency markets are large and time-varying. Currency excess returns are highly predictable, more than stock returns, and about as much as bond returns. In addition, these predicted excess returns are strongly counter-cyclical. The average excess returns on low interest rate currencies are about 5 percent per annum smaller than those on high interest rate currencies after accounting for transaction costs. We show that a single return-based factor, the return on the highest minus the return on the lowest interest rate currency portfolios, explains the cross-sectional variation in average currency excess returns from low to high interest rate currencies. In a no-arbitrage model of exchange rates, we show that by building currency portfolio returns, we extract the common innovation to the stochastic discount factor in different countries. A reasonably calibrated version of our model can match the carry trade risk premium if low interest rates currencies are more exposed to this common innovation when the price of risk is high.

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SESSION IV-2 : RISK MANAGEMENT (18/12/2008 à 16h00)

Are French Individual Investors reluctant to realize their losses?

Auteurs : BOOLEL-GUNESH Shaneera; BROIHANNE M-H.; MERLI M. (LARGE, Louis Pasteur University)

Intervenants : BOOLEL-GUNESH Shaneera (LARGE, Louis Pasteur University)

We analyze the presence of the disposition effect for 90 244 French individual investors based on a large brokerage account database between 1999 and 2006. Main results show that French 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. Moreover, results indicate that the behavioral bias is not eliminated for sophisticated individual investors (higher trading activity or international diversification). Finally and more originally, based on French account specificities; we demonstrate that the change of “tax account type” does not imply any change in investors’ behaviour.

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Fund Flows, Performance, Managerial Career Concerns, and Risk-Taking

Auteurs : HU Ping (Wachovia Corporation); R. KALE Jayant & SUBRAMANIAN Ajay (University of Georgia); Marco PAGANI (University of San José)

Intervenants : Marco PAGANI (University of San José)

We develop a framework in which we simultaneously model the interactions among investors, fund companies (represented by fund advisors), and managers. In this framework, we show that the interplay between a manager's incentives arising from her compensation structure and career concerns leads to a non-monotonic (approximately U-shaped) relation between her risk choices and prior performance relative to her peers. We empirically analyze the risk-taking behavior of a large sample of fund managers and find significant support for the predicted U-shaped relative risk-prior performance relation. Reputation concerns and employment risk plays a crucial role in driving the non-monotonic relation; significant out performers (under performers) are less (more) likely to be fired in the future, and are also more likely to increase relative risk. We also show empirical support for the additional testable implications of the theory that link determinants of the fund flow-performance relation and managerial career concern to risk-taking behavior. Funds with higher expense ratios have less convex fund flow-performance relations and less convex U-shaped relative risk-prior performance relations. Funds with younger managers, who face greater employment risk, have more convex U-shaped relative risk-prior performance relations.

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Top-Down versus Bottom-Up Approaches in Risk Management

Auteurs : GRUNDKE Peter (University of Osnabruck)

Intervenants : GRUNDKE Peter (University of Osnabruck)

Banks and other financial institutions face the necessity to merge the economic capital for credit risk, market risk, operational risk and other risk types to one overall economic capital number to assess their capital adequacy in relation to their risk profile. Beside just adding the economic capital numbers or assuming multivariate normality, the top-down and the bottom-up approach have been emerged recently as more sophisticated methods for solving this problem. In the top-down approach, copula functions are employed for linking the marginal distributions of profit and losses resulting from different risks. In contrast, in the bottom-up approach, different risk types are modelled and measured simultaneously in one common framework. Thus, there is no need for a later aggregation of risk-specific economic capital numbers. In this paper, these two approaches are compared with respect to their ability to predict loss distributions correctly. We find that the top-down approach can underestimate the true risk measures for lower investment grade issuers. The accuracy of the marginal loss distributions, the employed copula function, and the loss definitions have an impact on the performance of the top-down approach. Unfortunately, given limited access to times series data of market and credit risk loss returns, it is rather difficult to decide which copula function an adequate modelling approach for reality is.

