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This paper analyses the purchase and redemption behaviour of mutual fund investors and its implications on fund liquidity risk. We collect a novel set of proprietary data which contains a large number of French investors holding funds with various degrees of asset liquidity. We build a Self-Exciting Poisson model capturing fund flows’ clustering effects and over-dispersion. The model improves the forecast accuracy of future flows and provides a reliable risk indicator (Flow Value at Risk.) Accordingly, we introduce the notion of liability risk where investor’s behaviour increases mutual fund liquidity risk. We further decompose fund flows into investor categories. We find that investors exhibit high heterogeneous behaviour, and a lead-lag relation exists between them. Finally, we control flow dynamics for various economic conditions. We show that although flows evolve with economic conditions, investor’s behaviour stays the main significant determinant of flows’ randomness. Our findings encourage fund manager to adopt an ALM approach. Download paper

Episodes of booming firm creation often coincide with intense speculation on financial markets. gastronomia y cia Disagreement among investors transforms the economics of optimal firm creation. We characterize the interaction between speculation and classic entry externalities from growth theory through a general entry tax formula for a non-paternalistic planner. The business-stealing effect is mitigated when investors believe they can identify the best firms. Speculation thus increases firm entry but reduces the optimal tax, potentially resulting in under-entry. The appropriability effect also vanishes, leaving only general equilibrium effects on input prices, aggregate demand, or knowledge. As a result, speculation reverses the role of many industry characteristics for efficiency. For instance, as the labor share increases, the optimal tax decreases under agreement but increases under disagreement. Further, economies with identical aggregate properties but a different market structure have the same efficiency with agreement, but call for different policies once financial market speculation is taken into account. Download paper

Since 2007, the European Markets in Financial Instruments Directive (MiFID) has ended the national rule of order concentration and the directive has increased the fragmentation among the trading venues. This paper examines the price discovery dynamics for cross-listed CAC40 stocks, through the Information Shares metric, over the years 2012 and 2013 for three key places: NYSE Euronext Paris, BATS Europe and Chi-X Europe. We use the highfrequency order flow on individual stocks to study the monthly contribution of the Regulated Market (Euronext Paris) and Multilateral Trading Facilities (BATS and Chi-X Europe) to the price discovery by using the spread midpoint on the best limits at one-second intervals. We observe that the Multilateral trading facilities contribute significantly to the price discovery dynamics. The revision of MiFID should enhance the trade-through protections, and unified trade and price reporting protocols to avoid that fragmentation is detrimental on the market quality after the Brexit. Download paper

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. electricity storage costs 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. Download paper

Firms are connected if they borrow from the same lenders in the credit market. This study examines whether firm-level idiosyncratic shocks propagate in borrowing networks which are built on this type of firm link. Through increasing credit demand or loan defaults, borrower-level idiosyncratic shocks may drag the lenders into credit constraints, and then will negatively affect the subsequent credit supply to other borrowers that share the same lenders but not directly affected by these shocks. I identify idiosyncratic shocks with the occurrence of major natural disasters in the U.S. for almost 30 years. I find that disaster-affected relationship-borrowers receive more loans after the disaster, and impose substantial loan declines, output losses and equity value drops on their connected peers who are not affected by the natural disasters. This spillover effect is more severe for these connected peers in weaker relationship with the common lenders. My estimates are economically large, suggesting that firm linkages in the credit markets are an important determinant of the propagation of idiosyncratic shocks in the economy. Download paper

We provide a theoretical characterization of international stochastic discount factors (SDFs) in incomplete markets under different degrees of market segmentation. Using 40 years of data on a cross-section of countries, we estimate model-free SDFs and factorize them into permanent and transitory components. We find that large permanent SDF components help to reconcile the low exchange rate volatility, the exchange rate cyclicality, and the forward premium anomaly. 9game However, integrated markets entail highly volatile and almost perfectly comoving international SDFs. In contrast, segmented markets can generate less volatile and more dissimilar SDFs. In quest of relating the SDFs to economic fundamentals, we document strong links between proxies of financial intermediaries’ risk-bearing capacity and model-free international SDFs. We interpret this evidence through the lens of an economy with two building blocks: limited participation by households and financiers who face an intermediation friction. Download paper

This paper provides empirical evidence on the ability of consensus prices to reduce valuation uncertainty in the over-the-counter market for financial derivatives. The analysis is based on a proprietary data set of price estimates for S&P500 index options provided by major broker-dealers to a consensus pricing service. We develop and estimate a model of learning about fundamental asset values from consensus prices. The panel dimension of the data set allows us to estimate Bayesian updating dynamics at the individual broker-dealer level. We find that uncertainty about index option values, as measured by the variance of broker-dealers’ posterior beliefs about the options’ fundamental value, is substantial across the volatility surface of S&P500 index options that are traded over-the-counter. The 95% confidence intervals around posterior means can be as large as 10 volatility points for index options with strike prices that correspond to extreme moves of the S&P500 index. Having access to consensus pricing data is found to significantly reduce broker-dealers’ strategic uncertainty, that is uncertainty about the positioning of their option valuations in relation to other market participants’ valuations. Download paper

