Finance Journal

Institutional Trading and Near-Term Stock Returns

Authors : Bernd Hanke, Garrett Quigley, David Stolin, Maxim Zagonov

It is common for investment practitioners and commentators to link security returns with the level of institutional demand for these securities. The academic literature on linking (changes in) institutional holdings and subsequent stock returns has now reached critical mass. However, most of the evidence is US based with institutional holdings disclosed on an infrequent (i.e. at most quarterly) basis and reported with a substantial delay. Our paper, on the other hand, uses comprehensive UK institutional holdings data which are disclosed on a monthly basis and in a timelier manner. This allows us to conduct a cleaner analysis and helps gain insight into shorter-term linkages between institutional trading and returns. In contrast to US findings, we find no evidence that institutional trading significantly moves prices in the concurrent month, or that institutional trading positively predicts near-term returns. In fact, portfolios that are long stocks with little institutional trading activity outperform portfolios of actively traded stocks by up to 1 percent per month.

DATE PUBLISHED: 15/12/2018

VOLUME: 39

NUMBER: 3

Testing the new Fama and French factors with illiquidity: A panel data investigation

Authors : François-Éric Racicot, William F. Rentz, Raymond Théoret

We investigate the new Fama-French (FF, 2015, 2016) five factors augmented with a well-known illiquidity measure (Pástor and Stambaugh, 2003), using an innovative GMM robust instrumental variables estimator casted in a panel data framework. When using OLS, the augmented FF model seems to have explanatory power regarding the FF 12-sector returns. However, our panel data framework suggests that the only consistently significant factor is the market risk factor. Nevertheless, depending on the technique we use, we find that measurement errors may be the cause of this result, thus providing some empirical evidence in support of the new FF five-factor approach. As robustness checks, we also experiment with other liquidity measures – like the Amihud (2002) ratio and the term-spread – and bond-oriented factors. Across our 12 portfolios, the results are largely unchanged. We also apply our extended model to managed portfolios – i.e., hedge fund portfolios. The returns of hedge fund strategies seem more responsive to the augmented FF five-factor model that includes illiquidity measures, especially when accounting for the subprime crisis. There is also evidence that the new FF factors embed illiquidity.

DATE PUBLISHED: 15/12/2018

VOLUME: 39

NUMBER: 3

A literature review on neurofinance

Authors : Guillaume Baechler, Laurent Germain

Financial literature has taken to investigating individual investor behaviour. Some of the findings are quite puzzling, seeing as they are not consistent with classical models of rational behaviour. This is a challenge that has been partially solved by new models of investor behaviour in behavioural finance. Neurofinance has emerged as a new field since the late 1990s, seeking to understand the underlying aspects of financial decision-making. Psychology and neuroscience are some of the research fields that are merged in neurofinance to physiologically test finance theories. Our aim in this paper is to review the most prominent topics in neurofinance.

DATE PUBLISHED: 15/09/2018

VOLUME: 39

NUMBER: 2 Special issue in honor of Nobel prize winner Richard Thaler

Financial decisions of the financially literate

Authors : Nicolas Aubert, Niaz Kammoun, Yacine Bekrar

This paper investigates the portfolio performance of the company-based savings of a cross section of approximately 30,000 employees of a listed French bank. We have detailed information about each job position in the bank, which enables us to study the employees’ financial literacy, specific knowledge of the plans offered, and private information. These better-informed bank employees supposedly adopt behavior that is the closest to that of an informed rational investor. We explore the employees’ portfolio performance in the savings plans and find that financial expertise and knowledge of the plans are related to participation in the plans offered by the company. Financial expertise is related to better employee stock purchase plans (ESPP) individual portfolio performance but not to the company-based savings plan (CSP) and the overall performance of the company’s plans. For both offered plans, participation is more likely among the job categories (including finance experts), female employees, more educated employees and less financially constrained employees. We find evidence of the mental accounting of company stock highlighted by Benartzi and Thaler (2001).

DATE PUBLISHED: 15/09/2018

VOLUME: 39

NUMBER: 2 Special issue in honor of Nobel prize winner Richard Thaler

What can we learn from neurofinance?

Authors : François Desmoulins-Lebeault, Jean-François Gajewski, Luc Meunier

Neurofinance is a relatively recent field which aims to unveil the neurobiological mechanisms through which decisions are made in finance. This article investigates how neurosciences can contribute to the study of finance and the most appropriate ways for neuroscientific methodologies to be applied to financial situations. In order to examine these areas, we have produced a literature review around three axes of the main neuroscientific studies published in finance: financial risk; discounting and credit risk; information and trading decisions. One of the crucial insights offered by neurofinance is how to reconcile classic and behavioral finance by showing that emotions are critical to rational decision-making, in spite of also being part of the origin of biases. Through its unique set of techniques, neurofinance is able to pinpoint the biological and neurological explanations behind some of the common biases highlighted by behavioral finance, as well as tackle some novel questions. We conclude this review by pointing toward potentially fruitful avenues for future research and by highlighting which methods appear particularly well adapted for neurofinancial studies.

DATE PUBLISHED: 15/09/2018

VOLUME: 39

NUMBER: 2 Special issue in honor of Nobel prize winner Richard Thaler

Richard Thaler: The anomalies of life

Authors : Werner De Bondt, Marie Pfiffelmann, Patrick Roger

For four decades, the spirited, contentious ideas of Richard Thaler, laureate of the 2017 Nobel Prize in economics, have perturbed economics and finance as well as decision theory, accounting, marketing, law, and public policy. We review Thaler’s research philosophy and principal contributions, with an emphasis on his contributions to finance. In particular, we summarize and evaluate his work on inefficient markets, framing, decisions under risk, and choice architecture.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Analysts’ stickiness, over-reaction and drift

Author : Romain Boulland

We show that investor underreaction and overreaction to company news (Michaely, Thaler, and Womack, 1995; De Bondt and Thaler, 1985) can be traced back to sell-side analysts’ tendency to delay their stock recommendations for several months. Analysts exhibit stickiness in their stock recommendations because they face reputational concern in changing such recommendations too often and/or difficulties in processing new information. Using a broad set of corporate events, we find that heterogeneity among the population of analysts causes their response to corporate news to be spread over several months. Long-term drift and return reversal following those events can be predicted at different horizons by the fraction of contrarian recommendations, i.e., recommendations that contradict the initial market reception of the news. Together, our findings highlight the role of analysts’ stickiness in shaping long-term stock price reaction to corporate news.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Round-Number Bias in Investment: Evidence from Equity Crowdfunding

Authors : Fabrice Hervé, Armin Schwienbacher

We examine whether uncertainty affects the use of round numbers in investment decisions. Using unique data of more than 15,000 investments from WiSEED—the largest equity crowdfunding platform in France—for the period 2009-2016, we find that investors are more likely to invest a round number when facing greater uncertainty in equity crowdfunding campaigns. As more investors pledge funds, the perceived uncertainty is reduced, which in turn reduces the use of round numbers by follow-up investors. This finding is consistent with the round-number bias. When investors no longer know the funding status of the ongoing campaign, experience helps reduce the round-number bias. This suggests the presence of a learning-by-doing phenomenon through experience: as investors become more familiar with equity crowdfunding investments, they are less prone to behavioral bias. These findings are consistent with behavioral theories of investment.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Investment goals and mental accounting in French retail clients

Authors : Marie-Hélène Broihanne, Hava Orkut

Mental accounting is a cognitive process that guides individuals’ personal financial decisions. Although well-documented, the investigation into how individuals form and select mental accounts, how these accounts evolve over time and are affected by environmental factors, has yet to be undertaken. In this paper, we identify how an external force, the MiFID questionnaire, may strengthen mental accounting. Based on a sample of more than 60,000 retail clients’ questionnaire answers and banking records, we identify the determinants of the number of investment goals. We build a typology of retail clients’ mental goals and show that the actual investment decisions of retail clients, fit their mental goals.

DATE PUBLISHED: 15/06/2018

VOLUME: 39

NUMBER: 1

Employment Protection and Payout Policy

Authors : Muhammad Farooq Ahmad, Christof Beuselinck, Helen Bollaert

This paper examines the relationship between employment protection legislation (EPL) and corporate payouts. Employees are corporate claimants who compete with shareholders to extract economic rents generated by the firm, so management is influenced by workforce power via the EPL framework in setting its corporate payout policy. For a large international sample of 21 OECD countries for the period 1985-2013, we find that a one standard deviation increase in labor protection leads to a 5.07% (12.17%) lower dividend (total) payout. Consistent with the flexibility hypothesis, we find that EPL has a greater impact on payout in firms that are more resource-constrained such as labor-intensive firms, firms that face financial constraints and firms with higher operating leverage. The effects of tightening and loosening EPL are not symmetrical. Firms increase dividend payouts after employment protection is softened but are reluctant to cut dividends when employment protection is tightened. Our results provide important insights in the dynamics between labor law regulations and corporate financing decisions.

DATE PUBLISHED: 15/12/2017

VOLUME: 38

NUMBER: 3

Modelling bank leverage and financial fragility under the new minimum leverage ratio of Basel III regulation

Authors : Olivier Bruno, André Cartapanis, Eric Nasica

We analyse the determinants of banks’ balance sheet and leverage ratio dynamics, and its role in increasing financial fragility. Our results are twofold. First, we show there exists a value of bank leverage minimising financial fragility. Second, this value depends on the overall business climate and the expected value of the collateral provided by firms. Based on our findings, we argue that an adjustable leverage ratio restriction dependent on economic conditions would be preferable to the fixed ratio included in the new Basel III regulation.

DATE PUBLISHED: 15/12/2017

VOLUME: 38

NUMBER: 3

Investor Sentiment and Stock Return Predictability: The Power of Ignorance

Authors: Catherine D'HONDT, Patrick ROGER

Sentiment measures, based on the trading activity of retail investors, carry some predictive power of future market returns. In this paper, we use such a sentiment measure on two samples of approximately 25,000 individual investors, who differ in their choices when answering MiFID questionnaires, especially in terms of their appetite for information and professional recommendations. Our data covers 51 months from January 2008 to March 2012. We show that the sentiment of investors who disregard free information and professional advice is the best predictor of future returns on a long-short portfolio based on size. Our findings remain valid when controlling for investor characteristics like spoken language (French or Dutch), portfolio value and financial literacy. Our results bring evidence that sentiment is essentially driven by under diversification and narrow framing by retail investors. When shared by many investors, sentiment can generate long-lived mispricing, which is, therefore, difficult to arbitrage.

DATE PUBLISHED: 15/09/2017

VOLUME: 38

NUMBER: 2

Performance-Sensitive Debt: A New Mechanism

Authors: Sami ATTAOUI, Moez BENNOURI, Imen MEJRI

We propose a new mechanism of finite-maturity performance-sensitive debt (PSD). Unlike typical PSD, our mechanism relates positively the firm’s performance, captured by the level of its assets, to the coupon rate. That is, when its performance improves, the firm pays a high coupon rate, and when its performance deteriorates, the firm pays a low coupon rate. In a fairly general setting, we provide the necessary and sufficient conditions for our PSD to be efficient, and show that this mechanism can be immune against risk-shifting when augmented with a covenant deterring managers from changing risk following debt issuance. We analyze the characteristics of an example of such a mechanism where the coupon rate is a stepwise function of assets, and find that intermediate credit quality firms benefit most from it. This suggests that this new PSD should be considered as a complement to typical ones.

DATE PUBLISHED: 15/09/2017

VOLUME: 38

NUMBER: 2

ROE in Banks: Performance or Risk Measure? Evidence from Financial Crises

Authors: Christophe MOUSSU, Arthur PETIT-ROMEC

Return on equity (ROE) is a central measure of performance in the banking industry. The reliance on ROE emerged with the risk management approach that inspired bank capital regulation. In this paper, focusing on the 2007-2008 crisis, we empirically assess the validity of ROE as a performance measure in the banking industry. We document that pre-crisis ROE is a strong predictor of both bank standalone and systemic risk during the crisis. These results are unchanged for the 1998 crisis. Banks appear to be special as the same association between pre-crisis performance measures and the materialization of risk in crisis periods is not observed for firms outside the banking industry. Complementary tests confirm the existence of monetary incentives associated to ROE. Overall, our findings challenge the use of ROE as a main performance measure in banks and its incorporation in bank executives’ compensation contracts.

DATE PUBLISHED: 15/09/2017

VOLUME: 38

NUMBER: 2

Competition in Exchanges and Reputational Concerns

Authors: Selma BOUSSETTA

This paper proposes a theoretical model to analyse the effect of competition on the quality of the certification process offered by stock exchanges. If the stock exchange truthfully certifies the quality of a new issue, then it would list only the good projects, which would alleviate information asymmetries and generate gains from trade. However, it may be more protable for the listing requirements of exchanges to be too lax. The trade-off between short-term profits and reputation effects induces strategic behaviour. The results show that overestimating the quality of a project is an equilibrium despite the presence of reputation costs. Counterintuitively, introducing competition leads to more lax requirements than in the monopolistic case and reduces welfare as long as the reputation of the competitor is higher than that of the monopolistic stock exchange.

DATE PUBLISHED: 15/06/2017

VOLUME: 38

NUMBER: 1

Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

Authors: Eduard DUBIN, Olesya V. GRISHCHENKO, Vasily KARTASHOV

We explicitly solve for aggregate asset prices in a discrete-time general- equilibrium endowment economy with two agents who differ with respect to their preferences for risk aversion and sensitivity to additive habit, either internal or external. We generalize an algorithm of Dumas and Lyasoff (2012) for the case of utility functions with time nonseparability that is induced by habit preferences. In the internal habit case, we find that the equilibrium equity premium, equity return volatility, Sharpe ratio, and risk-free rate and its volatility are more consistent with historically observed aggregate prices relative to the external habit case (“catching up with the Joneses”).

DATE PUBLISHED: 15/06/2017

VOLUME: 38

NUMBER: 1

Bank Deregulation, Consolidation and Stability: Evidence on US M&A Centric Activity

Authors: Saqib AZIZ, Jean-Jacques LILTI

Employing a difference-in-difference estimation over a sample of 3,447 M&A deals of U.S. banks from 1990 to 2009, we examine the relation between U.S. bank deregulation, M&A centric consolidation and bank stability. Bank deregulation, in terms of its entirety, positively relate with M&A centric consolidation in U.S. However, the evidence on functional- and geographic-diversity aimed deregulatory acts is mixed. Our findings predominantly hold in the pre-crisis period analysis and disappear when the period extends to financial crisis. Lastly, deregulation and consolidation jointly cast negative effects over the stability of U.S. banks. Our findings broadly support the narrative that holds deregulation partly responsible for the 2007 financial calamity.

DATE PUBLISHED: 15/06/2017

VOLUME: 38

NUMBER: 1

Government Awards as Economic Instruments of Governance

Authors: Linus SIMING

This paper investigates if government awards can act as instruments that influence corporate behaviour. For identification I use the staggered introduction of orders of merit in six German states after the reunification. The introduction of orders leads to a fall in profitability but an increase in employment. However, CEOs who ultimately receive the awards are not running less profitable firms than CEOs who do not win awards but they employ more people. The performance of the honoured CEOs does not worsen after they have received an order. Overall, the results suggest that government awards function as economic instruments of governance.

DATE PUBLISHED: 15/12/2016

VOLUME: 37

NUMBER: 3

Smart Beta and CPPI Performance

Authors: David ARDIA, Kris BOUDT, Marjan WAUTERS

CPPIs are popular medium- to long-term investment products that dynamically allocate between a risk-free asset and a risky portfolio, with the objective of combining upside potential with a capital guarantee. This paper uses a block-bootstrap evaluation approach to study whether combining smart beta and portfolio insurance is mutually beneficial under various scenarios. Our results show that the improvement in performance is most apparent for CPPIs combined with a low-risk equity portfolio. This finding is consistent with the negative vega of CPPIs and with path-dependency of the CPPI protection against portfolio losses between rebalancing dates.

DATE PUBLISHED: 15/12/2016

VOLUME: 37

NUMBER: 3

Recent Trends in Executive Compensation: Are They Pareto Improving?

Authors: Igor SALITSKIY

In recent years firms have been shifting their executive compensation packages from plain stock and option grants to grants with accounting-based performance vesting provisions and awards that benchmark firm performance against those of a designated peer group. One potential explanation for this trend is that firms want to improve the signal-noise ratio of performance measures. This paper directly tests this hypothesis. It estimates the statistical relationship between various performance measures and computes the optimal combination of awards. It finds that the observed trend is consistent with compensation optimization. It also finds that firms with higher potential gains from switching to alternative performance characteristics have increased their usage more than other firms.

DATE PUBLISHED: 15/09/2016

VOLUME: 37

NUMBER: 2

Feedback Effects and Endogenous Risk in Financial Markets

AUTHORS: Lakshithe WAGALATH

This paper studies feedback effects and endogenous risk in financial markets. In order to model those effects in a non parsimonious manner, we propose a general framework of a financial market with multiple assets which takes into account feedback effects from systematic trading by large financial institutions and which is flexible enough to incorporate the impact of any type of trading strategy that can be source of feedback. The model yields tractable formulas linking realized volatilities and correlations to the strategies followed by large financial institutions and the asset liquidities and shows that, in the presence of feedback effects, asset dynamics may deviate significantly from fundamentals and be driven more by the market capitalizations and strategies of large financial institutions. We quantify the price-mediated contagion to other investors generated by feedback effects and give a decomposition of endogenous risk between a volatility component and a correlation component. The results developed in this paper are useful in a risk-management perspective as they provide a flexible framework to better tackle and anticipate liquidity events caused by large trades and also in a systemic risk-management perspective as they enable to quantify price-mediated contagion.

DATE PUBLISHED: 15/09/2016

VOLUME: 37

NUMBER: 2

A Repeat-sales Index for Pricing US Corporate Bonds

AUTHORS: Renaud BEAUPAIN, Stephanie HECK

In this paper we use a repeat-sales index methodology to construct US corporate bond price indices. Using several performance tests, we show that this methodology provides superior index estimates. In particular when assets trade at infrequent and irregular intervals the repeat-sales index is superior to taking an arithmetic price average. The methodology can readily be applied to any sub-sample of bonds based on a particular characteristic, such as the rating or the maturity. We further study the sensitivity of individual bond returns to systematic market risk as measured by a repeat-sales price index. Results indicate that variations in the price index are an important determinant of the time series and of the cross-sectional variation of corporate bond returns.

DATE PUBLISHED: 15/09/2017

VOLUME: 37

NUMBER: 2

Emerging Market Risk Premia Fluctuations: A micro-founded decomposition

Authors: Paula MARGARETIC

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.

DATE PUBLISHED: 15/06/2016

VOLUME: 37

NUMBER: 1

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

Authors: 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.

DATE PUBLISHED: 15/06/2016

VOLUME: 37

NUMBER: 1

Paulson Plan Credits

Authors: Eric de BODT, Frederic LOBEZ, Armin SCHWIENBACHER

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.

DATE PUBLISHED: 15/06/2016

VOLUME: 37

NUMBER: 1

Overcollateralization in Corporate Securitization

Authors: Ilham RIACHI, Armin SCHWIENBACHER

This paper examines the amount of assets sold to the special purpose vehicle (SPV) in the course of corporate asset-backed securitization and its impact on the originator’s working capital management. Originators generally over-collateralize the vehicle as a way to enhance the rating of the securities issued. We find that credit risk of the originator, cash availability by the originator and macroeconomic conditions significantly affect the level of overcollateralization. Furthermore, true sale treatment of ABS transaction are positively linked to overcollateralization. Finally, we provide insights into the impact of ABS on working capital management. Our results suggest that ABS initiation and the use of overcollateralization both improve working capital ratios of the originating firm, in particular receivables and cash conversion cycles.