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Hedging (Co)Variance Risk with Variance Swaps

Auteurs : DA FONSECA José (ESI Léonard de Vinci); GRASSELLI Martino (Universita degli Studi di Padova); IELPO Florian

Intervenants : IELPO Florian (Centre d'Economie de la Sorbonne)

In this paper we introduce a new criterion in order to measure the variance and covariance risks in financial markets. Unlike past literature, we quantify the (co)variance risk by comparing the spread between the initial wealths required to obtain the same final utility in an incomplete and completed market case. We provide explicit solutions for both cases in a stochastic correlation framework where the market is completed by introducing volatility products, namely Variance Swaps. Using real data on major indexes, we find that this criterion provides a better measure of the market risks with respect to the (misleading) traditional approach based on the hedging demand.

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SESSION V-1 : DEFAULT RISK (19/12/2008 à 08h30)

On the modeling of Debt Maturity and Endogenous Default: A caveat

Auteurs : DECAMPS Jean-Paul; VILLENEUVE Stéphane (Toulouse School of Economics)

Intervenants : DECAMPS Jean-Paul (Toulouse School of Economics)

We focus on structural models in corporate finance with roll-over debt structures in the vein of Leland (1994) and Leland and Toft (1996). We show that these models incorrectly assume that the optimal default is defined by the first time such that the firm's assets reaches a sufficiently low positive threshold that must be optimally determined. We characterize the optimal default policy and explain that the existing literature overestimates the probability of default and underestimates the equity value.

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The Credit Risk Premium in a Disaster-Prone World

Auteurs : COPELAND Laurence; ZHU Yanhui (Cardiff Business School)

Intervenants : COPELAND Laurence (Cardiff Business School)

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Default Risk on Derivatives Exchanges: Evidence from Clearing-House Data

Auteurs : PERIGNON Christophe (HEC Paris); JONES Robert A. (Simon Fraser University, Vancouver)

Intervenants : PERIGNON Christophe (HEC Paris)

In this paper, we analyze empirically the clearing house exposure to the risk of default by a clearing house member. Using actual daily data on margins and variation margins for all clearing members of the Chicago Mercantile Exchange’s clearing house, we identify many occurrences when the member’s daily loss exceeds his posted margin. Furthermore, we find that the major source of default risk for a clearing member is proprietary trading and not trading by customers. In order to quantify the default risk exposure, we provide a characterization of the tail risk of the clearing house using Extreme Value Theory. We then design and price a realistic insurance contract covering the loss to the clearing house from default by one or several clearing members. We investigate the impact on the insurance premium of including data from the Black Monday of 1987 in our sample. Our empirical analysis also allows us to put a dollar amount on the service provided by the Federal Reserve, which is the implicit insurer of the clearing house.

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CMCDS Premia Implicit in the Term Structure of Corporate CDS Spreads

Auteurs : LECCADITO Arturo & TUNARU Radu & URGA G. (Cass Business School)

Intervenants : TUNARU Radu (Cass Business School)

Credit default risk for an obligor can be hedged away with either a credit default swap (CDS) contract or the alternative constant maturity credit default swap contract (CMCDS). An economic agent should be indifferent to which instrument is used since both cover the same risk with identical payoffs. On a large universe of obligors we find strong evidence that there is persistent difference in the hedging premia carried by the two comparable contracts. It appears that, in general, it is more profitable to sell CDS and buy CMCDS. In addition, as expected, the implied forward CDS rates are not an unbiased estimate of the future spot CDS rates.

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SESSION V-2 : INTEREST RATES (19/12/2008 à 08h30)

Impacts of Jumps and Stochastic Interest Rates on the Fair Costs of Guaranteed Minimum Death Benefit Contracts

Auteurs : QUITTARD-PINON François (EM Lyon Business School); RANDRIANARIVONY Rivo (Université de Lyon)

Intervenants : RANDRIANARIVONY Rivo (Université de Lyon)

The authors offer a new perspective to the domain of guaranteed minimum death benefit contracts. These products have the particular feature to offer investors a guaranteed capital upon death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). In contrast to their results, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.