We study the effect of dividend taxes on the payout and investment policy of listed firms and discuss their implications for agency problems. To do so, we exploit a unique setting in Switzerland where some, but not all, firms were suddenly able to pay tax-exempted dividends to their shareholders following the corporate tax reform of 2011. Using a difference-indifferences specification, we show that treated firms increased their payout much more than control firms after the tax cut. electricity review worksheet answers Differently, treated firms did not concurrently or subsequently increase investment. We show that the tax-inelasticity of investment was due to a significant

drop in retained earnings ̶ as the rise in dividends was not compensated by an equally-sized reduction in share repurchases. Furthermore, treated firms did not raise more equity and/or did not reduce their cash holdings to compensate for the contraction in retained earnings. Finally, we show that an unintended consequence of cutting dividend taxes is to mitigate the agency problems that arise between insiders and minority hareholders.

Using administrative data on the population of start-ups in France and their financing sources, I provide evidence consistent with the existence of stereotypes among equity investors. First, I find that female-founded start-ups are 25-35% less likely to raise external equity including venture capital. However, in female-dominated sectors, female-founded start-ups are no longer at a disadvantage. They are equally to more likely to be backed with equity relative to male-founded start-ups in those sectors and to female-founded start-ups in male-dominated sectors. My empirical design ensures that the observed gender funding gaps are not driven by the composition of founding teams or by differences across individuals regarding ex ante motivations, optimism, or initial corporate performance. Second, consistent with the idea that the bar is set higher for minorities, I find that conditionally on being backed with equity, female entrepreneurs perform better in male-dominated sectors relative to female-dominated sectors. The evidence is consistent with a model in which investors have context-dependent stereotypes. Download paper

We examine the market reactions to earnings announcements within a parent-subsidiary ownership structure. gaz 67 for sale We find that the parents’ investors react to all announcements within the group either immediately or with delay, whereas subsidiaries’ investors only react to their own firm’s announcements, ignoring predictive information released by the parent. Multiple announcements within a group lead to enhanced transparency for parents’ investors, who benefit from detailed information on the origin of their firm’s earnings. In contrast, subsidiaries’ investors appear unaware of ownership links, and behave as inattentive investors. Inattention is worsened by geographical diversification of affiliated firms and by indirect ownership, but cannot be explained by strategic timing of the disclosure of earnings surprises, day-of-the-week effect or seasonality, internal capital markets, or synergy-related explanations across industries. Institutional investors do not seem to be smarter at understanding group structures, with the exception of active investors owning shares in both parent and subsidiary companies. Download paper

We investigate the role of High Frequency Traders (HFTs) during flash crashes. By using a new methodology to identify flash crashes, defined as sudden and extreme price movements which occur in relatively short time and then reverts to the initial level, we identify 65 flash crashes episodes among 37 stocks that belong to the CAC40 traded in the NYSE-Euronext Paris market in 2013. We show that HFTs are responsible for initiating the crash in roughly 70% of the considered events, and that they strongly contribute to exacerbating the consequences of the crash, especially at his climax. In most of the cases, instead of providing liquidity, they start selling more as the crash develops. HFTs do not even contribute to recovery after the end of the crash, but they continue to initiate selling orders. This is worryingly true even for HFTs which agreed to provide liquidity under a market making agreement, especially if flash crashes occur simultaneously on several stocks. Among the HFTs, Investment Banks HFTs played the largest role and are those that are the most aggressive in selling during flash crashes. Download paper

Complex risks differ from simple risks in that agents facing them only possess imperfect information about the underlying objective probabilities. This paper studies how complex risks are priced by and shared among heterogeneous investors in a Walrasian market. I apply decision theory under ambiguity to derive robust predictions regarding the trading of complex risks in the absence of aggregate uncertainty. I test these predictions in the laboratory. The experimental data provides strong evidence for theory’s predicted reduction in subjects’ price sensitivity under complex risks. While complexity induces more noise in individual trading decisions, market outcomes remain theory-consistent. electricity 80s song This striking feature can be reconciled with a random choice model, where the bounds on rationality are reinforced by complexity. When moving from simple to complex risks, equilibrium prices become more sensitive whereas risk allocations turn less sensitive to noise introduced by imperfectly rational subjects. Markets’ effectiveness in aggregating beliefs about complex risks is determined by the trade-off between reduced price sensitivity and reinforced bounded rationality. Moreover, my results imply that complexity has similar but more pronounced effects on market outcomes than ambiguity induced by conventional Ellsberg urns. Download paper