DATE PUBLISHED: 25/12/2015

VOLUME: 36

NUMBER: 3

Impact of the subprime crisis on the reputation of rating agencies

Authors: Jamil JABALLAH

I study the impact of the subprime crisis on the reputation of credit rating agencies by comparing investors’ perceptions of changes in ratings before and during the crisis, on both the European and American stock markets. Using a standard event study methodology, I find significant positive reactions to rating upgrades and significant negative reactions to rating downgrades in normal periods. This effect largely disappears during the crisis, although downgrades still have significant negative reactions on the European stock market. A general concern with event studies during crises is that investors are exposed to an unusual volume of dramatic news that could indirectly affect stock prices. I therefore conduct a Difference-in-Differences study in order to avoid this endogeneity issue. The Difference-in-Differences estimator shows insignificant effects for rating upgrades and downgrades on both stock markets during the crisis. This result supports the view that investors considered that CRAs did not convey reliable information during the crisis.

DATE PUBLISHED: 25/12/2015

VOLUME: 36

NUMBER: 3

The Impact of Different Risk Aversions on The Bond-Stock Mix: A Note

Authors: Sami ATTAOUI, Pierre SIX

This paper reexamines the issue of bond stock allocation by considering, contrary to existing literature, that the risk aversion towards consumption is higher than that towards wealth. We mainly find that a higher risk aversion towards consumption significantly increases the bond-stock ratio, due to, in particular an increase in the bond demand. Also, we find that the proportion of wealth used to satisfy future consumption decreases with the risk aversion towards consumption when the investor is sufficiently rich. Next, we show that when the investor’s current consumption decreases to zero, she saves all her wealth to meet future consumption and leaves nothing for her bequest. Finally, we find that the relative risk aversion exhibits a hump shaped pattern in the coefficient of the risk aversion towards consumption.

DATE PUBLISHED: 25/12/2015

VOLUME: 36

NUMBER: 3

Rethinking Zero Returns in the Liquidity Puzzle of a Limit Order Market

Authors: Paolo MAZZA

The frequency of zero returns has often been used as a proxy for illiquidity in the literature. Based on Euronext intraday data, we show that zero returns are significantly related to liquidity instead. We conduct an event study and run conditional logit regressions using spread, depth, dispersion and slope measures as liquidity variables. Although we find that zero returns are associated with less informed trading as previously outlined in the literature, this does not necessarily lead to higher illiquidity.

DATE PUBLISHED: 25/06/2015

VOLUME: 36

NUMBER: 2

On Path-Dependent Structured Funds: Complexity Does Not Always Pay (Asian versus Average Performance Funds)

Authors: Philippe BERTRAND, Jean-Luc PRIGENT

As emphasized by the U.S. Dodd-Frank Act and the European MiFID directive, financial institutions are required to “categorise their clients and assess their suitability for each type of investment product.” In this framework, this paper examines several standard financial structured products whose performances are based on smoothing the return of an underlying risky asset and providing a guarantee at maturity. We use various criteria such as probabilities of providing merely the guarantee at maturity and Kappa measures. Surprisingly, our study reveals that funds based on averages of calls generally do better than Asian funds.

DATE PUBLISHED: 25/06/2015

VOLUME: 36

NUMBER: 2

Too much of a good thing? The impact of a new bankruptcy law in Canada

Authors: Timothy C.G. FISHER, Jocelyn MARTEL

A new, more debtor-friendly bankruptcy law in Canada is associated with a tenfold increase in the proportion of insolvent firms choosing reorganization over liquidation. Comparing before-and-after samples of randomly-selected firms, we find that firms reorganizing under the new law are smaller and weaker with a capital structure exhibiting significantly higher tax claims. Reflecting the bargaining power shift towards debtors, we find the new law is also associated with 25% lower creditor recovery rates and a longer time in reorganization. Unintended effects of the new law include a possible increased government role in financing small businesses and an incentive for secured creditors to favour bankruptcy over other forms of distress resolution.

DATE PUBLISHED: 25/06/2015

VOLUME: 36

NUMBER: 2

A DARE for VaR

Authors: Benjamin HAMIDI, Christophe HURLIN, Patrick KOUONTCHOU, Bertrand MAILLET

This paper introduces a new class of models for the Value-at-Risk (VaR) and Expected Shortfall (ES), called the Dynamic AutoRegressive Expectiles (DARE) models. Our approach is based on a weighted average of expectile-based VaR and ES models, i.e. the Conditional Autoregressive Expectile (CARE) models introduced by Taylor (2008a) and Kuan et al. (2009). First, we briefly present the main non-parametric, parametric and semi-parametric estimation methods for VaR and ES. Secondly, we detail the DARE approach and show how the expectiles can be used to estimate quantile risk measures. Thirdly, we use various backtesting tests to compare the DARE approach to other traditional methods for computing VaR forecasts on the French stock market. Finally, we evaluate the impact of several conditional weighting functions and determine the optimal weights in order to dynamically select the more relevant global quantile model.

DATE PUBLISHED: 15/06/2015

VOLUME: 36

NUMBER: 1

Counterparty Credit Risk in a Multivariate Structural Model with Jumps

Authors: Laura BALLOTTA, Gianluca FUSAI

We present a multivariate version of a structural default model with jumps and use it in order to quantify the bilateral credit value adjustment and the bilateral debt value adjustment for equity contracts, such as forwards, in a Merton-type default setting. In particular, we explore the impact of changing correlation between names on these adjustments and study the effect of wrong-way and right-way risk.

DATE PUBLISHED: 15/06/2015

VOLUME: 36

NUMBER: 1

Increased Entry Threat and Merger Activity

Authors: Nihat AKTAS, Marion DUPIRE-DECLERCK

This paper examines whether and how increased entry threat drives industry merger activity. We use the reduction in import tariffs as a natural experiment of exogenous increase in competitive intensity and study its effect on merger and acquisition (M&A) decisions. Our results indicate that competition drives M&As towards more efficient resource allocation. We first document that increased entry threat intensifies takeover activity, consistent with the argument that M&As are an efficient reaction to economic shocks. We also find that, after import tariff reductions, the selection of targets outside the industry becomes more efficient and industry rivals react more positively to those deals, suggesting that efficient non-horizontal deals signal the existence of investment opportunities outside the industry for the industry peers.

DATE PUBLISHED: 15/06/2015

VOLUME: 36

NUMBER: 1

Interest Term Premiums and C-CAPM: A Test of a Parsimonious Model

Authors: Hubert de la BRUSLERIE, Jessica FOUILLOUX

This paper proposes a consumption-based model that accounts for term premiums of the nominal term structure of interest rates. The model focuses on ex ante term premiums, which depend on the volatility processes of real consumption and inflation. The contribution of the paper is to derive and test a parsimonious model that highlights linear relationship between term premiums and next period conditional volatilities. When calibrated to US data on interest rates, consumption and inflation, the model accounts for the C-CAPM expectations puzzle. Risk aversion coefficients between 2 and 7 are elicited.

DATE PUBLISHED: 25/12/2014

VOLUME: 35

NUMBER: 3

Performance of microfinance institutions: do board activity and governance ratings matter?

Authors: Hubert TCHAKOUTE TCHUIGOUA

This article aims to empirically verify the relationship among board activity, governance rating scores, and the financial performance of microfinance institutions (MFIs). The study comprises a sample of 215 MFIs rated by Planet Rating between 2003 and 2009. The findings, obtained after controlling for endogeneity and selection biases, suggest that board activity and governance rating scores are associated with profitability. In addition, the study of the moderating effect of legal status reveals a significant difference of the effect of governance rating score and CEO/Chairman duality. In view of the results, it seems difficult to conclude definitively that the legal form of MFIs has a moderating effect on their financial performance. The existence of a moderating effect and thus validation of the thesis that shareholder-based MFI governance systems would be more effective than nonprofit MFIs depends on how governance is measured. The results are robust to other measures of financial performance and to the functional form of board activity.

DATE PUBLISHED: 25/12/2014

VOLUME: 35

NUMBER: 3

The 99% Market Sentiment Index

Authors: Patrick ROGER

We build a market sentiment index based solely on the changes over time in the number of different stocks held by individual investors. No prices, returns or trading volumes enter the definition and trades of unwealthy and underdiversified investors are overweighted in our sentiment index. Using the trades and portfolios of a large sample of 87,373 French investors over a eight-year period, we show that our index outperforms other usual indices (based on surveys, macro-economic variables or buy-sell imbalances) in predicting short-term returns on long-short portfolios based on size or on the book-to-market ratio. An increase of one standard deviation of our market sentiment index in a given month implies a decrease of 1.05% of the return on such a long-short size based portfolio the following month. A simple dynamic strategy driven by our sentiment index delivers a Sharpe ratio higher than that of random dynamic strategies in 99.6% of cases and a much higher Sharpe ratio than the one of a buy-and-hold strategy.

DATE PUBLISHED: 25/12/2014

VOLUME: 35

NUMBER: 3

Explicit Representation of Cost-Efficient Strategies

Authors: Carole BERNARD, Phelim P. BOYLE, Steven VANDUFFEL

In this paper, we give an explicit representation of the lowest cost strategy to achieve a given payoff distribution (that we call “cost-efficient” strategy). For any inefficient strategy, we are able to construct financial derivatives which dominate in the sense of first-order or second-order stochastic dominance. We highlight the connections between cost-efficiency and dependence. This allows us to extend the theory to deal with state-dependent constraints to better reflect real-world preferences. We show in particular that path-dependent strategies (although inefficient in the Black Scholes setting) may become optimal in the presence of state-dependent constraints.

DATE PUBLISHED: 15/12/2014

VOLUME: 35

NUMBER: 2

Stock Returns Memories: a “Stardust” Memory?

Authors: Julien FOUQUAU, Philippe SPIESER

This article aims at investigating econometrically the market efficiency concept through an analysis of the dependence structure of stock market index returns. To that purpose, we use a large range of methods in this paper. Six different estimation procedures are applied to obtain the Hurst exponent, starting with the “R/S” approach, continuing with ARFIMA models and ending with wavelet models. We investigate the possible presence of long or short-memory in twelve market indexes between three periods, namely (1960-2013), (1980-2013) and (1990-2013). Our conclusions depend on the degree of financial maturity: most emerging markets display the presence of memory, whereas mature markets show an absence of or very short-memory dynamics.

DATE PUBLISHED: 15/12/2014

VOLUME: 35

NUMBER: 2

The Computation of Risk Budgets under the Lévy Process Assumption

Authors: Olivier LE COURTOIS, Christian WALTER

This paper revisits the computation of Value-at-Risk and other risk indicators based on the use of Lévy processes. We first provide a new presentation of Variance Gamma Processes with Drift: we reconstruct them in an original way, starting from the exponential distribution. Then, we derive general Fourier formulas that allow us to compute VaR quickly and efficiently, but also other typical indicators like Tail Conditional Expectation (TCE). Based on such a formula, we conduct a study of the term structure of VaR, and provide a discussion of the Basle 2 and Solvency II agreements.

DATE PUBLISHED: 15/12/2014

VOLUME: 35

NUMBER: 2

Acquisitions and Bidder Stock Valuations: Empirical Evidence from the French Market

Authors: Christophe TROWSKI

This paper analyzes the influence of industry shocks, mispricing, and managerial overconfidence on merger and acquisition activities on the Euronext Paris stock market, between 1996 and 2010. Merger and acquisition waves are led by industry shocks, where the probability that the target’s shareholders will be paid with stock increases with overpricing of the bidding firm’s shares, and tends to decrease with overconfidence of its manager. It thus appears that behavioral predictions do not necessarily contradict the economic disturbance hypothesis. Quite to the contrary, the influence of managerial overconfidence on the method of payment seems to be sensitive to industry shocks.

DATE PUBLISHED: 15/06/2014

VOLUME: 35

NUMBER: 1

Irrational Market Makers

Authors: Laurent GERMAIN, Fabrice ROUSSEAU, Anne VANHEMS

We analyze a model where irrational and rational informed traders exchange a risky asset with irrational market makers. Irrational traders misperceive the mean of prior information (optimistic/pessimistic bias) and the variance of the noise in their private signal (overconfidence/ underconfidence bias). Irrational market makers misperceive both the mean and the variance of the prior information. We show that moderately underconfident traders can outperform rational ones and that irrational market makers can fare better than rational ones. Lastly, we find that extreme level of confidence implies high trading volume.

DATE PUBLISHED: 15/06/2014

VOLUME: 35

NUMBER: 1

M&A Outcomes and Willingness to Sell

Authors: Eric DE BODT, Jean-Gabriel COUSIN, Irina DEMIDOVA

Should target shareholders divulgate their willingness to sell (WTS)? In this article, we tackle this issue by investigating the net WTS wealth effect. We first model the trade-off between the probability of a sale and the price paid in case of a sale, and derive testable predictions. We then provide an empirical test using a proxy of the target’s WTS based on deal initiation and the chosen selling procedure, which are hand-collected in Securities and Exchange Commission filings. The results reveal a negative relationship between the target’s displayed WTS and its expected profits, mitig

DATE PUBLISHED: 15/06/2014

VOLUME: 35

NUMBER: 1

Legality and the Spread of Voluntary Investor Protection

Authors: CUMMING D., IMAD’EDDINE G., SCHWIENBACHER A.

We examine the spread of Undertakings for Collective Investment
in Transferable Securities (UCITS) funds around the world and consi-
der whether such mutual funds, which voluntarily adopt higher stan-
dards of investor protection, expand their operations to other countries
with higher or lower investor protection regimes. The data indicate
equity funds spread to countries with better anti-director rights and
bond funds spread to countries with better creditor rights; however,
either type of spread is uncorrelated with and unexplained by enforce-
ment standards. The data therefore indicate that the loss of insider
managerial benefits from UCITS constraints is smaller in countries
where legal standards are higher, and this mechanism is a primary
determinant of the spread of voluntary protection mechanisms among
mutual funds. This central finding holds over a wide range of robust-
ness checks and the use of treatment-effect models that account for self selection.

DATE PUBLISHED: 15/12/2013

VOLUME: 34

NUMBER: 3

The value effect of operational hedging: Evidence from foreign takeovers

Authors: AKTAS N., COUSIN J.-G., ZHANG J. Y.

The paper examines cross-border takeovers using the lens of cur-
rency risk management. With a sample of 152 large, cross-border deals
undertaken by listed French firms, the findings reveal that acquirers
tend to be firms with greater exposure to the target currency prior to the
takeover announcement. The value of the acquiring firm becomes less
sensitive to the target currency after the transaction. Acquirer abnormal
returns also are positively associated with a decrease in exposure to the
target currency; this gain is economically substantial. For example, for
an acquirer worth €100 million in equity, a one-unit decrease in cur-
rency exposure leads to a gain of €1.68 million.

DATE PUBLISHED: 15/12/2013

VOLUME: 34

NUMBER: 3

What drives the herding behavior of individual investors?

Authors: MERLI M., ROGER T.

We introduce a new measure of herding that allows for tracking
dynamics of individual herding. Using a database of nearly 8 million
trades by 87,373 retail investors between 1999 and 2006, we show that
individual herding is persistent over time and that past performance
and the level of sophistication influence this behavior. We are also able
to answer a question that was previously unaddressed in the literature:
is herding profitable for investors? Our unique dataset reveals that the
investors trading against the crowd tend to exhibit more extreme
returns and poorer risk-adjusted performance than the herders.

DATE PUBLISHED: 15/12/2013

VOLUME: 34

NUMBER: 3

A scenario-based description of optimal American capital guaranteed strategies

Authors: ATTAOUI S., LACOSTE V.

The aim of the paper is to describe portfolio strategies with partial
guarantee of the initial capital. We consider the option-based (OBPI)
and the constant proportion portfolio insurance (CPPI) strategies with
both European and American features. First, we provide explicit for-
mulae for all strategies and contribute to the literature by providing the
value of the American CPPI. Second, relying on both historical data
and path simulations, we show that strategies perform differently in a
bear market. We focus on liquidation values when the market recovers
after a sharp drop. We find that the American CPPI strategy usually
outperforms the American OBPI one due to the Asian component of
the former and despite the lookback feature of the latter. To complete
our analysis, we investigate both deltas and gammas of our strategies.

DATE PUBLISHED: 15/06/2013

VOLUME: 34

NUMBER: 2

Portfolio choice and financial advice

Authors: DIRER A., VISSER M.

This paper analyzes portfolio allocation decisions of individual
investors. Our dataset records how individuals allocate their money
among risky funds and a money-market fund, and also the characteris-
tics of both the investors and the financial advisors who sell the pro-
ducts. These data offer a unique opportunity to investigate how portfo-
lio decisions are affected by financial advisors. Our empirical strategy
consists in studying the relationship between the share of the total capital invested in risky funds and the characteristics of buyers and sellers. Since the dependent variable is bounded between zero and one, we estimate a fractional response model. We find that the share invested in risky funds is larger when the advisor is more educated. Furthermore, male advisors sell larger shares of risky funds than female advisors. We offer possible explanations for these findings

DATE PUBLISHED: 15/06/2013

VOLUME: 34

NUMBER: 2

Underwriting Syndicate Structure and Lead Manager Reputation: An Empirical Study on European Stock Markets

Authors: BERNOUSSI A., DEREEPER S., SCHWIENBACHER A.

Using a comprehensive sample of 1542 initial public offerings
(IPOs) sold on German, French and British stock markets, we investi
gate the structure of underwriting syndicates in the presence of reputa
ble lead managers. We consider two aspects of syndicate structure: the number of syndicate members and the ratio of the total number of
members to the number of lead managers. First, we find that the lead
manager is often the sole bank to perform the underwriting; the lead
manager delegates part of the tasks of distributing shares to other par-
ticipants in only 41% of the IPOs. An important reason is that a large
fraction of the IPOs in Europe are relatively small. Second, we show
that the extent of task delegation increases with lead manager reputa-
tion because it leads to more co-managers and other managers partici-
pating in the syndicate. However, this effect only occurs for larger
issuances; in general, smaller IPOs are left to smaller and less reputa-
ble underwriters, some of whom nevertheless perform a large number
of small deals. Overall, our findings are consistent with the view that
lead manager reputation generates market segmentation between larger and smaller issuances.

DATE PUBLISHED: 15/06/2013

VOLUME: 34

NUMBER: 2

Analysis and Comparison of Leveraged ETFs and CPPI-type Leveraged Strategies

Authors: Philippe Bertrand et Jean-Luc Prigent

Among leveraged funds, leveraged ETFs are designed to achieve multiple exposure (e.g., twice) to some financial index returns, on a daily basis. In this paper, we provide and analyze various properties of the value process of a leveraged ETF. We examine its main statistical properties and point out that there is some probability that the stock index price increases while, at the same time, the leveraged fund decreases. This is an event that is difficult to accept for an investor in such a fund. In the continuous-time framework, we prove an equivalence result stating that a leveraged ETF can also be viewed as a CPPI fund with a floor proportional to the portfolio value itself. Next, from a more practical point of view, we compare Leveraged ETFs and Leveraged CPPI having a specific variable leverage. This type of Leveraged CPPI portfolio is not fully equivalent to a Leveraged ETF because the leverage is reduced in falling markets as well as bounded from above. We derive a quasi explicit expression for the value of such Leveraged CPPI. Then, using Monte Carlo simulations, we compare the Leveraged ETFs and Leveraged CPPI return distributions by means of their moments as well as by relying on Omega and Kappa performance measures.