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Rating Migrations: the Effect of History and Time

Auteurs : DANG Huong; PARTINGTON Graham (University of Sydney)

Intervenants : DANG Huong (University of Sydney)

We use the Cox proportional hazard model to investigate the probability of rating transitions using data for the period 1986 to 2005. Variables that capture rating history and the current rating significantly affect the probability of a rating transition. Different models are required for upgrades and downgrades, but the evidence consistently shows a tendency for history to repeat itself. Longer lagged durations in ratings tend to lead to longer subsequent durations and rating changes exhibit momentum. In addition to lagged duration and the direction of the lagged rating change, other significant variables are the rate of prior rating changes, the firm’s first ever rating, the time elapsed since that first rating, and having a period of being unrated. There is also evidence of interactions between the time spent in a rating grade and the main effect variables. The extent of these time interactions is greater for downgrades than for upgrades. The nature of the interaction is that the impact of the rating history variables diminishes as the time spent in the current rating gets bigger. The time interaction for the current rating diminishes the impact of the current rating for downgrades and intensifies it for upgrades.

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The Immunization Performance of Traditional and Stochastic Durations: A Mean-Variance Analysis

Auteurs : FRANCOIS Pascal (HEC Montréal); MORAUX Franck (Université de Rennes 1)

Intervenants : MORAUX Franck (Université de Rennes 1)

This paper provides a mean-variance analysis of immunization strategies that trade off coupon reinvestment risk with resale price risk. For static immunization strategies, neither traditional nor stochastic durations fall in the set of efficient horizons. This finding is robust across various interest rate environments and bond characteristics, and explains the poor immunization results obtained by the comparative study of Gultekin and Rogalski (1984). When dynamic portfolio rebalancing is allowed, traditional and stochastic durations induce efficient strategies with similar performance. We therefore obtain that immunization performance is more driven by strategy sophistication rather than by the choice of duration, which corroborates the empirical finding of Agca (2005). Our results still hold under the two-factor term structure model with stochastic volatility of Longstaff and Schwartz (1992).

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Representative Yield Curve Shocks and Stress Testing

Auteurs : DIEBOLD Francis(University of Pennsylvania);LI Canlin(University of California);PERIGNON Christophe(HEC Paris);VILLA Christophe

Intervenants : VILLA Christophe (Audencia School of Management)

In this paper we propose a systematic procedure to identify a set of representative yield curve shocks and use them for stress-testing purposes. We first fit a factor model to actual bond yields and estimate the main shape factors of the yield curve. We then partition the factors into non-overlapping sets of representative shocks. The key feature of our procedure is that it provides a wide variety of yield curve shocks including typical, uncommon, and extreme ones. We apply our methodology to a variety of bond strategies using actual U.S. yields.

SESSION VI-1 : CORPORATE FINANCE II (19/12/2008 à 10h30)

Stock Exchange Markets for New Ventures

Auteurs : CARPENTIER Cécile & SURET Jean-Marc (Laval University); L’HER Jean-François (La Caisse de dépôt et placement du Québec)

Intervenants : CARPENTIER Cécile (Laval University)

In Canada, a venture stock market lists micro-capitalization firms that are at a pre-revenue stage, and competes with both formal and informal venture capital (VC). This market provides a higher rate of return and is able to provide seven times more new listings to the main exchange than the VC market. We do not evidence post-graduation underperformance, and indeed, new listings on a main exchange can succeed even if they originate from a public venture market. Our results do not support the theoretical arguments that confer specific advantages on the VCs with regard to screening, monitoring and exiting new ventures.

