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Volume 37 - Numéro 1

June 2016

Emerging Market Risk Premia Fluctuations: A micro founded decomposition - 15 June 2016


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.

The Asymmetrical Behavior of Hedge Funds across the State of the Business Cycle: The q-factor Model Revisited - 15 June 2016

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.

Paulson Plan Credits - 15 June 2016


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.