DATE PUBLISHED: 15/03/2013

VOLUME: 34

NUMBER: 1

Is the Market Portfolio Efficient? A New Test of Mean-Variance Efficiency when all Assets are Risky

Authors: M. Brière, B. Drut, V. Mignon, K. Oosterlinck, A. Szafarz

The market portfolio efficiency remains controversial. This paper develops a new test of portfolio mean-variance efficiency relying on the realistic assumption that all assets are risky. The test is based on the vertical distance of a portfolio from the efficient frontier. Monte Carlo simulations show that our test outperforms the previous mean-variance efficiency tests for large samples since it produces smaller size distortions for comparable power. Our empirical application to the U.S. equity market highlights that the market portfolio is not mean-variance efficient, and so invalidates the zero-beta CAPM.

DATE PUBLISHED: 15/03/2013

VOLUME: 34

NUMBER: 1

On the Bankruptcy Risk of Insurance Companies

Authors: Olivier Le Courtois et Rivo Randrianarivony

The fall of AIG proved that the insurance business is not immune to bankruptcy, contrary to the actuarial literature which postulates that insurance firms can survive forever. In this article we model the surplus process of an insurance firm firstly by a stable Lévy process, secondly by a double exponential compound Poisson process. We compute finite-time survival and bankruptcy probabilities under such hypotheses. To achieve this, we make use of the Wiener-Hopf factorization and compute bankruptcy formulas written in terms of inverse Laplace transforms. The Abate and Whitt, and Gaver-Stehfest algorithms are used to obtain numerical estimations. This article can be viewed as an illustration of a general approach to the bankruptcy of financial institutions.

DATE PUBLISHED: 15/03/2013

VOLUME: 34

NUMBER: 1

A Structural Balance Sheet Model of Sovereign Credit Risk

Authors: FRANÇOIS, Pascal ; HÜBNER, Georges ; SIBILLE, Jean-Roch

This article studies sovereign credit spreads using a contingent claims model and a balance sheet representation of the sovereign economy. Analytical formulae for domestic and external debt values as well as for the financial guarantee are derived in a framework where recovery rate is endogenously determined as the solution of a strategic bargaining game. The approach allows to relate sovereign credit spreads to observable macroeconomic factors, and in particular accounts for contagion effects through the corporate and banking sectors. Pricing performance as well as predictions about credit spread determinants are successfully tested on the Brazilian economy.

DATE PUBLISHED: 15/12/2012

VOLUME: 32

NUMBER: 2

Corporate Risk Management and Information Disclosure

Authors: Emmanuelle Gabillon et Jean-Claude Gabillon

In this paper, we propose a theory linking corporate risk management, information disclosure and cost of capital. We show that the hedging strategy of a value-maximizing firm can be an instrument of its disclosure policy. We emphasize that optimal hedging strategy does not systematically eliminate all risks but distinguishes between undesired risks that have to be hedged because they are a source of noise, and risks that should not be eliminated because they have an informational content. We show that optimal risk management, by eliminating noise, reduces the variability of the firm’s cost of capital, thereby creating value. Moreover, having shown that optimal hedging policy depends on whether hedge transactions are disclosed or not, we then discuss the optimality of disclosure requirements in hedge accounting standards.

DATE PUBLISHED: 15/12/2012

VOLUME: 33

NUMBER: 2

Ownership Structure and Board Characteristics as Determinants of CEO Turnover in French-Listed Companies

Authors: NGUYEN, Bang Dang

This paper investigates whether ownership structure and board characteristics determine CEO turnover in a sample of largest French-listed firms from 1994 to 2001. The results show that CEO turnover is negatively and significantly related to prior accounting and stock performance. Controlling for prior performance, ownership structure and characteristics of boards of directors impact the sensitivity of CEO turnover to prior performance. Firms with blockholders, high government ownership, two-tier boards, and larger boards are less likely to dismiss CEOs for poor performance. Institutional investors and their co-existence with large blockholders, do not impact the sensitivity of CEO turnover to prior performance

DATE PUBLISHED: 15/12/2012

VOLUME: 32

NUMBER: 2

Ownership, control and market liquidity

Authors: Edith Ginglinger et Jacques Hamon

We examine how ownership concentration and the separation of ownership and control affect secondary-market liquidity in France. We find that firms with a large insider blockholder exhibit significantly lower liquidity. However, different methods of enhancing control affect liquidity in different ways. Pyramid structures impair market liquidity. Double voting right shares, a French specific means of control enhancement rewarding long-term shareholders and restraining insiders from trading their shares, lead to increased liquidity, especially for family firms. Our results suggest that by using double voting rights to enhance their control, a transparent decoupling mechanism, rather than pyramids, an opaque decoupling mechanism, blockholders offer higher secondary-market liquidity to outside investors.

DATE PUBLISHED: 15/12/2012

VOLUME: 33

NUMBER: 2

The Performance of French LBO Firms: New data and new results

Authors: Gaspar, José-Miguel

This paper investigates the operating performance of French targets of Leveraged Buy-Out (LBO) transactions during the 1995-2005 period. To benchmark LBO performance, I use a propensity score methodology to find a suitable non-LBO matching pair. The study finds that after the deal, the representative LBO firm exhibits higher operating returns of 4% to 5% relative to its matching control. This finding seems mostly due to increased gross margins, productivity gains, and working capital efficiency gains. These findings are not particular to a certain type of targets and are unchanged if I use the industry of the LBO firm as a benchmark.

DATE PUBLISHED: 15/12/2012

VOLUME: 33

NUMBER: 2

Backtesting Value-at-Risk: From Dynamic Quantile to Dynamic Binary Tests

Authors: E-I. Dumitrescu, C. Hurlin, V. Pham

In this paper we propose a new tool for backtesting that examines the quality of Value-at-Risk (VaR) forecasts. To date, the most distinguished regression-based backtest, proposed by Engle and Manganelli (2004), relies on a linear model. However, in view of the dichotomic character of the series of violations, a non-linear model seems more appropriate. In this paper we thus propose a new tool for backtesting (denoted DB) based on a dynamic binary regression model. Our discrete-choice model, e.g. Probit, Logit, links the sequence of violations to a set of explanatory variables including the lagged VaR and the lagged violations in particular. It allows us to separately test the unconditional coverage, the independence and the conditional coverage hypotheses and it is easy to implement. Monte-Carlo experiments show that the DB test exhibits good small sample properties in realistic sample settings (5% coverage rate with estimation risk). An application on a portfolio composed of three assets included in the CAC40 market index is finally proposed.

DATE PUBLISHED: 15/06/2012

VOLUME: 33

NUMBER: 1

Hedge Fund Market Risk Exposures: A Survey

Authors: Lambert, Marie

This paper reviews the literature on Hedge Fund performance attribution. Hedge Funds follow very dynamic and leveraged strategies and invest massively in derivatives and illiquid securities. Consequently, these funds present linear but also non-linear relationships with market indexes. The article investigates the risk factors that have been used to capture the linear and non-linear comovements of Hedge Fund returns with passive indexes. The review especially discusses the significance of adding option-like or distribution-based factors to benchmark models. It moreover supports the evidence that multi-moment risk premiums could considerably improve the models traditionally used to evaluate Hedge Funds.

DATE PUBLISHED: 15/06/2012

VOLUME: 33

NUMBER: 1

Sophistication of Individual Investors and Disposition Effect Dynamics

Authors: Boolell-Gunesh S., Broihanne M-H., Merli M.

This paper analyses the disposition effect at an individual level by studying the trading records of 20 379 investors over 1999-2006. As in previous studies, we confirm a huge heterogeneity among investors and we propose to explain these differences on the basis of financial sophistication and trading behavior proxies. In our new approach, we use direct sophistication variables: trading of foreign assets, derivative assets and bonds as well as trading on both tax-free and traditional accounts. We show that these variables significantly reduce the level of the disposition effect. Furthermore, based on a dynamic panel data analysis, we question investors’ ability to correct their bias over time. Results show that individual investors’ disposition effect decreases over time and that this decrease is partly caused by sophistication variables.

DATE PUBLISHED: 15/06/2012

VOLUME: 33

NUMBER: 1

Misunderstanding risk and return?

Authors: LIOUI, Abraham ; PONCET, Patrice

In a seminal contribution, Campbell (1996) [Campbell, J., 1996, Understanding Risk and Return, Journal of Political Economy 104(2), 298-345] proposed a methodology based on a VAR(1) process to test Merton’s Intertemporal CAPM. Innovations in predictors of portfolio returns are estimated and used as risk factors in an asset pricing model. One key element is the triangularization of the VAR system used to obtain orthogonal innovations. We show that this procedure makes the cross-sectional prices of risk associated with the predictors non identifiable. This is because they depend on the arbitrary ordering of the variables in the VAR. Moreover, since the factors are orthogonal to the market and to one another, the comparison with alternative multi-factor models is problematic. To illustrate, we revisit recent results that allegedly showed that innovations in the predictors drive the two Fama-French factors out in the cross section of portfolio excess returns and concluded that HML and SMB proxy for time-varying investment opportunities. We show that these results are mainly a statistical artifact of the methodology used to obtain orthogonal innovations.

DATE PUBLISHED: 15/12/2011

VOLUME: 32

NUMBER: 2

The Link between Social Rating and Financial Capital Structure

Authors: GIRERD-POTIN, Isabelle ; JIMENEZ-GARCÈS, Sonia ; LOUVET, Pascal

This article focuses on the link between a firm’s corporate financial structure and its social rating. We propose a new general model showing that less socially engaged firms issue more debt in order to avoid the financial market penalties experienced by non-socially responsible firms. With growing investor interest in social responsibility, these non-SR firms bear a higher financing cost when issuing equity capital. However, they can issue debt at the same cost as their SR counterparts given that banks do not take into account SR criteria in their interest rate determinations. Debt will thus be preferred by non-socially responsible companies while socially responsible firms take advantage of issuing equity capital. We tested the main implications of our model on the European market. Our sample consists of 562 firms which were rated by the Vigeo rating agency from 1999 to 2007. We use regression methodology to study the link between a firm’s debt ratio and its social rating. Our regressions used for explaining firm debt ratios include various control variables (as explanatory variables) such as bankruptcy costs, tax rates, agency and adverse selection variables. Our results show that European firms with a lower social rating tend to exhibit a higher or increasing debt ratio over the period 1999-2007. In particular, when considering the top and bottom quartile firms in term of their social rating, a firm’s social rating has a negative and highly significant influence on its debt ratio. Moreover, we get a significant and negative link between the debt ratio variation and each social dimension rating, except the environmental and the community involvement ones. Globally, our results seem to show that debt financing is a way for firms with low social commitment to avoid the equity market penalty.

DATE PUBLISHED: 15/12/2011

VOLUME: 32

NUMBER: 2

A survey of 'culture and finance'

Authors: REUTER Charles H. J.

In this research article, peer-reviewed academic journals in the area of finance have been screened to investigate the recent rise in interest for “cultural approaches”. The aim has been to let the definitions emerge from the screening process; thus, building a field-based analysis about “culture” in finance, and its operationalization. The results of that screening are as follows: firstly, the concept of “culture” is mainly connected to the notion of “national cultures”. Secondly, the survey shows that “culture” is now used in a very large range of financial research areas: from the study of international financial flows, to corporate financial management, through to the analysis of the development, efficiency and robustness of stock markets and financial macro-structures. Thirdly, a marked polarization has been noted: some approaches rely on “national cultural indices” (dimensionalism), while others generally provide no definition of “culture”. Taken together, these other approaches provide a fuzzy view, and no consistent framework emerges to compete with dimensionalism. As a consequence, the review, presented here, is extended to all dimensionalist work that can be identified in the field of finance, which provides a fourth result: the only framework with current generality in finance is not likely to be adapted as a unifying model anytime soon. Overall, the research contributes to a preliminary roadmap for cross-referencing with other disciplines; it suggests the adoption of backward definitions, and the building upon of complementarities in existing approaches, including, in particular, dimensionalism, trust, religions, or, still, the idea of “culture”, as layers, derived, in particular, from recent advances in cognitive sciences.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Are Jumps Contagious? An Empirical Investigation of Jumps Transmission Mechanisms in the Nasdaq Sector Indexes

Authors: ANÉ Thierry, MÉTAIS Carole

This article relies on the comparison of the realized variance and the realized bipower variation to provide a nonparametric extraction of jumps in Nasdaq sector indexes. It proceeds with their empirical analysis along two directions: intensity and size. Whereas the jump intensity appears to be sector-specific, the average jump contribution to the total variance is approximately constant across sectors. Moreover, unlike volatility, jumps do not cluster through time. A multivariate analysis reveals that jump arrivals are significantly linked even though the contemporaneous occurrence of discontinuities does not increase the average jump size. Finally, despite their interdependence, jumps do not seem to be very contagious and few spillover effects can be observed.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Capital Structure Decisions of French Very Small Businesses

Authors: AKTAS, Nihat ; BELLETTRE, Ingrid ; COUSIN, Jean-Gabriel

Very small businesses (VSB) experience financing constraints unlike those encountered by larger companies; however, they are rarely studied. Their unique characteristics, including the important information asymmetry they suffer and the predominant role of their shareholder-manager, may be well suited to a pecking order theory framework as a means to analyze their capital structure decisions. Specifically, VSB financing choices appear to follow a hierarchical order, such that they prefer internal to external financing and debt to stock issuance. Using a sample of 393,662 firm-year observations from 56,605 individual French VSB, this study shows that the pecking order theory can explain most of their financing decisions. In addition, a change in debt relates asymmetrically to financing deficit. Firms with a positive deficit rely almost entirely on debt for financing, whereas firms with a negative deficit (excess of financing) behave more conservatively and are less likely to repay their debts spontaneously in advance.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Report of Editors of FINANCE for years 2009 & 2010

Authors: DERRIEN François, MORAUX, Franck

This report aims at exposing official statistics about Finance – the official publication of the French Finance Association. For this first report, we will analyze a couple of years 2009 and 2010 and present first some elements on the Submission process and then turn to some descriptive statistics related to publications. In this report, we want to mention.

DATE PUBLISHED: 15/06/2011

VOLUME: 32

NUMBER: 1

Dynamic strategies when consumption and wealth risk aversions differ

Authors: SIX, Pierre

This paper focuses on the consequences on asset allocation of an empirical fact outlined in a recent survey of the literature about risk aversion (Meyer and Meyer, 2005): Investors are more risk averse toward consumption than they are toward wealth. We demonstrate that this empirical fact can be assessed with the study of a single financial variable. This variable measures the share of wealth that investors set aside to satisfy their future consumption. We show that this variable depends on wealth only when the empirical case is considered. Our findings build on some methodological results developed by Karatzas et al. (1987) as well as insights provided by Wachter (2002) and Munk and Sørensen (2007) for the restricted setting in which risk aversions are equal.

DATE PUBLISHED: 15/12/2010

VOLUME: 31

NUMBER: 2

How to get a syndicated loan fast? The role of union composition and organization

Authors: GODLEWSKI, Christophe J.

We empirically investigate the organizational determinants of the speed of a loan syndication process, with a particular focus on the influence of syndicate composition and organization. Indeed, the major advantage of syndicated lending is the speed with which the required funding can be obtained, while syndication composition and organization are considered as crucial for successful syndication. In a cross-country framework, we show that syndicate composition and organization characteristics clearly matter for the duration of the syndication process and therefore for borrower satisfaction in terms of the speed of obtaining the necessary funding. In particular, a syndicate composition and organization adapted to the specific agency problems of syndication, with numerous, reputable and experienced arrangers holding a larger portion of the loan and with more lenders from the same country as the borrower reduces the duration. Furthermore, past relationships between lenders or arrangers and borrowers allow for a faster syndication process as well.

DATE PUBLISHED: 15/12/2010

VOLUME: 31

NUMBER: 2

Money and Asset Prices in a Production Economy

Authors: LIOUI, Abraham ; PONCET, Patrice

We generalize the monetary economy with cash and credit goods pioneered by Lucas and Stokey (1983, 1987) to the case of a neoclassical production economy. Assuming a fairly general continuous time stochastic process for real capital returns, we show that money non-neutrality is generic, even though the money growth rate is i.i.d. and the representative agent’s utility is log separable. We also show that the capital to wealth ratio plays a key role in the transmission mechanism by which monetary policy affects the dynamics of all real variables, in particular those of the pricing kernel and of asset excess returns. We finally provide some empirical evidence that supports the hypothesized influence of the capital to wealth ratio on the US equity market premium.

DATE PUBLISHED: 15/12/2010

VOLUME: 31

NUMBER: 2

Employee's investment behaviors in a company based savings plan

Authors: AUBERT, Nicolas ; RAPP, Thomas

This paper investigates the investment behaviors of 44,649 employees working in a CAC 40 index listed company. The company savings plan offers its employees a choice among various asset categories generally listed by financial institutions. We first describe employees’ saving behaviors for each asset category offered within the company savings plan. We then focus on the individual determinants of employees’ participation in each asset category and the total amount invested in each asset category. We finally investigate the individual determinants of portfolio breadth in terms of number of funds selected and number of asset categories selected. We document extreme saving strategies such as high investment in company stocks. We find the existence of a positive association between the number of funds offered, and the number of funds chosen within the plan. Our results emphasize how several proxies of human capital are associated with company-based investment strategies.

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Exchange Options when One Underlying Price Can Jump

Authors: QUITTARD-PINON, François ; RANDRIANARIVONY, Rivo

Many problems in life insurance and finance can be described in terms of exchange options. These contracts give their holders the right to exchange an asset against another one at some specified later date. Exchange options were introduced in the classical diffusive framework where an explicit formula can be obtained for the price. This article extends this framework by taking jumps into account. In the particular case where one asset follows a jump diffusion model, the present authors present two alternative approaches for the pricing of these exchange options. The first one is a complete probabilistic approach where a quasi-closed form formula can be obtained. The second one is based on the generalized Fourier transform approach. With the latter, this article gives a general methodology for pricing exchange options when one underlying can jump. This methodology can then be used in many areas such as the study of guaranteed funds in life insurance.

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Mathematical Methods for Financial Markets

Authors: JEANBLANC, Monique ; YOR, Marc ; CHESNEY, Marc

Mathematical Methods for Financial Markets succeeds to be both an excellent finance textbook and an excellent maths textbook. Contrary to what the profane may believe, it is therefore not just a textbook in financial mathematics or in mathematical finance. The enlighten reader shall be able to find in this book essential elements to understand options markets...

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Volatility regimes and liquidity co-movements in cap-based portfolios

Authors: BEAUPAIN, Renaud ; GIOT, Pierre ; PETITJEAN, Mikael

In contrast with prior studies focused on market-wide liquidity co-movements, we study class-wide liquidity co-movements and condition the analysis on volatility regimes using the Markov switching methodology. By defining three regimes of volatility (low, normal and high), we can investigate whether, and to what extent, liquidity co-movements in cap-based portfolios are affected by volatility fluctuations. As our analysis points out, class-wide shocks dominate stock-specific shocks in low volatility regimes for both large and mid caps. For small caps, cross-sectional statistical evidence of liquidity co-movements is weak in both high and low volatility regimes. Evidence indicates that failure to recognise the importance of volatility to determine class-wide variations in liquidity could significantly alter the performance and risk of size-based portfolios.