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Trade Credit as a Signal of Quality

Auteurs : DE BODT Eric; LOBEZ Frédéric; Jean-Christophe STATNIK (Lille School of Management)

Intervenants : Jean-Christophe STATNIK (Lille School of Management)

Trade Credit is a major source of financing. Over the past decade, it has represented more than 20% of the total assets of US listed firms. Different arguments have been suggested in the academic literature to explain why there is a strong industry pattern to trade credit usage (including the nature of the firm’s assets, the degree of liquidity of the firm’s inputs, and the degree of competition among suppliers), but little is known about the factors underlying the variance of trade credit usage among firms in the same industry. We argue that trade credit can be used by firms as a signal of quality. Our theoretical predictions are empirically verified using a large sample of US firms observed during the 1977−2005 period.

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Shareholder agreements and firm value: Evidence from French listed firms

Auteurs : BELOT François (Université Paris-Dauphine)

Intervenants : BELOT François (Université Paris-Dauphine)

In listed companies, some shareholders can be signatories to agreements that govern their relations. This paper investigates the effects of such agreements on the valuation of firms. I use a sample of French firms that is well suited for my analysis insofar as French law requires the disclosure of the shareholder agreements’ clauses. In line with previous literature, a negative relationship between firm value and the dispersion of voting rights across major shareholders is observed. However, the existence of a shareholder agreement tends to offset this negative effect. This countervailing effect is more pronounced when a “concerted action” provision is in force and/or the contracting shareholders are of the same type. Shareholder agreements thus appear as efficient coordination mechanisms rather than expropriation mechanisms.

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SESSION VI-2 : COMMODITIES MARKETS (19/12/2008 à 10h30)

Common industry exposure in seemingly unrelated commodities

Auteurs : CHNG Michael (University of Melbourne)

Intervenants : CHNG Michael (University of Melbourne)

We investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation shows that in shorter dynamics, cross-market interaction occurs between NR and GA, and from NR to PA. PA itself does not influence either NR or GA. Instead, cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our main findings are robust to lag-specifications, volatility measures, other proxies for trading activity and an alternative multivariate estimation in full BEKK-GARCH. Further analysis, which benchmarks against the silver futures market, TOCOM index and TOPIX transportation equipment index, confirms that our main results are driven by a common industry exposure, and not a commodity market factor. Our study offers new insights into how commodity and equity markets relate at an industry level, and provide multi-commodity hedging implications.

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Price Discovery and Liquidity in the European CO2 Futures Market: An Intraday Analysis

Auteurs : BENZ Eva; HENGELBROCK Jördis (University of Bonn)

Intervenants : HENGELBROCK Jördis (University of Bonn)

European Union CO2 allowances (EUAs) are traded on several markets with increasing intensity. We provide an intraday data analysis of the EUA futures market for the complete first trading period 2005-2007 (Phase 1). To investigate the trading process in this young market, we compare the two main trading platforms, ECX and Nord Pool, with respect to price discovery and liquidity. Both are of high relevance to traders. We analyze liquidity by estimating traded bid-ask spreads following the approach of Madhavan, Richardson, and Roomans (1997) and study price discovery using the VECM framework of Engle and Granger (1987). We find that while estimated transaction costs are always lower on the larger exchange ECX, the less liquid platform Nord Pool also contributes to price discovery, especially during the first months of trading. Overall, results indicate that from 2005 to 2007 liquidity in the European CO2 futures market has markedly increased and according to microstructural criteria the trading process has developed smoothly.

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Modeling Scarcity in Convenience Yield: Inventory v. Price

Auteurs : Katelijne CARBONEZ & Thi Tuong Van NGUYEN & Piet SERCU (Leuven School of Business and Economics)

Intervenants : Thi Tuong Van NGUYEN (Leuven School of Business and Economics)

SESSION VII-1 : INVESTMENT BEHAVIOR (19/12/2008 à 14h00)

Individual Investors and Volatility Abstract

Auteurs : FOUCAULT Thierry & THESMAR David (HEC School of Management Paris); SRAER David (University of California, Berkeley)

Intervenants : FOUCAULT Thierry (HEC School of Management Paris)

We test the hypothesis that retail trading contributes to the idiosyncratic volatility of stock returns. To this end, we consider a reform of the French equity market that restrains individual investors’ ability to short-sell or buy on margin a subset of stocks listed on this market. Using differences-in-differences estimates, we find a significant reduction in return volatility for stocks affected by the reform. For these stocks, we also find a significant decrease in (i) the magnitude of returns reversals, and (ii) the Amihud ratio after the reform. We show that these findings are predicted by theories of noise trading. Overall, the findings support the view that retail trading has a positive impact on idiosyncratic volatility because individual investors are noise traders.