DATE PUBLISHED: 15/06/2010

VOLUME: 31

NUMBER: 1

Dynamics of Implied Distributions: Evidence from the CAC 40 Options Market

Authors: KERMICHE, Lamya

This paper discusses the dynamics of the entire risk-neutral density, based on a Principal Component Analysis (PCA) of distribution curves calculated using a moneyness metric. The PCA revealed a limited number of factors that influence these dynamics. This paper outlines the time series of these factors and shows that at least one of them, displaying a strong correlation with the distribution variance, contains jumps. These findings are consistent with recent research showing that a jump component exists in the shock factors affecting implied volatility surfaces. Finally, this paper gives an example of how these findings can be applied to options portfolio hedging.

DATE PUBLISHED: 15/12/2009

VOLUME: 30

NUMBER: 2

Idiosyncratic Volatility Change and Event Study Tests

Authors: AKTAS, Nihat ; DE BODT, Éric ; COUSIN, Jean-Gabriel

The idiosyncratic volatility is a key input to the standard event-study method. The recent literature has suggested that the idiosyncratic volatility is not stable through time. This paper investigates the extent to which the event-study method is affected by this economic phenomenon. Using both simulation and real dataset analyses, we show that standard event-study methods suffer from a significant loss of power in the presence of increasing idiosyncratic volatility, as intuition would suggest. This affects the comparability of event study results obtained in two different empirical contexts (time periods or geographical zones). Therefore, to compare results between high and low regime of idiosyncratic volatility on a fair ground, everything else being equal, the ratio of the sample sizes needs to be equal to the ratio of the idiosyncratic variances in the two contexts.

DATE PUBLISHED: 15/12/2009

VOLUME: 30

NUMBER: 2

Is employee ownership so senseless

Authors: AUBERT, Nicolas ; GRAND, Bernard ; LAPIED, André ; ROUSSEAU, Patrick

Since Enron and the ruin of thousands of its employees, employee ownership is harshly criticized. Investing savings in employer’s stock would be equivalent to bet on only one asset. Moreover, employee ownership’s debated efficiency would not justify employers to grant company stock to their employees. Still, employee ownership is put in place by thousands of companies and withhold by millions of employees throughout the world. This paper considers a moral hazard setting where a risk neutral entrepreneur grants company stock to its risk averse employee as an incentive. We show that there is an optimal transfer of employee ownership that satisfies employee’s risk preference and has an incentive effect. We thus bring about rational argument in favor of employee ownership.

DATE PUBLISHED: 15/12/2009

VOLUME: 30

NUMBER: 2

An Empirical Analysis of the Firm's Reorganization Decision

Authors: FISHER, Timothy C. G.; MARTEL, Jocelyn

While the bankruptcy framework introduced in the seminal work of
Bulow & Shoven, later extended by White, has been the foundation for
theoretical work in the area for the last 20 years, it has never been
empirically tested. The paper empirically examines the liquidationreorganization decision using micro data on 640 bankrupt firms in Canada. Results are generally supportive of the Bulow-Shoven-White framework: the probability of reorganization increases with the level of free assets, the amount of debt reduction, and firm size while it decreases with the firm’s liquidation value. Results also show that the BSW framework does not provide a complete picture of the firm’s reorganization decision. In particular, the relative size of Crown (government) claims, the legal form of the firm, and the asset/debt ratio are also significant determinants of the reorganization decision.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Disposition effect, investor sophistication and taxes: Some French Specificities

Authors: BOOLELL-GUNESH, S.; BROIHANNE, M. H.; MERLI, M.

We investigate the presence of the disposition effect for 90 244
individual investors using a unique large brokerage account database
between 1999 and 2006. Our main results show that individual 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. Taking French specificities such as, the way short sales are realized and the existence of tax free account (PEA account) into account, show that: a) the behavioral bias is not eliminated for sophisticated individual investors; b) the change of “tax account type” does not imply any change in investors’ behavior.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Optimism and overconfidence investors' biases: a methodological note

Authors: FABRE, Bruno; FRANÇOIS-HEUDE, Alain

In literature, there are little evidence about interactions and respective
roles of optimism and overconfidence on characteristic variables
of cash-flows like mean and variance [Barberis and Thaler (2003)].
The starting point of this paper consists in explaining the change between two dates of mean and variance of financial cash flows as a result of two biases: optimism and overconfidence of investors. The main conclusion of this paper is the following one: all the profiles of decision- makers and thus their change in their behavior can be described by three parameters of biases which are the degree of overconfidence.

There are few studies in the literature that study the interactions and
the respective roles of optimism and confidence on the characteristic variables of cash flows such as the mean and the variance [Barberis and Thaler (2003)]. The starting point of this paper is to explain the passage of a mean and a variance from one date to another as the result of two biases: that of overconfidence and optimism. The main conclusion of this paper is the following: all the profiles of decision-makers and therefore their change of behavior can be described by three parameters: the degree of overconfidence, that of optimism in favorable and unfavorable states. These three parameters make it possible to describe the complex relationship that links these biases as well as their consequences on investors.

In a first part, the framework of the model is presented. In a second part, the biases of overconfidence and optimism are taken into account in the model but separately. In the next section, overconfidence is combined with optimism bias in order to obtain a more realistic model of investor behavior. In a final section, we abandon the decision-maker of economic theory to focus on the case where only a portion of investors are victims of these behavioral biases.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Venture Capital Performance: The Disparity Between Europe and the United States

Authors: HEGE, Ulrich; PALOMINO, Frédéric; SCHWIENBACHER, Armin

This paper compares the success of venture capital investments in the United States and in Europe by analyzing individual venture-backed companies and the value generated within the stage financing process. We document that US venture capitalists generate significantly more value with their investments than their European counterparts. We find differences in contracting behavior, such as staging frequency and syndication, and evidence that they help to explain the observed performance gap and we report a substantial unexplained residual. We find that US venture funds investing in Europe do not perform better their European peers. European Common Law and Civil Law countries exhibit comparable levels of venture performance, and differences in stock market development or tax subsidies in favor of venture investments are unrelated to performance differences. European IPO exits from venture investments yield returns similar to the US, while trade sale exits weakly underperform. We attribute the overall performance gap essentially to the segment of poorly performing companies.

DATE PUBLISHED: 15/06/2009

VOLUME: 30

NUMBER: 1

Calibration of options for three mixed diffusion and jump models

Authors: QUITTARD-PINON, François; RANDRIANARIVONY, Rivo

This article presents calibration of European options using a non-Gaussian setting. In particular, the authors consider three jump diffusion models, the classical Merton [1976] and Kou [2002] processes and another one which extends Kou to the case of multiple jumps. The pricing methodology rests on a very efficient Fourier framework, which permits calibrations in a short computational time. This is particularly advantageous in the multiple jump case. This article is an invitation to use non-Gaussian models in option pricing and calibration.

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

Transparency and market microstructure: a literature review

Authors: MAJOIS, Christophe

This article offers an extensive review of the market microstructure literature dealing with the issue of transparency on financial markets. We survey the theoretical, empirical and experimental contributions on both pre-trade and post-trade transparency. One section is devoted to transparency on fixed-income markets. It appears that a minimum level of transparency is necessary for the well-functioning of financial markets, but also that a certain degree of opacity may benefit market efficiency and liquidity. Those results of the literature are used to assess MiFID rules regarding transparency.

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

A modeling of the implied volatility surface by jump process

Authors: KERMICHE, Lamya

The aim of this paper is the study of the dynamics of CAC40 options implied volatility surface. Using a functional form of Principal Component Analysis, based on a Karhunen-Loève decomposition, we isolate and analyse principals shocks factors influencing the surface. Our results suggest different behaving for short and long term volatilities: short term volatilities are well represented by a two-factor model, while three factors are necessary for long term volatilities. We obtain an orthogonal base, in which we project the implied volatility surface. Studying the time series of the obtained factors, we show that these are well represented by jump processes, particularly the first factor, which represents the global variation of the implied volatility surface. Actually, our simulations indicate that adding a jump component significantly improve the prediction power of the model.

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

“The Calculus of Retirement Income.” Financial Models for Pension Annuities and Life Insurance »

Authors: QUITTARD-PINON

DATE PUBLISHED: 15/12/2008

VOLUME: 29

NUMBER: 2

"The Calculus of Retirement Income. Financial Models for Pension Annuities and Life Insurance"

Authors: MILEVSKY, Moshe A.

The article reviews the book "The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance," by Moshe A. Milevsky.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

Errors in Canadian financial asset pricing variables and models

Authors: CARMICHAEL Benoît; COËN, Alain; L'HER, Jean-François

This paper sheds a new light on Fama and French (1993) and Carhart (1997) multifactor models estimation focusing on the possibility of errors-in-variables. We use monthly data for the Canadian stock market from July 1960 to December 2004. Fama and French (1997) conclude that "estimates of the cost of equity for the three-factor model of FF (1993)" are imprecise. Our results show that this imprecision is more severe in presence of measurement errors. We suggest to use Dagenais and Dagenais (1997) higher moments estimator to deal with this problem. This estimator has the advantages of being easy to compute and to require no extraneous information. We show that estimates of the cost of equity on the Canadian stock market obtained with Dagenais and Dagenais estimator sharply differ from biased OLS estimates. This approach revisits performance attribution and abnormal performance (α).

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

The Order Book: a literature review

Authors: MOINAS, Sophie

For a few decades, there has been a proliferation of markets organized as electronic limit order books. This development has spurred considerable interest and raises several questions about so-called order-driven markets". Providing an answer to these questions may help regulators as well as practitioners. In order to understand what is at stake, this article proposes a literature review to present the characteristics of a limit order market and its performance.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

Multiple Potential Payers and Sovereign Bond Prices

Authors: OOSTERLINCK, Kim; URECHE-RANGAU, Loredana

Sovereign bonds are usually priced under the assumption that only the issuer may be responsible of their repayment. In some cases however, bondholders may legitimately expect to be repaid by more than one agent. This paper first discusses the theoretical financial implications stemming from an infrequent and challenging situation, namely the existence of multiple potential payers. Then, through a historical precedent, the 1918 Russian repudiation, the paper confirms that the existence of multiple payers has a diversification effect which lowers the volatility of the bond price and increases its value. These results are strengthened by a comparison with a closely related standard case of default.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

An Evaluation of Backtesting Procedures “All is for the Best in the Best of All Worlds” (French)

Authors: HURLIN, Christophe; TOKPAVI, Sessi

This paper proposes an evaluation of backtests that examine the accuracy of Value-at-Risk (VaR) forecasts. It is well known that VaR backtesting procedures outlined by the Basel Committee for Banking Supervision have limited power to control the probability of accepting an incorrect VaR forecast. In this study, we propose an original approach based on the replication of these tests on six different VaR forecasts (parametric or non parametric) for a given asset. We show that backtests generally lead to not reject the accuracy of all (or most of) these different forecasts. In other words, most of VaR forecasts are likely to be considered as valid.

DATE PUBLISHED: 15/06/2008

VOLUME: 29

NUMBER: 1

Are IPOs still a Puzzle? A Survey of the Empirical Evidence from Europe

Authors: Emmanuel Boutron ; Jean-François Gajewski ; Carole Gresse ; Florence Labégorre

This survey aims at appraising the empirical research conducted on the European IPO markets as of the current date, and at determining to what extent IPO theories explain European IPO patterns. To that end, we first describe the going public process in Europe, its recent developments and its specificities in comparison with the organisation of American primary markets. Second, we review the empirical evidence on initial underpricing, long-term IPO performance and IPO-mechanism efficiency, based on European data, and we put it in perspective with the IPO theoretical literature.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

Business Risk Targeting and Rescheduling of Distressed Debt

Authors: Franck Moraux ; Patrick Navatte

This article reconsiders rescheduling of distressed debt and the period preceding the financial reorganization. It reveals that the new equity price is a quasi-concave function of the firm's assets volatility and that there exists an optimal strategy for equity holders, which consists in targeting a specific business risk level. Simulations show that the volatility shift does not necessary cause opportunity costs for creditors. We question the timing of the business risk adjustment and address the reciprocal influence of stake holders before and at the reorganization. All these extensions essentially yield the same conclusion. When debt rescheduling is possible, there exists, some time before a default, a finite business risk level valuable to target.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

The impact of admission to listing on the economic performance of companies

Authors: Stéphanie Serve

This article investigates the change in operating performance of 115 firms that went public on the French New Market over the period 1996-2000. A significant decline in operating performance subsequent to the Initial Public Offering (IPO) is found. Companies appears to sustain sales growth but not capital expenditure after the IPO. Additionally, there is a significant negative relation between post-IPO change in operating performance and equity retention by the original ownership.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

Credit Spreads and Interest Rates

Authors: Jean-Claude Gabillon

In standard risky debt models the credit spreads are, apparently, inversely related to the level of the interest rates. An increase in r tends to reduce the probability of a default because of the effect on the upward drift of the risk-neutral process for the firm value V. We show, with a cash flow approach in a one factor model and in a two factors model, that this analysis is incomplete and that, in structural models, credit spreads widen as interest rate increase, at the opposite of the empirical evidence.

Empirically, a narrowing of credit spreads generally seems to accompany an increase in interest rates. Standard structural models for valuing risky debt seem to explain this relationship quite well. The apparent reason for this result lies in the increase in the drift of the risk-neutral process caused by an increase in the interest rate. It has the effect of reducing the risk-neutral probability of default. But we show, using a cash flow approach, that an increase in the interest rate actually leaves the drift of the risk-neutral process unchanged in standard one-factor structural models. Moreover, it lowers the instantaneous value of the firm. In the end, the risk-neutral probability of default is actually increased. Standard models cannot therefore directly justify an inverse relationship between interest rates and credit spreads. We present a two-factor, cash-flow oriented model in order to analyze the problem in the presence of dual operating and interest rate risk. The conclusions are similar. The model highlights, in particular, the impact of interest rate fluctuations on drift and on the volatility of the company's value. We clarify the concept of stochastic sensitivity in this context of risky debt.

DATE PUBLISHED: 15/12/2007

VOLUME: 28

NUMBER: 2

Nonlinear dynamics of G7 stock markets: an application of STAR models

Authors: Fredj Jawadi; Yosra Koubbaa

One of the debates of topicality is focused around the study of the structure of stock prices dependency. The search of a specification of this dependency and a representation of underlying dynamics has been the subject of several empirical studies. These studies were primarily centered on the definition of the functional form of the process underlying the dynamics of prices. The idea consists of adapting the nonlinear oscillations theory to economic phenomena since this type of modeling coincides with the evolution of economic and financial time series. The reflection was essentially led within the time framework and few studies are related to the specification of nonlinearity through tests of market efficiency, taking into account the heterogeneity of agents and the asymmetry due to transaction costs. The answer is not obvious because the approaches linarity-nonlinearity, efficiency-inefficiency, dependence-independence are not mutually exclusive. This paper explores the stock market dynamics. For this purpose, we test the nonlinear contribution of the STAR models in modeling stock prices dynamics. To do so, we test the independence assumption versus the nonlinear dependence assumption. In particular, we propose to model the time series of stock prices in the framework of Smooth Transition Autoregressive Models (STAR). They allow to capture the nonlinearity component, by using some recent statistical and econometric tools, and to analyze the short-run dynamics of prices.

One of the current debates focuses on the study of the dependency structure of financial asset prices. The search for a specification of this dependency and a representation of the underlying dynamics has been the subject of several empirical studies. These works have essentially focused on the definition of the functional form of the process underlying price dynamics. The idea is to adapt the theory of non-linear oscillations to economic phenomena since this type of modeling coincides with the evolution of financial series. The reflection has been mainly conducted in the temporal framework and few studies have focused on the specification of non-linearity through financial market efficiency tests, taking into account the heterogeneity of agents and the asymmetry due to the presence of transaction and information costs. The answer is not obvious in itself because the linearity-non-linearity, efficiency-inefficiency, dependence-independence approaches are alternatives but exclusive. Nevertheless, this work aims to present a personal point of view on the underlying problem of stock market dynamics. More specifically, the desire to find an economic meaning to the rejection of linearity led us to test the hypothesis of independence against the alternative of non-linear dependence. To this end, we propose to model stock market series using STAR (Smooth Transition Autoregressive Models) regime-switching models in order to reproduce the nonlinearity present on average while using recent statistical tools and econometric tests to examine the dynamics of stock prices in the short term.

DATE PUBLISHED: 15/06/2007

VOLUME: 28

NUMBER: 1

Complementarity between bank debt and bond debt: an interpretation in terms of signals

Authors: Frédéric Lobez ; Jean-Christophe Statnik

In this work, we show how complementary bank debt and bond debt are. Banks distinguish themselves from the bond market in the sense that they are the best evaluators of firms' riskiness. Due to market power, bank rates are therefore uninformative and also more expensive than bond rates. In a context of adverse selection, firms can signal their quality to the bond market by using the size of bank debt. We show within this framework that the less risky the firm is, the larger the part of bank debt in its whole financing. Then, we study the trade-off between the previous signalling equilibrium (using both bank debt and bond debt) and an exclusive bond issue with fixed costs. We show that the exclusive bond issue is used by both the firms of best qualities and worst qualities: the first type wishing cheaper financing and the second type being reluctant to signal its quality. The firms of medium qualities prefer to negotiate mixed financing (bank debt and a bond issue).

DATE PUBLISHED: 15/06/2007

VOLUME: 28

NUMBER: 1

Anomalous Price Behavior Following Earning Surprises: Does Representativeness Cause Overreaction

Authors: Michael Kaestner

Behavioral finance aims to explain empirical anomalies by introducing investor psychology as a determinant of asset pricing. Two kinds of anomalies, namely underreaction and overreaction, have been established by an impressive record of empirical work. While underreaction defines a slow adjustment of prices to corporate events or announcements, overreaction deals with extreme stock price reactions to previous information or past performance. This study investigates current and past earnings surprises for listed US companies over the period 1983-1999. It provides evidence that investors exhibit long-term overreaction to past, highly unexpected, earnings surprises. Investors tend to overestimate (underestimate) future earnings after extreme positive (negative) earnings surprises. As, on average, these extreme past surprises are not confirmed by subsequent earnings figures, they are followed by a correction of the initial overreaction at the date of the subsequent earnings announcement. Moreover, the longer the similar earnings surprise series, the higher the subsequent correction, suggesting that representativeness may cause this overreaction phenomenon.

DATE PUBLISHED: 15/12/2006

VOLUME: 27

NUMBER: 2

Industry specialization and performance: a study of mutual funds

Authors: Burlacu, Radu; Fontaine, Patrice; Jimenez-Garces, Sonia

A significant body of literature predicts that mutual funds with higher levels of private information are more specialized and deliver superior performance. We analyze the impact of private information (informational advantages) on mutual funds' performance for 224 U.S. sector funds and 1,135 U.S. actively-managed equity funds. Using the degree of industry concentration as a proxy for private information, we find a positive and significant relation between performance and private information for sector funds. This relation is less obvious for equity funds. Our results are robust to asset pricing models and benchmark specifications.

DATE PUBLISHED: 15/12/2006

VOLUME: 27

NUMBER: 2

Stock Prices, Inflation and Stock Returns Predictability

Authors: Butcher, Christophe

This paper considers a new perspective on the relationship between stock prices and inflation, by estimating the common long-term trend in real stock prices, as reflected in the earning-price ratio, and both expected and realized inflation. We study the role of the transitional deviations from the common trend in the earning-price ratio and realized inflation for predicting stock market fluctuations. In particular, we find that these deviations exhibit substantial out-of-sample forecasting abilities for real stock returns. Moreover, we find that this variable provides information about future stock returns at short and intermediate horizons that is not captured by other popular forecasting variables.

In this paper, we consider the relationship between stock prices and inflation in the United States from a new perspective. We estimate the common stochastic trend between real stock prices, as captured by the Earning Price Ratio (EPR), and expected and realized inflation. In particular, we study the role of transitory deviations from the common long-run trend between EPR and realized inflation in predicting stock market fluctuations. Our results show that these temporary deviations have out-of-sample predictive power on real stock returns. Our results also indicate that the information about future real returns contained in these deviations does not appear, at short and intermediate horizons, in the variables identified so far by the literature to predict stock returns.

DATE PUBLISHED: 15/12/2006

VOLUME: 27

NUMBER: 2

The risk premium in an international context: is the exchange rate risk appreciated?

Authors: Arouri, Mohamed El Hedi

In this article, we investigate whether exchange rate risk is priced. We use a multivariate GARCH-in-Mean specification and test alternative conditional international CAPM versions. Our results strongly support the international asset-pricing model that includes exchange rate risk for both developed and emerging stock markets. However, there are important time and cross-country variations in the relative size and dynamics of different risk premia.

The purpose of this paper is to study the determinants and dynamics of the equity risk premium in an international setting. To do so, we use a multivariate GARCH model and test a conditional version of the international CAPM with PPP deviations. The model is estimated under the assumption of perfect financial integration and then under the assumption of partial segmentation jointly for five markets: two developed markets, two emerging markets and the global market. Our results support the CAPM and indicate that exchange rate risk is remunerated internationally. However, we find that the exchange rate premium varies considerably over time and across markets.

DATE PUBLISHED: 15/06/2006

VOLUME: 27

NUMBER: 1

The role of deposit insurance in preventing bank runs: theoretical foundations and empirical studies

Authors: MADIES, Philippe

This paper reviews and discusses theoretical literature on banking panics and the different methods to prevent them. Deposit coverage is compared to alternative solutions, some of which have been implemented in the past: partial or total suspension of deposit convertibility (whether or not carried out by a clearinghouse association) and narrow banking. Two major theories on bank runs stand out. On the one hand, purely self-fulfilling banking panics resulting from a coordination failure between depositors. Such runs are ineffective in so far as they may drive sound banks to bankruptcy and require a high deposit coverage to be prevented. On the other hand, "information-based runs" theory shows that depositors, being informed of upcoming difficulties regarding their bank (information on fundamentals) run preventively to withdraw their funds. Policy implications will then be different. In order to test existing theories, empirical works have focused first on historical studies about past banking panics, notably in the United States. This has slow support to the "information-based runs" theory, even if the results are discussed. However, experimental research on self-fulfilling banking panics shows that such runs are recurrent and persistent phenomena. Besides deposit insurance, only a full coverage is an effective method to prevent such panics but a partial coverage is sufficient to curb "information-based runs". Finally, empirical studies on recent banking crises find that explicit deposit insurance can have an adverse impact on bank stability, unless there exists a quality institutional environment and banking regulation.

This article first proposes to draw lessons from the theoretical literature on bank runs and on the means of preventing such phenomena. Deposit insurance will be compared to a certain number of alternative solutions, some of which have been observed in the past: partial or total suspension of deposit convertibility (within the framework of a clearinghouse association or not) and "narrow banking". It emerges that two conceptions of bank runs are opposed. First, bank runs can be purely self-fulfilling and result from a lack of coordination between depositors. They are inefficient in the sense that they can lead to the bankruptcy of healthy banks and require the implementation of highly protective deposit insurance to be avoided. Second, the theory of "informed runs" shows that depositors, informed of the upcoming difficulties of their bank (information on fundamentals), rush preemptively to withdraw their funds. Regulatory requirements are then different. To test competing theories, empirical work has first taken the form of historical studies conducted on past banking panics, particularly in the United States. The theory of "informed runs" emerges from this, even if the results remain controversial. However, experimental studies conducted on self-fulfilling banking panics show that these runs are recurring and persistent phenomena. To prevent such panics, deposit insurance must also offer depositors full coverage, even if high protection encourages depositors to be less vigilant and therefore leads to increased risk-taking by banks (moral hazard). On the other hand, partial coverage of depositors is a sufficient means of preventing "informed runs". Finally, empirical studies conducted on recent banking crises show that mandatory and highly protective deposit insurance can be a source of instability unless it is located in a quality institutional environment where banking supervision and banking regulation are exercised effectively. The effectiveness of the deposit guarantee cannot therefore be assessed independently of the regulatory framework in which it is inserted.

DATE PUBLISHED: 15/06/2006

VOLUME: 27

NUMBER: 1

News Intensity and Conditional Volatility on the French Stock Market

Authors: Cousin, Jean-Gabriel; De Launois, Tanguy

The relation between information flow and asset prices behavior is one of the key issues of modern finance. Our study investigates more closely the link between frequency of information arrivals and stock return volatility. It aims precisely to test empirically the mixture of distribution hypothesis and to check whether the stock returns distribution is driven by the frequencies of information arrivals on the Paris stock Exchange (Euronext). We analyze the impact of news on volatility at the firm-level. We opt for a model with two (Markov switching) regimes of volatility that we apply to all stocks pertaining to the CAC40 index from January 1999 to December 2003. We find a positive and significant but marginally decreasing impact of the daily frequency of information arrivals on the probability to be in a state of high volatility for each of the 40 companies considered. The subsequent model for panel data allows us to conclude that this impact crucially depends on the timing and the topic of the news release. Asymmetry and informational content issues are also investigated. Results are consistent with previous literature, although we show that any asymmetric effect disappears once the news informational content is accounted for.

Dans cet article, nous nous attachons à étudier avec précision, l'impact de l'arrivée d'informations publiques sur le processus générateur de prix des actifs financier, et plus particulièrement dans quelle mesure les changements dans le processus d'arrivée de l'information destinée aux investisseurs sont à l'origine des sauts de variances généralement observés. À l'aide d'un échantillon composé de l'ensemble des titres inclus dans l'indice CAC 40 sur la période du 01/01/1999 au 31/12/2003 et de la totalité des annonces Reuters spécifiques à ceuxci, nous répliquons dans un premier temps les travaux de Kalev, Liu, Pham et Jarnecic (2004) et démontrons que le flux d'informations publiques explique une grande partie de la persistance de la volatilité conditionnelle mise en évidence par les processus GARCH. Dans un second temps, nous introduisons les processus à changement de régime markovien afin de déterminer la probabilité qu'a le processus générateur des rentabilités de se trouver dans un régime à haute volatilité. Leur utilisation démontre alors l'impact positif et significatif, pour une grande majorité des titres étudiés, du nombre d'annonces quotidiennes sur la probabilité de se trouver dans un régime à haute volatilité. L'analyse en panel confirme ces résultats tout en contrôlant l'impact de la variance conditionnelle du portefeuille de marché et celui de l'indice sectoriel dont les titres font partie. De tels résultats confortent l'hypothèse de mélange de distributions de Clark (1973), et plus particulièrement l'intuition de Roll (1984) affirmant que le processus des rentabilités est un mélange de distributions guidé par la fréquence de l'arrivée d'informations. En divisant notre échantillon par catégorie de sujet d'annonces ou par la période durant laquelle elles sont publiées, nous mettons également en évidence le fait que les informations tombées durant les heures de cotation ont un impact plus important que celles publiées durant les heures de non cotation. Concernant le contenu de ces annonces, celles traitant des politiques gouvernementales ou de régulations sont celles ayant le plus d'impact sur la volatilité conditionnelle des titres, viennent ensuite les prévisions de résultats, et plus particulièrement les recommandations et commentaires d'analystes. Et enfin les annonces concernant les fusions et acquisitions qui paraissent bien, elles aussi, affecter significativement la volatilité des actions. Enfin, nous examinons également les effets asymétriques mis en évidence dans la littérature. Les résultats sont globalement identiques aux précédents travaux et les annonces négatives semblent, en moyenne, se situer de manière plus probable que les positives, dans le régime à forte volatilité. Néanmoins, une fois pris en compte le contenu informationnel moyen de l'ensemble des annonces publiées, cette asymétrie disparaît.

DATE PUBLISHED: 15/06/2006

VOLUME: 27

NUMBER: 1

Internal Capital Market Efficiency of Belgian Holding Companies

Authors: Gautier, Axel; Hamadi, Malika

In this paper, we raise the following two questions. (1) Do Belgian holding companies operate an internal capital market to transfer financial resources amongst their subsidiaries? And if yes, (2) is the internal capital market efficient? To answer the first question, we check if group cash flow is a determinant of the group members investment spending. The answer is positive if the holding company's subsidiary is affiliated to a coordination center and negative otherwise. To answer the second question, we evaluate if internal transfers are driven by efficiency. From our estimations, we cannot conclude that Belgian Holding companies have an efficient internal capital market.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

Is automotive leasing a risky business?

Authors: Schmit, Mathias

This paper is devoted to credit risk modelling issues of lease portfolios. It presents results on the default and loss given default performance of automotive leases and proposes specific solutions dealing with their most important characteristics including their large size, the ownership of leased assets by lessors and limited availability of information about lessees' financial situation. Probability density function of losses and VaR measures are estimated on the basis of a private database comprising a unique set of 35,861 individual automotive lease contracts issued between 1990 and 2000 by a major European financial institution. Results show that recovery rates in the automotive lease industry are high and further confirm that leasing is a relatively low-risk activity. A comparison with capital requirements stemming from the Basel Committee's proposed new framework also show that a wider recognition of physical collateral under Basel II would not only allow to better reflect the risk profile of automotive lease exposures but would also contribute to reduce the significant gap in capital requirements stemming from the different approaches of the proposed framework.

Cet article se consacre à la question de la modélisafion du risque de crédit pour les portefeuilles de crédit-bail automobile. Il expose les résultats relatifs aux performances des contrats de crédit-bail en termes de probabilité de défaut et de perte en cas de défaillance, et propose des solutions spécifiques tenant compte des caractéristiques les plus saillantes de ces portefeuilles : leur grande taille, le fait que la propriété des actifs reste aux bailleurs et le niveau limité d'informations disponibles quant à la situation financière des locataires. La fonction de densité des probabilités de pertes et les mesures VaR sont estimées grâce à une base de données privée comprenant un ensemble unique de 35.861 contrats de crédit-bail automobiles émis entre 1990 et 2000 par une importante institution financière européenne. Les résultats montrent que les taux de recouvrement observés dans l'industrie du crédit-bail automobile sont élevés et confirment le fait que cette activité est relativement peu risquée. Une comparaison avec des exigences en capital telles que dictées par la proposition du Comité de Bâle montre également qu'une plus large reconnaissance des collatéraux physiques sous Bâle II permettrait non seulement de mieux refléter le profil de risque des contrats de crédit-bail automobiles mais aussi de réduire l'écart significatif qui existe entre les exigences en capital des différentes approches de l'accord-cadre proposé par le Comité de Bâle.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

The dynamics of very high frequency volatility of long euro rates

Authors: Lespagnol, Charlotte; Teïletche, Jérôme

The aim of this text is to analyse the dynamics of European longrate volatility, as measured at various frequencies (intraday, daily). We identify and quantify the dimension of the diverse components of volatility: long memory and ARCH effects, seasonal effects, news announcements. Among the news, we highlight the role played by the US employment report and ECB announcements. The analysis is based on nearly two years of observations on the Euro Notionnel contract, sampled every five minutes. The comparison of the results with those obtained on the Euro Bund contract shows that results do not depend on competition problems of MATIF with EUREX.

L'objet de ce texte est d'analyser la dynamique de la volatilité des taux longs européens à différentes fréquences (intra-journaliers, quotidiens). Nous identifions et quantifions l'ampleur des différentes composantes de la volatilité : mémoire longue et effet ARCH, effets saisonniers, annonces de nouvelles économiques. Parmi ces dernières, nous mettons notamment en évidence le rôle joué par le rapport sur l'emploi américain et les annonces de la BCE. L'analyse est basée sur près de deux ans d'observations du contrat Euro Notionnel, échantillonnées toutes les cinq minutes. La comparaison des résultats avec ceux obtenus sur le contrat Euro Bund montre leur absence de dépendance aux problèmes concurrentiels du MATIF face à l'EUREX.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

On the use of nearest neighbors in finance

Authors: Guégan, Dominique; Huck, Nicolas

Nearest Neighbors is a nonlinear and nonparametric forecasting method regularly used in finance. This article questions how this method is used in the literature. We observe that the methods of selecting the size and number of neighbors by reconstruction of the phase space or by forecasting in the sample lead to altering the idea that founds the Nearest Neighbors method. Proposals for a better use are put forward.

DATE PUBLISHED: 15/12/2005

VOLUME: 26

NUMBER: 2

Fair value assessment of participatory contracts

Authors: Bernard, Carole; Le Courtois, Olivier; Quittard-Pinon, François

This study is dedicated to the valuation, in the presence of stochastic interest rates and default risk, of participating contracts guaranteeing the growth of an initial capital at a given interest rate and maturity. The participating contracts considered here are typical in the actuarial literature; yet, we can claim these are financial contracts, and indeed, they can be decomposed into sums of standard exotic options. To price them under a term structure of interest rates, we ground ourselves on the method elaborated by Collin-Dufresne and Goldstein [2001]; we display the interest and adequacy of this method by comparing our results with those obtained by means of Monte-Carlo simulations.

Cette étude est dédiée à l'évaluation, en présence de taux stochastiques et de risque de défaut, de contrats participatifs garantissant la rémunération d'un capital initial à un taux d'intérêt et à une échéance fixés au préalable. Les contrats participatifs considérés ici sont des contrats typiques au sein de la littérature actuarielle, mais l'on peut tout aussi bien considérer que ce sont des contrats financiers, et, en tout état de cause, ils se décomposent en sommes d'options exotiques standard. Afin de les évaluer en présence de taux stochastiques, nous nous fondons sur la méthode élaborée par Collin-Dufresne et Goldstein [2001] ; nous montrons l'intérêt et la justesse de cette méthode par comparaison avec des résultats obtenus par simulations de Monte-Carlo.

DATE PUBLISHED: 15/06/2005

VOLUME: 26

NUMBER: 1

Portfolio Insurance Strategies: OBPI versus CPPI

Authors: Bertrand, Philippe; Prigent, Jean-Luc

Portfolio insurance allows investors to recover, at maturity, a given percentage of their initial capital. This limits downside risk in falling markets and allows some participation in rising markets. Therefore, these properties prove the importance of such portfolio strategies. The two standard portfolio insurance methods are the Option Based Portfolio Insurance (OBPI) and the Constant Proportion Portfolio Insurance (CPPI). The paper analyzes and compares their performances and risk characteristics by means of various criteria such as some of their quantiles. We introduce in particular the comparison when both expected returns are equal and for that case, we provide the value of the corresponding multiple. Their dynamic hedging properties are also examined in the Black and Scholes framework. In particular, the paper shows that the insured percentage of the initial capital plays a key role. It is also proved that OBPI is a generalized CPPI.

L' assurance de portefeuille donne la possibilité aux investisseurs de récupérer à maturité un pourcentage donné de leur investissement initial. Ceci permet de limiter les risques de perte lorsque le marché financier baisse sensiblement tout en permettant de profiter des hausses éventuelles de ce dernier. Ces deux propriétés montrent en conséquence l'importance de telles stratégies de gestion de portefeuille. Les deux méthodes les plus usuelles sont la méthode à base d'options (OBPI) et celle fondée sur le coussin (CPPI). Le présent article analyse et compare leurs performances et leurs caractéristiques de risque au moyen de critères variés tels que ceux basés sur l'utilisation des quantiles. Nous introduisons en particulier la comparaison de ces deux méthodes lorsque leurs deux espérances de rendement sont égales et calculons dans ce cas le multiple correspondant. Leurs propriétés de couverture dynamique sont également examinées dans le contexte de Black et Scholes. Nous soulignons en particulier le rôle important joué par le pourcentage de capital initial garanti. Nous montrons également que la stratégie OBPI est une généralisation de la stratégie CPPI.

DATE PUBLISHED: 15/06/2005

VOLUME: 26

NUMBER: 1

Relevance of detecting outliers in GARCH models for modeling and forecasting financial data

Authors: Charles, Amélie; Darné, Olivier

In this study we apply an outlier detection procedure in a GARCH model to nine daily stock market indexes. We identify outliers for all the series and attempt to associate them to economic and financial events. We show that the detected outliers affect the normality coefficients, and mostly, the evidence for non-normality is reduced after correcting for outliers. We also find that GARCH models for outlier corrected series yield substantial forecasting improvement over GARCH models for the original returns.

Dans cette étude nous appliquons une procédure d'identification des outliers dans un modèle GARCH à neuf séries journalières d'indices boursiers. Des outliers sont identifiés dans toutes les chroniques et sont associés à des événements économiques et financiers. En outre, ces outliers affectent les coefficients de normalité, et leur correction permet d'une part de réduire, le plus souvent, la présence de non normalité, et d'autre part d'améliorer les prévisions de la volatilité lors d'une modélisation GARCH.

DATE PUBLISHED: 15/06/2005

VOLUME: 26

NUMBER: 1

An accurate analytical approximation for the price of a European-style arithmetic Asian option

Authors: Vyncke, David; Goovaerts, Marc; Dhaene, Jan

For discrete arithmetic Asian options the payoff depend on the price average of the underlying asset. Due to the dependence structure between the prices of the underlying asset, no simple exact pricing formula exists, not even in a Black and Scholes setting. In the recent literature, several approximations and bounds for the price of this type of options are proposed. One of these approximations consists of replacing the distribution of the stochastic price average by an ad hoc distribution (e.g Lognormal or Inverse Gaussian) with the same first and second moment. In this paper we use a different approach and combine a lower and upper bound into a new analytical approximation. This approximation can be calculated efficiently, turns out to be very accurate and moreover, it has the correct first and second moment. Since the approximation is analytical, we can also calculate the corresponding hedging Greeks and construct a replicating strategy.

Pour les options asiatiques arithmétiques discrètes le solde à l'échéance dépend d'une moyenne de cours de l'actif support. A raison de la structure de dépendance des prix de l'actif sous-jacent, il n'y a pas de formule simple pour l'évaluation de ces options même dans le cadre des hypothèses du modèle de Black et Scholes. La littérature récente fournit plusieurs approximations et bornes pour le prix de ces options. L'une de ces approximations consiste à remplacer la distribution de la moyenne des cours par une distribution ad hoc (i.e. lognormale ou gaussienne inverse) ayant le même couple : espérance, moment du second ordre. Dans cet article une approche différente est utilisée, elle combine une borne inférieure et une borne supérieure dans une nouvelle approximation analytique. Cette approximation, qui peut être calculée efficacement, se révèle très précise et, de plus, possède les vrais premier et second moments. Du fait de l'analycité de l'approximation il est possible de calculer les Grecs et de construire une stratégie de duplication.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Changes of probability measurement in finance and insurance: A synthesis.

Authors: Le Courtois, Olivier; Quittard-Pinon, François

This paper studies various ways of changing probability measures with applications to Finance and Insurance. Changes of numéraire and Esscher transforms are considered, just as pricing kernels which are, in a complementary direction, a mean of keeping a privileged probability measure. These approaches are compared and new insights on them are given. This article gives a unifying point of view and makes a synthesis on the subject.