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On the Information Content of the Order Flow: An Experiment

Auteurs : BISIERE Christophe & DECAMPS Jean-Paul (Toulouse School of Economics and IAE); LOVO Stefano(HEC School of Management Paris)

Intervenants : BISIERE Christophe (Toulouse School of Economics (IDEI) and IAE (CRG)) bisiere@univ-tls

We report results of a series of experiments that simulates trading in financial market. The specific format of our experiment allows to unambiguously measure the information content of the order flow and to disentangle the impact that risk attitudes and belief updating rules have on market informational efficiency. On the one hand, we show that many of the so called “irrational” behaviors are not so if one
takes into account subjects’ risk attitude. On the other hand we find evidence of non-Bayesian updating of beliefs. Risk neutral subjects are rare and subjects displaying risk aversion or risk loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. This behavior implies that when the market has a sharp opinion on an asset fundamental value, the private information dispersed in the economy struggles to enter trading prices. Non-Bayesian belief updating has an ambiguous effect on market efficiency as it reduces (improves) the information flow when subject prior belief is weak (strong).

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Rational bubbles: an experiment

Auteurs : MOINAS Sophie & Sebastien POUGET (Toulouse School of Economics)

Intervenants : MOINAS Sophie (Toulouse School of Economics)

This paper studies bubbles in the laboratory. Starting with Smith, Suchanek and Williams (1988), many researchers focus on irrational bubbles. We complement this literature and design an experimental setting where bubbles can be made rational or irrational by varying one parameter. Our setting features sequential trading and sustains rational bubbles because traders are not sure to be last in the market sequence. Our analysis shows that it is pretty difficult to coordinate on rational bubbles even in an environment where irrational ones flourish.

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Time-Varying Incentives in the Mutual Fund Industry

Auteurs : OLIVIER Jacques (HEC Paris and CEPR); TAY Anthony (Singapore Management University)

Intervenants : OLIVIER Jacques (HEC Paris and CEPR)

This paper re-examines the incentives of mutual fund managers arising from investor flows. We provide evidence that the convexity of the flow-performance relationship varies with economic activity. We show that the effect is economically large and is driven neither by abnormal years nor by outliers. We test two possible channels through which this pattern may arise. We investigate implications of the time-varying convexity for the incentives of managers to alter strategically the risk of their portfolios. We provide evidence supporting a ‘conditional’ tournament hypothesis: poor mid-year performers increase the risk of the portfolio only when economic activity is strong. Finally, we briefly discuss some methodological implications.

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Bank Competition and Collateral: Theory and Evidence

Auteurs : WEILL Laurent (Université Robert Schuman); HAINZ Christa (University of Munich); GODLEWSKI Christophe (Université Louis Pasteur)

Intervenants : WEILL Laurent (Université Robert Schuman)

We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking collateral. We show that presence of collateral is more likely when bank competition is lower. We then test empirically this prediction on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions of a negative role of bank competition on the presence of collateral. These findings survive several robustness checks.

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A smoke screen theory of financial intermediation

Auteurs : BRETON Régis (Université d’Orléans)

Intervenants : BRETON Régis (Université d’Orléans)

with competitors who free ride on his screening activity. Absent commitment problems, the lender funds one borrower and exerts optimal evaluation. When borrowers cannot commit to a long term relationship, the free riding problem is responsible for too little evaluation. We show how this problem can be mitigated by simultaneously financing several borrowers. This effect provides a rationale for intermediaries as an ‘information garbling’ device.

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