Cet article présente diverses manières d'effectuer des changements de mesures de probabilité et leurs applications en finance et assurance. Les changements de numéraire et les transformées d'Esscher sont considérés, de même que les noyaux d'évaluation qui, de façon complémentaire, donnent les moyens de conserver une mesure privilégiée. Ces approches sont comparées et de nouvelles perspectives sont tracées. Cet article adopte un point de vue unitaire et réalise une synthèse sur ce sujet.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Deflators, Actuarial Discounting and Fair Values

Authors: Devolder, Pierre; Dominguez-Fabian, Inmaculada

The aim of this paper is on the one hand to present a self-contained and rigorous approach to deflators with explicit formulations for some classical financial environments and on the other hand to show how deflators can be applied to fair valuation of insurance liabitities. Deflators technnique is presented in discrete time models (single versus multiple periods, complete versus incomplete models) as well as in continuous time models (Black and Scholes model, Poisson models with jumps). As example of actuarial application, deflator concept is used to compute fair value of annuities where liabilities are linked to the financial performance of underlying assets.

Le but de cet article est d'une part de présenter une approche autonome et rigoureuse des déflateurs avec des formulations explicites pour quelques environnements financiers classiques, d'autre part de montrer comment les déflateurs peuvent être appliqués à l'évaluation équitable (fair value) des engagements des compagnies d'assurances. La technique des déflateurs est exposée aussi bien dans des modèles à temps discret (mono/multipériodes, complets/incomplets) que dans des modèles en temps continu (Black et Scholes, Poisson avec sauts). Comme exemple d'application actuarielle, le concept de déflateur est utilisé pour calculer la valeur équitable d'annuités où les engagements sont liés à la performance financière d'actifs supports.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Double impact: Credit risk assessment and collateral value.

Authors: Chabaane, Ali; Laurent, Jean-Paul; Salomon, Julien

This paper deals with credit portfolio risk analysis. The benchmark Basel II IRB approach relies on the independence between losses given defaults and default events. Nevertheless, empirical evidence shows that recorded values are likely to be lower when the number of defaults increases, such as in recession periods. We consider a model embedding Basel II that allows to deal with dependence between recovery rates and default events. We then study loss distribution for large credit portfolios. We show that both expected credit losses and standard risk measures such as credit VaR or Expected Shortfall tend to increase compared with the Basel II approach.

Cet article étudie l'influence du risque de collatéral dans la quantification du risque d'un portefeuille de crédits. L'approche IRB du Comité de Bâle constitue la référence en la matière et repose sur l'hypothèse d'indépendance entre taux de défaut et taux de perte, alors qu'on constate pourtant que ces deux quantités ont tendance à augmenter concomitamment. Nous proposons donc un modèle qui englobe le modèle réglementaire et permet la prise en compte de ces effets de corrélation. Dans ce cadre, l'étude de la distribution de perte d'un portefeuille homogène de grande taille montre que l'approche réglementaire a tendance à sous-estimer et la perte moyenne et la charge de risque quantifiée par mesures de risque (Vatue-at-Risk, Expected Shortfall).

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Introduction to Special Issue on “Insurance and Finance.”

Authors: Gerber, Hans; Quittard-Pinon, François

The article discusses various reports published within the issue including one by Hans Bühlmann on multidimensional actuarial valuation and another by Pauline Barrieu and Nicole El Karoui on one type of hybrid derivative and the pricing and hedging of non-tradable risks on financial markets.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Multidimensional valuation

Authors: Bühlmann, Hans

The first part of the text is devoted to explaining the nature of insurance losses, technical as well as financial losses based on the technique of Multidimensional Valuation. The principle tool derived in this part is the Valuation Portfolio. The financial risk is then treated as the difference between the Portfolio of Assets and the Valuation Portfolio. One possibilty is to assess the financial risk by option pricing (Margrabe Option fo switch the Asset Portfolio for the Valuation Portfolio). The standard approach to cope with financial risk, Capital at Risk, is also studied.

La première partie de cet article explique la nature des pertes rencontrées en assurance, qu'elles soient techniques ou financières, en se fondant sur la technique de l'évaluation multidimensionnelle. L'outil principal utilisé dans cette partie est le portefeuille d'évaluation. Le risque financier est alors traité comme la différence entre le portefeuille d'actifs et le portefeuille d'évaluation. Une possibilité est d'évaluer le risque financier en utilisant la théorie de l'évaluation des options (Option de Margrabe permettant d'échanger le portefeuille d'actifs contre le portefeuille d'évaluation). L'approche standard consistant à aborder le risque financier par le Capital at Risk est également étudiée.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Optimal risk transfer

Authors: Barrieu, Pauline; El Karoui, Nicole

This article develops a methodology to optimally design a financial issue to hedge non-tradable risk on financial markets, in the general framework of convex risk measures. The modelling involves a minimization of the risk borne by issuer given the constraint imposed by a buyer who enters the transaction if and only if her risk remains below a given threshold. Both agents have also the opportunity to invest all their residual wealth on financial markets but may not have the same access to financial investments.

Cet article développe une méthodologie pour traiter de façon optimale de la couverture d'un risque non négociable sur les marchés financiers, dans le cadre général des mesures convexes du risque. La modélisation comprend une minimisation du risque supporté par l'émetteur étant donné la contrainte imposée par l'acheteur qui ne s'engagera dans la transaction que si et seulement si son risque demeure en deçà d'un seuil prédéterminé. Les deux agents ont également la possibilité d'investir toute la richesse résiduelle sur les marchés financiers mais peuvent ne pas y avoir le même accès.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Pricing insurance via stochastic control: Optimal consumption and terminal wealth

Authors: Young, Virginia R.; Zariphopoulou, Thaleia

An expected utility approach was recently introduced by Young and Zariphopoulou (2001) for the pricing of dynamic insurance risks. The valuation method is based on comparing the maximal expected utility functions with and without incorporating the insurance product; it is the dynamic analog to the principle of equivalent utility used in pricing static risks. In this paper, we generalize this work in two directions. First, instead of simply maximizing the expected utility of terminal wealth, we also allow for maximizing consumption during the investment period. The investment period is either fixed or random until the time of death of the insured. When making financial decisions, individual who wishes to consume more might spend less on insurance, but on the other hand, she might actually spend more in the future. Second, instead of considering a risky asset follows a geometric Brownian motion, we allow for risky assets that follow a diffusion process with general dynamics, as in Zariphopoulou (1999). This more general structure allows for models of statement stochastic volatility and mean-reverting processes.

Une approche de type utilité espérée a été récemment introduite par Young et Zariphopoulou (2001) pour l'évaluation du risque assurantiel. La méthode d'évaluation est basée sur la comparaison des utilités espérées maximales obtenues en incorporant ou non le produit d'assurance. C'est la version dynamique du principe de l'équivalent certain utilisée dans l'analyse mono-périodique du risque. Dans cet article cette extension est faite dans deux directions. D'abord, au lieu de considérer simplement la maximisation de l'utilité espérée de la richesse finale, celle de la consommation durant la période d'investissement est également prise en compte. L'horizon de gestion peut être soit certain soit aléatoire. En matière de décisions financières les individus mettent en balance des demandes concurrentes : par exemple, un individu qui désire consommer davantage pourrait dépenser moins pour s'assurer, mais, d'un autre côté, pourrait aussi augmenter ses assurances afin de protéger ses actifs pour pouvoir consommer plus dans le futur. Ensuite, au lieu de modéliser les prix des actifs par des mouvements browniens géométriques, des diffusions générales sont considérées. Ce cadre permet d'incorporer des modèles à volatilité stochastique et de considérer des processus avec retour vers la moyenne.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Some applications of Lévy processes in insurance and finance

Authors: Chan, Terence

The purpose of this paper is to review some problems related to exit times from a one-sided interval by Lévy processes, which arise in the context of models in insurance and finance which give rise to essentially the same mathematical question: first, the problem of calculating the probability of ruin in a risk model and second, the problem of pricing an American put option. Some results presented here have been known for some time, while others are new.

L'objet de cet article est d'examiner quelques problèmes liés au temps d'atteinte de certains processus de Lévy qui apparaissent dans des modèles de l'assurance et de la finance. Ils soulèvent fondamentalement la même question mathématique, mais prennent les deux formes suivantes selon qu'il s'agit d'un problème de finance ou d'un problème d'assurance : d'abord, comment calculer la probabilité de ruine dans le modèle assurantiel de risque, ensuite comment évaluer une option de vente américaine. Quelques-uns des résultats présentés ici sont déjà connus mais d'autres sont nouveaux.

DATE PUBLISHED: 15/12/2004

VOLUME: 25

NUMBER: 2

Diversification and Capital Structure of Multinational Enterprises: A Model of Regime Change

Authors: Imed Chakir

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

Estimation of margins on the auction of Treasury securities: the case of OATs over the period 1992-1997

Authors: Raphaële Préget

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

The catch basin algorithm applied to option valuation

Authors: Dominique Pujal et Patrick Saint-Pierre

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

Decision making in the pari-mutuel betting market: an empirical test

Authors: Marie-Hélène Broihanne

DATE PUBLISHED: 15/06/2004

VOLUME: 25

NUMBER: 1

Asset Pricing with asymmetric information: The case of conditionally Gaussian information structures

Authors: Detemple, Jérôme B.

This paper generalizes J. Detemple (2002) to economies with conditionally gaussian information structures. Our setting allows for stochastic volatility in the information technology, stochastic volatility of dividends, stochastic coefficients in the evolution of the drift of the dividend process and correlation between the dividend growth rate and changes in its drift. In this context we show the existence of a partially revealing rational expectations equilibrium. The equilibrium stock price is a function of publicly observed dividends and therefore fails to reveal any private information. The equilibrium interest rate reveals a noisy translation of the private information signal. Full revelation fails because uninformed agents are unable to distinguish private information from a private preference parameter of informed agents. In the partially-revealing equilibrium consumption and wealth are nonnegative at all times. We examine the informational efficiency of the bond market and the sources of interest rate volatility.

Cet article généralise les résultats de J. Detemple (2002) à une économie à structure d'information conditionnellement gaussienne. Le cadre d'analyse adopté permet de prendre en compte des volatilités stochastique dans la technologie d'information et dans le processus de dividendes, des coefficients stochastiques dans l'évolution de la dérive du processus de dividendes, et une corrélation entre le taux de croissance des dividendes et leur dérive. L'existence d'un équilibre à anticipations rationnelles partiellement révélateur est démontrée. Le prix d'équilibre des actions est une fonction des dividendes, dont les réalisations sont d'information publique, et en conséquence ne révèle aucune information privilégiée. Le taux d'intérêt d'équilibre, en revanche, révèle un signal bruité de l'information privée. La révélation incomplète provient du fait que les agents non informés ne sont pas capables de séparer l'information privée d'un paramètre non observé dans les préférences des agents informés. Dans l'équilibre à révélation partielle la consommation et la richesse sont non négatives à tout instant. L'efficience informationnelle du marché des titres obligataires et les sources de variabilité dans les taux courts sont étudiées.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Optimal employee shareholding contract and information asymmetries

Authors: De la Bruslerie, Hubert; Deffains-Crapsky, Catherine

The new French regulation on employee stock ownership plans gives a strong incentive to the awarding of stock to employees using a tax subsidy. The purpose of the article is to analyze conditions of a joint optimal contract between employees and shareholders. The setting of the optimal contract is based on the existence of an effort made by stimulated employees to increase the economic cash-flow of the firm once they are awarded stocks though an ownership plan. Two variables are outlined : the percentage of new stocks awarded to the employees and the discount in the issue price of theses stocks compared to the market price. We show that a process of negotiation is necessary between the employees and the managers acting for the shareholders. Two different situations are successively analyzed. In a risk neutral framework, the conclusion of an optimal joint incentive contract which creates wealth for both parties is not evidenced. Then, we have to take in account different sources of information asymmetries. Theses elements are necessary to converge to an optimal equilibrium in a more realistic framework including risk aversion. A process of negotiation leads to the partial disclosure of private information from one party to the other. The meaning of this equilibrium is not only based on the economic sharing of the new wealth but also on a process of mutual exchange of trustable and true economic information on both the effort possibilities and the profitability of the investment projects in the firm.

L'introduction du nouveau régime juridique d'épargne salariale (le Plan partenarial d'épargne salariale volontaire) incite fortement au développement de l'actionnariat salarié. L'objet de la recherche présente est de déterminer les conditions de la réalisation d'un contrat optimal d'actionnariat salarié. L'étude se situe dans le cadre de la théorie de l'incitation en privilégiant la relation d'agence entre actionnaires et salariés. La définition du contrat optimal prend en compte l'existence d'une fonction d'effort réelle conduisant à augmenter le cash-flow de l'entreprise après l'adoption d'un plan d'actionnariat salarié. Deux variables apparaissent centrales, le taux d'ouverture du capital aux salariés et le prix d'émission des nouvelles actions. On constate alors que la conclusion d'un plan d'actionnariat salarié s'inscrit dans un processus itératif de négociation entre dirigeants, représentant les actionnaires, et salariés. Deux situations sont analysées. On montre tout d'abord que, dans un cadre d'information partagée avec neutralité au risque, rien ne garantit la conclusion d'un contrat d'actionnariat salarié créateur de richesse. Aussi, les asymétries d'information entre actionnaires et salariés ne doivent pas être écartées. Au contraire, on montre qu'elles permettent de restaurer la possibilité d'un équilibre économique conjoint dans une situation d'aversion au risque. En effet, la négociation permet alors de révéler une information au profit des deux parties. L'équilibre est non Seulement un équilibre de répartition et d'optimisation de richesses créées entre les parties, mais aussi un équilibre en termes d'informations, fondé sur la délivrance de certaines données et le maintien d'une crédibilité.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

High speed of learning in financial markets

Authors: Germain, Laurent

We analyze the role of liquidity and collection of information in order to measure the speed of revelation of information during the preopening of order-driven markets. We extend Vives (1995) model to the case where risk averse traders receive a new private signal before each round of quotation of the preopening. We show that price discovery takes place at high speed which is consistent with the empirical studies of Biais, Hillion and Spatt (1999).

Nous analysons le rôle de la liquidité et de l'arrivée d'informations dans la mesure de la vitesse de convergence des prix durant la préouverture de marchés gouvernés par les ordres. Nous étendons le modèle de Vives (1995) au cas où des agents averses au risque reçoivent une nouvelle information avant chaque tour de cotation. Nous montrons que la vitesse de convergence est plus rapide et qu'elle est validée par les études empiriques de Biais, Hillion et Spatt (1999).

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Information sharing, liquidity and transaction costs

Authors: Foucault, Thierry; Lescourret, Laurence

We consider information sharing between traders who possess different types of information, namely information on the payoff of a risky security or information on the volume of liquidity trading in this security. We identify conditions under which these informed traders are better off sharing information. We also show that information sharing fosters price discovery and reduces volatility. Information sharing can improve or impair the depth of the market, depending on the values of the parameters but it always reduces liquidity traders' aggregate trading costs. Overall the analysis suggests that facilitating informations sharing among market participants can improve market quality.

Nous analysons te partage d'information entre des opérateurs boursiers possédant des informations de nature différentes: (i) des informations sur la valeur fondamentale d'un actif risqué ou (ii) des informations sur le volume des ordres émanant d'investisseurs échangeant pour des raisons de liquidité dans le marché de cet actif risqué. Nous montrons qu'il existe des cas dans lesquels ces opérateurs peuvent augmenter teur profit moyen en mettant en commun leur information. Nous montrons également que ce partage d'information augmente toujours l'efficience informationnelle du marché et réduit sa volatilité. Il peut diminuer ou augmenter la liquidité du marché mais dans tous les cas il réduit les coûts de transactions des investisseurs échangeant pour des raisons de liquidité. Notre analyse suggère donc que les mécanismes facilitant le partage d'information entre les opérateurs boursiers peuvent améliorer la qualité du marché.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Introduction to Information and Finance

Authors: Mellios, Constantin; Prigent, Jean-Luc

The article discusses various reports published within the issue including "Information sharing, liquidity and transaction costs," "High speed of learning in financial markets," and "Optimal employee stock ownership plans and asymmetric information."

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

The information content of financial reorganization contracts

Authors: Martel, Jocelyn

This article proposes a signaling model of financial reorganization in which the firms use the structure of the reorganization proposal, in particular the mix of cash and deferred payments, to signal their viability to uninformed unsecured creditors. The main prediction of the model is that the proportion of cash payments increase with the firm's type. A sample of 393 firms in financial reorganization under the Canadian Bankruptcy Act is used to examine the structure of contracts and their impact on the outcome of reorganization. The statistical and econometric analysis show that the probability of success in reorganization increases with the proportion of short term cash payments to unsecured creditors, when controlling for the fact that firms are cash constrained.

Cet article propose un modèle de signal dans le cadre d'une réorganisation financière d'entreprises en difficultés. Dans ce contexte, la structure du contrat de réorganisation, c'est-à-dire, la combinaison paiements comptants / paiements différés, est utilisée par les entreprises comme mécanisme de signal envers les créanciers non garantis sur leur viabilité financière. Sur la base du modèle, la proportion des paiements comptants augmentent avec la qualité de l'entreprise. Les prédictions du modèle sont ensuite testées à l'aide d'une banque de données comprenant 393 entreprises canadiennes en réorganisation judiciaire. Les analyses statistique et économétrique montrent que la probabilité de succès en réorganisation augmente avec la proportion de paiements comptants, tout en contrôlant le fait que les entreprises font face à des contraintes de liquidités et de financement.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

The takeover process revisited: An emphasis on the incumbent manager role

Authors: Chauveau, Thierry; Phelizon, Constance

Recent literature on the takeover process widely emphasizes the extent to which the capital market acts as a disciplinary device by inciting firms to behave in a profit-maximizing fashion. However, existing theoretical work does not consider the probability of takeover to increase with the target firm underestimation. We suggest that the theory may be incomplete and introduce an explicit link between the target firm value and the amount of private benefits extracted by the incumbent manager. We thus underline the responsibility -- often neglected in previous work -- of the incumbent manager in the takeover process.

On considère souvent que les OPA sont une conséquence du pouvoir disciplinaire du marché : la création de valeur associée aux offres publiques correspond alors à la résolution des problèmes d'agence entre actionnaires et dirigeants. Néanmoins, dans les modèles existants, la valeur de la cible est indépendante des profits prélevés par le dirigeant de sorte que la probabilité d'une offre publique n'y augmente pas avec la sous-évaluation de l'entreprise. Nous tentons de combler cette lacune, en présentant un modèle d'offres publiques dans lequel les valeurs ex ante et ex post de la cible sont exprimées en fonction des profits privés, ce qui nous permet de mettre en valeur le rôle -- souvent négligé -- du dirigeant sortant.

DATE PUBLISHED: 20/12/2003

VOLUME: 24

NUMBER: Special Issue

Bank Financing Strategies, Diversification and Securitization

Authors: Martel, Jocelyn; Mokrane, Mahdi

This article follows from Diamond and Dybvig (1983) in the analysis of the role of a bank as a financial intermediary in project financing and risk sharing. In an environment where risk averse depositors face two types of risk (liquidity and macroeconomic risks) and a profit maximizing bank which must decide on whether or not to finance a “new” risky investment, we show that the optimal solution depends on the information revealed by the bank and the depositors level of relative risk aversion. As an alternative to a pure deposit strategy, we show that securitization leads to overinvestment since the bank cannot follow a separating strategy which would trigger a bank run. Finally, we describe one possible method to achieve the first best solution with a pure deposit contract.

This paper is in line with the work of Diamond and Dybvig (1983) on the role of a bank as a financial intermediary in project financing and risk sharing. We show that in an environment characterized by risk-averse depositors facing two types of risk (liquidity risk and macroeconomic risk) and by a bank having to choose between financing or not a "new" investment project with the objective of maximizing its profits, the optimal solution is a function of the information revealed by the bank and the degree of relative risk aversion of the depositors. In addition, we show that securitization, as an alternative to a deposit contract strategy, generates overinvestment on the part of the bank because there then appears a risk of bank panic. Finally, we describe a possible method to find the first-best optimum.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

Valuation of options in the presence of one or more default risks

Authors: Augros, Jean-Claude; Djamen, Idriss Tchapda

Within the framework of a default intensity model, this paper proposes an analytic valuation methodology for interest-rate and stock derivatives securities in presence of one, or more than one, credit risk. The neutral forward default measure, introduced by Augros and Tchapda (2000), is generalized in the case where default risk and interest rate are correlated. This approach is compatible as much with the recovery at default date as with the recovery at maturity of the security (or contract) subject to credit risk. Applications of the model are proposed for vulnerable options valuation, first in the case where just the seller of the option is subject to credit risk, secondly when the seller of the option as well as the issuer of the underlying option asset may default.

Dans le cadre d'un modèle d'intensité de défaut, cet article propose une méthode analytique d'évaluation d'actifs dérivés de taux ou d'action en présence d'un ou plusieurs risques de contrepartie. La mesure forward-neutre de défaut, introduite par Augros et Tchapda (2000), est généralisée au cas où il existe une corrélation entre les risques de défaut considérés et les taux d'intérêt. L'approche développée est compatible aussi bien avec le mode de recouvrement à la date de défaut qu'avec celui à l'échéance du titre (ou contrat) soumis au risque de contrepartie. Une application du modèle est proposée pour évaluer des options vulnérables, d'abord dans le cas où seul le vendeur de l'option peut faire défaut, puis dans celui où à la fois le vendeur de l'option et l'émetteur du sous-jacent de l'option peuvent être défaillants.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

Indexed Executive Stock Options with a Ratchet Mechanism and Average Prices

Authors: Jian Wu; Wei Yu

In this article, we present a new type of executive stock option, dubbed the indexed stock option with a ratchet mechanism and average prices. We also derive its pricing model and investigate its incentive implications. Like an indexed option, the proposed option links its strike price to a benchmark, so as to eliminate common risks beyond the reach of the executive's control and reinforce the option's incentive effect. With the ratchet mechanism, the proposed option enables its holder to enjoy a series of compensations spread over a period of time, thereby developing the executive's loyalty towards the firm. Furthermore, in order to minimize impacts of a rough market movement and those of a possible price manipulation, average prices are taken into account in the payoff of the proposed option.

Nous proposons dans cet article un nouveau type de stock-option non traditionnel: les stock-options indexées à cliquets sur moyenne. Comme les stock-options indexées, les options proposées éliminent les facteurs exogènes conséquents à l'évolution globale du marché financier, ce qui permet de renforcer le caractère incitatif du plan. Grâce au mécanisme à cliquets, les cadres bénéficiaires ont la possibilité d'accumuler périodiquement les surperformances boursières réalisées par la société, ce qui permet d'accroître l'effet de fidétisation auprès des salariés. Afin d'éviter une éventuelle manipulation du marché boursier, la moyenne géométrique du cours de l'action et celle de l'indice sont prises en compte dans le calcul de la rémunération.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

A Reexamination of the Relationship Between Return and Risk in Canadian Equities

Authors: L'her, Jean-François; Sy, Oumar; Vencatachellum, Désiré

We use two classes of specifications to examine the risk-return relationship in Canada from January 1966 to December 1995. The first class of specifications does not distinguish between up- and down-markers, whereas the second does it on an ex post basis. Two test procedures are performed: on the one hand, the two-pass test developed by Fama and MacBeth (1973), on the other hand, tests based on panel data using OLS and GLS. We find a systematic relationship between data and return when we distinguish these two states of nature: the risk premium is positive (negative) when the market is up (down). The size effect if caused by extreme observations but is significant in January and when the market is down. Finally, there is a significant positive, January effect.

We examine the return-risk relationship in Canada from January 1966 to December 1995 using two categories of specifications: the first does not distinguish between periods when the stock market is rising or falling, while the second does so on an ex post basis. Two testing procedures are also used: the first is based on the two-pass test of Fama and MacBeth (1973), the second on panel data (OLS and GLM). Our results show a systematic relationship between return and beta when both states of nature are taken into account: the risk premium associated with beta is positive (negative) in periods of bull (bear) markets. The size effect is largely induced by extreme observations, but remains significant for the month of January and in periods of bear markets. Finally, returns in January are significantly higher than those in other months.

DATE PUBLISHED: 15/12/2003

VOLUME: 24

NUMBER: 2

An introduction to utility maximization with partial observation

Authors: Lefèvre, David

We give an overview of the theory and methods involved in portfolio optimization problems with partial observation. By "partial observation", we mean that the drift process and the driving Brownian motion appearing in the stochastic differential equation for the asset prices are not directly observable for investors in the market. The history of asset prices is assumed to constitute the only information available to investors and the investment processes are then required to be adapted to the natural filtration of the price processes. In a complete market case, we obtain explicit formulae for the optimal wealth process in a "Bayesian" context, when the drift vector is an unobserved random variable with known prior distribution; explicit representations for the optimal investment process are only derived when the stock drift is modelled as a Gaussian process. We also consider the case of an incomplete market and characterize the optimal investment policies when the price processes of the risky assets follow a stochastic volatility model.

Nous donnons un aperçu de la théorie et des méthodes relatifs aux problèmes d'optimisation de portefeuilles en observation partielle. Par « observation partielle », nous entendons que le processus de dérive et le mouvement Brownien apparaissant dans l'équation différentielle stochastique pour les prix des actifs risqués ne sont pas directement observables par les investisseurs dans le marché. L'historique des prix des actifs risqués est supposé constituer la seule information disponible aux investisseurs et on exige des procesus d'investissement qu'ils soient adaptés à la filtration engendrée par le processus des prix. Dans le cas d'un marché complet, nous obtenons des formulas explicites pour le processus de richesse optimale dans le contexte d'un investisseur Bayésien, lorsque la dérive est une variable aléatoire de loi initiable connue ; des formulas explicites pour le processus d'investissement optimal ne sont présentées que lorsque la dérive est modélisée par un processus Gaussien. Nous considérons aussi le cas d'un marché incomplet et caractérisons les politiques d'investissement optimales lorsque le processus de prix actifs risqués suit un modèle de volatilité stochastique.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Choosing the cheapest to deliver: a useful shortcut

Authors: Lacoste, Vincent

This paper presents a simple method for choosing the cheapest to deliver for notional bond future contracts. A proof is given that the cheapest to deliver is the bond within the delivery pool with longest (resp. shortest) duration when actual rates are superior (resp. inferior) to the coupon rate of the notional bond. A valuation formula is then provided for the contract, first considered as a forward contract, and later on extended to a future contract by taking into account the day-to-day margin call mechanism.

Cet article propose une méthode simple de calcul de la moins chère à livrer pour un future sur notionnel. On démontre en particulier le résultat selon lequel la moins chère à livrer est l'obligation du panier de plus longue (resp. plus courte) duration lorsque tes taux actuariels sont supérieurs (resp. inférieurs) au taux facial de l'obligation notionnelle. On propose par la suite une formule d'évaluation du prix future avec option de changement de cheapest, en considérant d'abord le contrat future comme un forward, puis en ajustant la formule pour prendre en compte l'impact sur le prix du système d'appels de marge.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

The Business Cycle and Default Risk

Authors: Gatfaoui, Hayette; Radacal, François

This paper's goal is to take into account the relationship between business cycle and default risk to determine probabilities of deterioration of firms' financial state. Following this view, we attempt to characterize the influence of macroeconomic and/or micro-economic indicators on risky bonds issued by private firms. Our study considers credit spreads related to three different economic sectors and belonging to two rating classes. We compute these credit spreads as the difference between risky bonds' yields and corresponding Treasury yields. Then, we apply a binary or trinomial Probit model to monthly variations of credit spreads. This methodology allows us to estimate probabilities of deterioration of firms' financial state for a given economic sector and for specified rating and maturity.

The purpose of the article is to exploit the relationship between the economic cycle and default risk to determine probabilities of deterioration of the financial situation of companies. In this perspective, we attempt to characterize the influence of macroeconomic and/or microeconomic indicators on risky bonds issued by private companies. For our study, we consider the credit spreads of bonds belonging to three different economic sectors and which can belong to two rating classes. We calculate these credit spreads as the difference between the yields of risky bonds and the corresponding Treasury rates. Then, we apply a binary or trinomial choice model of the Probit type to the monthly variations of credit spreads, which then allows us to estimate probabilities of deterioration of the financial situation of companies in a given economic sector, for a fixed rating and maturity.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Utility functions and the informational advantage of higher order moments: application to option hedging

Authors: Selmi, Farhat; Bellalah, Mondher

We study in this paper the possibility of considering the high orders moments in the expected utility decision criterion. The traditional "mean-variance" model considers only the two first moments and it becomes a particular case from a generalized approach that accounts for the asymmetric and the heavy tails of the wealth distribution. To show the informational content of the high order moments, we consider the case of an option writer who seeks to maximize his expected utility applied to his terminal wealth.

Ce papier étudie la possibilité d'intégrer les moments d'ordre supérieurs dans le critère de décision basé sur l'approche de la maximisation de l'utilité espérée. Le modèle traditionnel de la « moyenne-variance » relève dès lors d'une approche plus générale qui intègre les effets de l'asymétrie et des queues épaisses de la distribution de la richesse de l'investisseur. Pour illustrer l'apport informationnel des moments d'ordre élevés, on étudie le cas d'un investisseur qui, via le critère de l'utilité espérée, cherche à couvrir une position courte d'une option d'achat.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

On cumulative Parisian options

Authors: Moraux, Franck

This article examines the pricing of cumulative parisian options. These options are knocked in/knocked out when the total time spent by the underlying asset beyond a known barrier exceeds a prescribed value. Analytical valuation of occupation time derivatives have early been studied by Chesney-Jeanblanc-Yor (1997) and Hugonnier (1999). Here one follows Hugonnier (1999)'s approach and derives new pricing formulae.

Cet article s'intéresse à l'évaluation des options parisiennes cumulatives. Ces options s'activent ou se désactivent dès que le temps total de séjour de l'actif sous-jacent au-delà d'une barrière connue excède une durée prescrite. L'évaluation analytique des dérivés du temps d'occupation a déjà été étudiée par Chesney-Jeanblanc-Yor (1997) et Hugonnier (1999). On revient ici sur l'approche de Hugonnier (1999) et on fournit de nouvelles formules.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Options and optimal coverage of extreme risks

Authors: Selmi, Farhat

As soon as one accepts to abandon the zero-risk paradigm of Black-Scholes, very interesting issues concerning risk control arise because different definitions of the risk become unequivalent (in the Black-Scholes world, the risk is zero, whatever the definition of risk!). Optimal hedges then depend on the quantity one wishes to minimize. We study here the possibility of considering the fourth moment as a risk measure, since it's more sensitive to "fat-tailed" distributions of the underlying security than the quadratic criteria (variance). Compared to the variance risk-minimization approach (Bouchaud and Sornette (1994), Schweizer (1995), etc.) and a Δ-hedge d la Black-Scholes, we show that a definition of the risk more sensitive to the extreme events generically leads to a decrease both of the probability of extreme losses and of the sensitivity of the hedge on the price of the underlying (the "Gamma"). Therefore, the transaction costs and the impact of hedging on the price dynamics of the underlying are reduced. By reducing the sensitivity of the hedge on the price of the underlying, one can also hope to reduce the destabilizing effects in the market.

Au fur et à mesure que l'on abandonne la théorie de risque zéro de Black-Scholes, plusieurs choix de contrôle de risque s'offrent désormais, compte tenu du fait que différentes définitions de risque ne sont plus équivalentes (dans la théorie de Black-Scholes, le risque est nul quelque soit la définition du risque !). Dans ce cas, la couverture optimale dépend de la quantité du risque à minimiser. Dans le cadre des options, on considère dans ce papier le moment d'ordre quatre comme une nouvelle mesure du risque puisqu'il est plus sensible aux grandes fluctuations que le critère quadratique (variance). Comparée à l'optimisation de la variance (Bouchaud et Sornette, 1994; Schweizer, 1995, etc.) et la couverture en Δ à la Black-Scholes, la stratégie optimale, qui minimise le moment d'ordre quatre, permet de diminuer la sensibilité de la couverture par rapport au cours du sous-jacent. Ceci est de nature à réduire les coûts de transaction associés. De plus, la minimisation « quartique » à l'avantage de réduire la probabilité des pertes importantes, et, de manière générale, elle pourrait réduire les effets déstabilisants sur le marché, via la réduction de la sensibilité de la couverture par rapport à la dynamique du sous-jacent.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Super-replication problem in a jumping financial market

Authors: Brunel, Vivien

Incomplete markets are known to worry theorists because not every contingent claim is replicable; however, if one can afford it, it is possible to super-replicate. This paper deals with the super-replication problem of any European contingent claim when stock prices and/or volatilities may jump at random dates. We explore a subset of all the equivalent martingale measures that correspond to markovian changes of probability. On this subset, we show that the maximum price for a contingent claim is the viscosity solution of some non linear Hamilton-Jacobi-Bellman equation that can be solved in most cases and we obtain non trivial bounds of the super-replication price in the other boxes.

Incomplete markets are an important problem in theoretical finance because not all contingent assets can be hedged from market assets; however, it is always possible to over-hedge them. This paper addresses the problem of over-hedging European options when risky asset prices and/or volatility can jump at random dates. We explore a subset of the set of equivalent martingale measures that correspond to Markovian probability changes. On this subset of equivalent martingale measures, we show that the maximum price for contingent assets is a solution (in the sense of viscosity) of a nonlinear Hamilton-Jacobi-Bellman equation. We solve this equation in many cases and exhibit non-trivial price bounds when an explicit analytical solution cannot be found.

DATE PUBLISHED: 20/12/2002

VOLUME: 23

NUMBER: Special Issue

Building a Financial Richter Scale to Assess the Gravity of a Financial Crisis: The Case of 1998

Authors: Legras, Jérôme

We apply extreme value theory to financial data. Analysing the 1998 financial turmoil, we estimate the average waiting times of some price variations and show that the crisis must be considered a severe one. We then propose a new scale to quantify extreme financial movements, inspired from geophysics: the Financial Richter Scale, designed to measure the information flow on the market. We also show how to measure the contagion effects that were observed on the emerging markets at the end of August 1998. We give numerical examples on stock markets, Brady bonds markets, interest rate markets and foreign exchange (FX) markets.

Dans cet article, nous appliquons la théorie des valeurs extrêmes à la grave crise financière survenue en 1998. Nous estimons les temps de retour de certaines des variations de prix observées alors et montrons que cette crise peut être qualifiée d'exceptionnelle. Nous proposons ensuite une nouvelle échelle de mesure des crises financières, échelle que nous dénommons échelle de Richter financière, par analogie avec son équivalent issu de la géophysique. Nous analysons et quantifions également les effets de contagion observés notamment sur les marchés émergents à la fin de l'été 1998. Enfin, nous menons des études empiriques sur les marchés de taux, de change et d'action ainsi que sur la dette obligataire des pays émergents.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Introduction to Extreme Events in Finance

Authors: Longin, François

The article discusses various reports published within the issue including "The leptokurtic phenomenon in financial markets," by Christian Walter and "Extreme Values and Risk Appreciation Changes at the Paris Stock Exchange over the Period 1802-2000," by Pedro Arbulu and Georges Gallais-Hamonno.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

The Leptokurtic Phenomenon in Financial Markets

Authors: Walter, Christian

The non-normality of returns is become a well documented stylized fact which appears in almost all the financial markets time series. The aim of this paper is to review the issue of leptokurtosis, with special emphasis on certain aspects still relatively unexplored. 1 / It starts with a review of the old financial literature, exhibiting the age of this phenomenon and its hidden existence, because of a lack of strong recognition by academics and practitioners. 2 / It goes on to emphasize the irrelevance of the statistical concept of the « average » for the purpose of professional risk management in case of leptokurtosis, and presents a new type of model risk : the shape risk. 3 / A new relationship between investment processes and the distribution of returns is proposed, with a conjecture on the revaluation of bottom up approaches as a result of the leptokurtic phenomenon. 4 / Lastly, the paper provides a synoptic view of the different understandings of the non-normality, with special emphasis on the distinction between exogenous information and endogenous information, to introduce some thoughts related to market microstructure and time measure.

La non-normalité des distributions des variations boursières est devenue un fait d'expérience omniprésent dans la finance de marché. Le but de cet article est de présenter un état de la question en mettant en évidence certains aspects de la non-normalité encore peu explicités. On montre que le phénomène leptokurtique a toujours été présent dans les travaux de recherche sur les fluctuations boursières, mais qu'il n'a acquis que récemment une reconnaissance institutionnelle. On fait apparaître la perte de pertinence de la notion de moyenne dans les pratiques professionnelles de couverture et de gestion du risque, en présentant un nouveau type de risque de modèle. On montre la relation existant entre la forme des processus d'investissement dans la gestion d'actifs avec la forme des distributions des rentabilités, en présentant une conjecture sur la revalorisation de l'importance des choix de titres comme conséquence du phénomène leptokurtique. On résume enfin les différentes compréhensions actuelles de la non-normalité en proposant un point de vue distinguant l'information exogène de l'information endogène, pour introduire des considérations sur la microstructure des marchés et la mesure du temps.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Multivariate Extremes at Work for Portfolio Risk Measurement

Authors: Bouyé, Éric

This paper proposes a methodology to provide risk measures for portfolios during extreme events. The approach is based on splitting the multivariate extreme value distribution of the assets of the portfolio into two parts: the distributions of each asset and their dependence function -- named copula. The estimation problem is also investigated. A trivariate empirical application for market indices portfolios (US, German and Japanese stock markets) is provided. Then, stress-testing values and Monte-Carlo based risk measures -- Value-at-Risk and Expected Shortfall -- are computed.

Cet article propose une méthodologie permettant d'obtenir des mesures du risque d'un portefeuille lors des événements de marché rares. Notre approche se fonde sur la séparation du problème de l'estimation multivariée des extrêmes en deux parties : (i) l'étude des distributions des marges; et, (ii) la caractéfisation de leur fonction de dépendance appelée copule. Le problème d'estimation est appréhendé. Nous fournissons un exemple empirique trivarié pour des portefeuilles (indices) du marché action (États-Unis, Allemagne et Japon). Finalement, nous calculons des valeurs de scénarios de stress et des indicateurs de risque (valeur en risque et perte moyenne au-delà de celle-ci) obtenus par méthode de Monte-Carlo.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Portfolio Insurance: The Extreme Value Approach to the CPPI Method

Authors: Bertrand, P.; Prigent, J.-L.

This paper applies the extreme value theory to the Constant Proportion Portfolio Insurance (CPPI). A quantile hedging approach is introduced, which provides an upper bound on the standard multiple m. This bound is statistically estimated from the behaviour of extreme variations in rates of asset returns. Moreover, we introduce the distributions of interarrival times of these extreme movements and show their impact on the portfolio insurance. We illustrate these results on S&P 500 data.

Dans cet article, nous proposons une application de la théorie des valeurs extrêmes à la méthode du coussin. Une approche en termes de couverture par quantile nous permet de donner une borne supérieure au multiple, m. Cette borne est estimée à partir des variations extrêmes des rentabilités des actifs. De plus, nous introduisons les distributions des instants d'arrivée de ces variations extrêmes et nous montrons leur impact sur le portefeuille garanti. Les résultats sont illustrés à partir de données sur le S&P 500.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

The Role of REIT's in Asset Allocation

Authors: Booth, G. Geoffrey; Broussard, John Paul

We explore the risk of large losses in the context of the asset allocation decision involving real estate investment trust (REIT) stocks and a well-diversified portfolio of stocks proxied by the S&P 500 stock index. We examine the performance of 11 different portfolios. Our statistical framework measures return in the conventional manner but uses lower partial moments with probabilities estimated by extreme value theory to measure risk. We confirm the traditional finding that REIT returns are tess volatile and document that REITs enhance portfolio performance by providing the investor with protection against downside risk associated with extreme negative returns.

Dans cet article, nous explorons le risque de grande perte dans le contexte de l'allocation d'actifs. L'univers d'investissement comprend un portefeuille d'actions bien diversifié (l'indice S&P 500) et des fonds investis dans des actifs immobiliers aux États-Unis (real estate investment trust ou REIT). Nous examinons la performance de 11 portefeuilles différents. Notre cadre d'analyse statistique reprend les mesures classiques pour analyser les rentabilités mais utilise les moments partiels avec des probabilités estimées à l'aide de la théorie des valeurs extrêmes pour mesurer le risque. Nous confirmons les résultats traditionnels que les fonds investis dans des actifs immobiliers sont moins volatiles et documentons que ces actifs améliorent la performance des portefeuilles en fournissant à l'investisseur une protection contre le risque de baisse associé à des rentabilités extrêmes négatives.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Extreme values and changes in risk assessment on the Paris Stock Exchange over two centuries, 1802-2000

Authors: Arbulu, Pedro; Gallais-Hamonno, Georges

This research is empirically based on a new index of monthly returns of stocks prices at the Paris Stock-Exchange covering two centuries, from 1802 to 2000. Extreme values are categorized into two kinds : « maximum variation » to which no direct cause can be attributed and « exogenous » ones, which are caused by a direct event, generally political or linked with a war. Thirty six extreme values are found, of which twelve (33 %) are « maximum variations » and twenty four (67 %) are « exogenous ». A original methodology using the jumps in averaged volatility shows that these two hundred years have been made of seven sub-periods, during which the Parisien market had a specific level of volatility, i.e. a specific assessment of total risk. An historical analysis shows that this statistical result brings out relevant sub-periods.

Ce travail utilise un indice inédit de l'évolution mensuelle du cours des actions à la Bourse de Paris sur deux cents ans, de 1802 à 2000. Une typologie des « valeurs extrêmes » en deux catégories est proposée: les « variations maximales » dues à un emballement momentané du marché, sans cause précise; les valeurs « exogènes » entraînées par un événement majeur, généralement d'ordre politique ou lié à un conflit. Trente-six valeurs extrêmes sont trouvées, douze (33 %) variations maximales et vingt-quatre (67 %) valeurs exogènes. Une méthode originale, qui utilise les sauts de la volatilité glissante, met en lumière l'existence de sept sous-périodes caractérisées par un niveau spécifique de volatilité, c'est-à-dire d'appréciation du risque par le marché. L'analyse historique confirme la pertinence de ce découpage d'origine statistique.

DATE PUBLISHED: 15/12/2002

VOLUME: 23

NUMBER: 2

Heterogeneous expectations and stock market returns: the case of the French market

Authors: Levasseur, Michel; L'her, Jean-François; Suret, Jean-Marc

This study empirically examines the relationships between stock returns and financial analysts' earnings forecasts distributed by IBES (Institutional Brokers Estimate System) over the March 1987 - June 1995 period on the French stock market. Changes in mean and dispersion in one-year horizon earnings forecasts are associated with a positive and a negative impact on stock prices respectively. Our main results are as follows : 1 / The largest variation in consensus forecasts (in absolute terms) corresponds to the largest variation in dispersion (in absolute terms). 2 / Variation in consensus and dispersion of financial analysts' forecasts are positively and negatively related to stock returns. Due to the lag between the production and the dissemination of forecasts, the price adjustment largely occurs before the public announcement of changes in forecasts. 3 / The effect of consensus revisions on stock returns changes dominates the effects of dispersion variation. Apparently, the impact of new information on stock prices not only depends on the direction and the magnitude of the consensus revision, but also on its impact on the dispersion of financial analysts' forecasts.

Cette étude examine empiriquement les relations entre le rendement des actions françaises et les révisions des prévisions de bénéfice par action réalisées par les analystes financiers et transmises par IBES (Institutional Brokers Estimate System) durant la période de mars 1987 à juin 1995. Les variations de la moyenne et de la dispersion des anticipations des analystes portant sur un horizon de un an ont respectivement un effet positif et négatif sur le prix des titres. Les principaux résultats sont les suivants : 1 / Les variations les plus importantes du consensus (en valeur absolue) correspondent aux variations les plus importantes (en valeur absolue) de la dispersion des prévisions d'analystes. 2 / Les changements dans le consensus et la dispersion des prévisions sont liés positivement et négativement aux rendements des actions. En raison du décalage entre la réalisation et la diffusion des prévisions, une part importante de l'ajustement de prix a lieu avant la diffusion publique des changements dans les prévisions. 3 / L'effet des variations du consensus sur le rendement des titres domine l'effet des variations de la dispersion des prévisions. Il semble donc que l'impact de l'arrivée d'information sur le prix des titres ne dépende pas uniquement du sens et de l'ampleur de la révision moyenne des anticipations, mais aussi de son impact sur la dispersion des anticipations.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

Valuation, in a forward-neutral universe, of interest rate products subject to default

Authors: Augros, Jean-Claude; Djamen, Idriss Tchapda

The aim of this paper is to give a methodology for pricing interest rates derivatives subject to default risk. The valuation is operated in an environment different of the riskneutral world adapted to default risk. Prices of financial securities are then expressed in new numeraires represented by zero-coupon defaultable bonds for which the recovery rate is not zero in case of default. With this methodology, we obtain the same valuation formula of a european option on a zero-coupon defaultable bond as that of Jarrow and Turnbull (1995). The advantage of the new probability measure, qualified as « default forward-neutral », is highlighted when we are pricing options on more complicated financial assets such as a defaultable coupon bearing bond.

Cet article propose une méthode d'évaluation d'instruments de taux d'intérêt, contingents ou non, soumis à un risque de défaut. L'évaluation s'opère dans un univers différent de l'univers risque neutre et qui s'apparente à un univers forward-neutre adapté pour le risque de défaut. Dans cet univers, les prix des actifs financiers sont exprimés dans de nouveaux numéraires représentés par des obligations zéro-coupon risquées pour lesquelles le taux de recouvrement en cas de faillite n'est pas nul. La méthode présentée conduit à la même formule d'évaluation d'une option d'achat européenne sur une obligation zéro-coupon risquée que celle proposée par Jarrow et Turnbull (1995). L'avantage de la nouvelle mesure de probabilité proposée, qualifiée de « forward-neutre de défaut » est mis en évidence lors de l'évaluation de produits plus complexes tels qu'une option sur obligation couponnée risquée.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

The impact of reputation effects on banks' incentives to support unviable firms

Authors: Vilanova, Laurent

We try to explain why some banks delay voluntarily the liquidation of non-viable firms. The model is based on the strategic interaction between the bank and the non-equity stakeholders (customers, suppliers...) of the distressed firm. The bank decides to support (or not) a distressed firm according to the expected payoff associated to the continuation of business. This payoff depends on the reaction of non-equity stakeholders that decide to continue or to stop their collaboration with the firm after having observed the bank's decision. In this context, there exists a risk of collusion between the bank and the non-viable firm. Both agents can decide to misrepresent the actual situation of the non-viable firm in order to expropriate non-equity stakeholders. However, this incentive to delay the liquidation of non-viable is reduced when banks are long-term players in the debt market. We show that the banks' desire to acquire a reputation of « toughness » increases the credibility of bank decisions. As a consequence, reputation effects increase the incentives of nonequity-stakeholders to support distressed firms and reduce the liquidation of viable firms.

Cet article met en évidence l'impact des effets de réputation sur l'incitation des banques à retarder sciemment la liquidation d'emprunteurs non viables. Le modèle repose sur l'interaction stratégique entre la banque et les autres partenaires externes (clients, fournisseurs...) de l'entreprise en difficulté. La banque décide de soutenir (ou de ne pas soutenir) l'emprunteur en fonction de son anticipation sur les revenus issus d'une continuation de l'activité. Or, ces revenus dépendent de la réaction des partenaires externes qui, après avoir observé la décision de renouvellement de la banque, décident de continuer (ou de cesser) leur collaboration avec l'emprunteur. Dans ce contexte, il existe un risque de collusion entre la banque et l'entreprise condamnée. Ces deux agents peuvent en effet décider de créer une apparence trompeuse de solvabilité afin d'exproprier une partie des fonds investis par les partenaires externes dans le redressement de l'entreprise. Nous montrons que ce risque est réduit lorsque les banques sont des joueurs à long terme sur le marché du crédit. Ces dernières peuvent en effet être incitées à développer une réputation de « liquidateur inflexible ». Ces effets de réputation, en augmentant la crédibilité du soutien bancaire, encouragent les autres partenaires à collaborer au redressement des entreprises et permettent d'éviter la liquidation d'emprunteurs viables.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

Modeling coupon bonds in the presence of default risk

Authors: Belhaj, Riadh

This paper presents a model for valuing coupon bonds when there is default risk. Default occurs at the first time the value of the finn's assets falls below a critical level. This critical level is defined as the total value of the debt faced by the finn. In case of default, the bondholder receives a constant fraction of the bond value in case of no-default. We develop a model displaying the features of the one factor interest rate model of Cox, Ingersoll and Ross (1985) and the explicit finite difference method as developped by Hull et White (1990). Our model makes possible the study of the evolution of default spread as function of the variance of the finn's assets, the level of the short-term interest rate and the rate of loss in case of default. Lastly, we apply the model to the empirical study of the french bond market.

Ce papier présente un modèle d'évaluation des obligations à coupons sujettes à un risque de défaut de la part de l'émetteur. L'événement de défaut est modélisé comme la première date où la valeur des actifs de la firme passe au-dessous de la valeur faciale de la totalité des dettes de la firme. En cas de défaut, le détenteur de l'obligation reçoit une fraction fixée de la valeur qu'aurait eue l'obligation en cas de non-défaut. Le modèle repose à la fois sur le modèle de taux de Cox, Ingersoll et Ross (1985) à un seul facteur et sur la méthode des différences finies explicite, développée par Hull et White (1990). Notre modèle permet d'étudier l'évolution du spread de défaut en fonction de l'écart type du rendement des actifs de la firme, du quasi-ratio d'endettement, du taux d'intérêt sans risque et du taux de perte en cas de défaut. Enfin, nous appliquons le modèle à l'étude empirique du marché obligataire français.

DATE PUBLISHED: 15/06/2002

VOLUME: 23

NUMBER: 1

Evaluation of Some Quantos Instruments

Authors: Bensaid, Bernard; Bottazzi, Jean-Marc

In this article we price a few interest rate quanto instruments capitalising on the two country model of Amin and Jarrow (1991) and general term structure methodology : Heath, Jarrow and Morton (1992). We derive explicit pricing formula for common interest rate quanto instruments : Diff-Swap, CAT options and option on intercountry yield spread.

Afin de constituer un cadre général d'étude et d'évaluation d'une série d'instruments mêlant à la fois risque de taux d'intérët et de change, on explicite les relations entre les diverses évolutions de courbe des taux et de taux de change sous l'hypothèse d'absence d'opportunité d'arbitrage (cf. Heath-Jarrow-Morton, 1992). Nous appliquons ensuite ces relations pour valoriser des instruments dérivés de taux d'intérêt et taux de change. Dans le cas gaussien, des formules explicites sont obtenues.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

IPO, Signal and Issues of New Shares on the French Secondary Market

Authors: Faugeron-Crouzet, Anne-Marie; Ginglinger, Édith

The purpose of this study is to test the empirical implications of the signalling-based models of IPOs underpricing. These models suggest that high-quality firms underprice their IPOs so that they can subsequently issue seasoned equity at more favourable prices. We test this suggestion for 292 French firms that made an initial public offering during 1983-1994. We find a positive relation between IPO underpricing and the probability of subsequent equity offerings. Underpricing is lower when the primary shareholder sells a large part of his shares at the initial offering. Our results are consistent with some of the implications of the signalling hypotheses, especially for small and family-controlled firms.

Cette étude propose un test empirique des modèles de signal pour les introductions en bourse sur le second marché français. Ces modèles envisagent une sous-évaluation délibérée des actions introduites en bourse par les firmes de bonne qualité, afin d'obtenir un prix plus élevé lors des émissions d'actions ultérieures. Nous validons certaines des prédictions de ces modèles sur un échantillon de 292 introductions en bourse réalisées de 1983 à 1994 sur le second marché français, suivies de 71 émissions d'actions de 1983 à 1998. La sousévaluation initiale est significativement plus élevée pour les firmes procédant à une augmentation de capital ultérieure et décroît lorsque les actionnaires principaux se désengagent. Sur le marché français, le mécanisme de signal paraît plus adapté aux firmes les plus petites et les plus familiales.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

Mean-Variance Asset Allocation for Long Horizon

Authors: Bajeux-Besnainou, Isabelle; Jordan, James V.

We investigate whether mean-variance portfolio theory can produce the conventional wisdom that investors with long horizons should make a large initial allocation to stocks and then decrease the allocation as time passes. For the case of a risk-free asset and a stock index following geometric brownian motion, we derive closed-form solutions for the meanvariance portfolio problem allowing continuous rebalancing based on realized prices and wealth (called a stochastic strategy). This optimal stochastic strategy is in general a conventional wisdom strategy as it involves large initial allocation to stocks which then decreases with time. We relate this strategy to the concave strategies described by Perold and Sharpe and explain the role played by relative risk aversion in this result. We also derive the optimal deterministic strategy (predetermined schedule of weights, independent of new price and wealth realizations) and find it to be a constant-weight strategy.

Does mean-variance portfolio theory explain the financial adage that an investor with a long horizon should initially invest a large allocation in stocks and then gradually reduce it? We find explicit solutions to the mean-variance portfolio problem when dynamic continuous-time management based on new price and wealth realizations (called stochastic strategy) is allowed and the traded assets consist of a risk-free asset and a market index whose price is assumed to satisfy a geometric Brownian motion. The optimal stochastic strategy follows the usual financial advice, starting with a large initial allocation to stocks, decreasing over time. We associate this strategy with concave strategies as described in the Perold and Sharpe paper and explain the role played by the relative coefficient of risk aversion in this result. We also explain the deterministic optimal strategy (corresponding to weights expressed as deterministic functions, independent of new price and wealth realizations) and we prove that it is a constant weight strategy.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

Valuation of Options on Bond Spreads Involving Two Currencies

Authors: Mellios, Constantine; Poncet, Patrice

The pay-off of a bond price (or yield) spread option depends on the difference between two underlying bond prices (or yields) and a strike price. Its value is equal to the double integral of its discounted pay-off over the risk-neutral joint distribution of the terminal prices (or yields) of the two underlying bonds. In this paper, European options on bond price spreads, on bond yield spreads and on bond futures and forward price spreads are evaluated when the two underlying bonds involved in the spread are denominated in two different currencies. In an international economy a la Amin and Jarrow (1991), foreign and domestic interest rates obey the stochastic processes postulated by Heath, Jarrow and Morton (t992) in which the volatility of forward rates is deterministic but otherwise arbitrary. In this framework, using the “risk-neutral” then the “forward-neutral” probability measures, we show that the value of a bond price spread option reduces to a simple integral. The latter can easily be solved either by numerical methods, or, as here, approximated by using a Taylor's series expansion about the forward or future prices. Bond yield spread options are simpler to evaluate and a closed-form solution for their prices is derived.

The terminal value of a bond price (or interest rate) spread option depends on the difference between the prices (or yields) of two underlying bonds and a strike price. Its value before maturity is given by the double integral of its discounted terminal value over the joint risk-neutral distribution of the terminal prices (or yields) of the two underlying bonds. We value European options on price spreads, interest rate spreads, and forward and future price spreads when the two bonds concerned are denominated in two different currencies. In an international economy à la Amin and Jarrow (1991), domestic and foreign interest rates are governed by the stochastic processes postulated by Heath, Jarrow, and Morton (1992) for which the volatility of instantaneous forward rates is deterministic but arbitrary. Using the "risk-neutral" and "forward-neutral" probability measures, we show that the value of a bond spread option reduces to a simple integral. This is easily calculated numerically, or, as here, can be approximated from a Taylor series expansion around the forward or futures price. Bond yield spread options are simpler to value because they lend themselves to explicit formulas.

DATE PUBLISHED: 15/12/2001

VOLUME: 22

NUMBER: 2

Moral hazard, bank debt financing and the leniency of the corporate failure law

Authors: Recasens, Gilles

The game between the manager-owner, the bank and the judge is analyzed. Assuming the existence of a moral hazard problem between the bank and the manager, their different interests can lead to a conflict in some states of the world. In case of financial distress, the manager can be deterred to produce the necessary effort for the project success. Anticipating this problem the bank can decide to refuse to finance the project. The link between these problems and the level of softness of the bankruptcy law is analyzed. On the one hand, a soft law avoids ex-post inefficient liquidations. On the other hand, the law must not be too soft so as to encourage ex-ante the manager to provide the necessary effort in case of financial distress. Finally, the degree of softness of the law influences the ability to reach an informal workout which leads to an increase in efficiency. In fact, the optimal law acts so as to give to the manager and to the bank incentives for undertaking the project ex-ante and to bargain in case of financial distress, by balancing their chances of seeing their interests respected, in case of failure, by the ex-post judge's decision to reorganize or to liquidate.

L'objectif de cette recherche est d'analyser le jeu qui met aux prises le dirigeantpropriétaire, la banque et le juge. En supposant l'existence d'un problème d'aléa moral entre la banque et le dirigeant, leurs intérêts peuvent, dans certains états du monde, entrer en conflit. Le dirigeant pourrait être incité, en cas de détresse financière, à ne pas fournir tous les efforts nécessaires à la réussite de son projet. Anticipant cette éventualité, la banque pourrait refuser de financer le projet du dirigeant. On analyse alors le lien entre ces problèmes et le degré de clémence de la loi sur les défaillances d'entreprises. En effet, si une loi clémente permet d'éviter ex post la disparition de l'entreprise, elle risque, ex ante, de ne pas inciter suffisamment le dirigeant à fournir des efforts supplémentaires en cas de difficultés. Le degré de clémence de la loi influe sur la possibilité de parvenir à un règlement amiable des difficultés qui entraîne des gains d'efficience. En réalité, la loi optimale agit de manière à rétablir les incitations de la banque et du dirigeant à mettre en œuvre le projet ex ante et à conduire une renégociation en cas de difficultés, en rééquilibrant leurs chances de voir leurs intérëts respectés, dans l'éventualité d'une défaillance, par la décision de réorganisation ou de liquidation du juge ex post.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Experimental market finance: a literature review

Authors: Pouget, Sébastien

This paper surveys the literature on experimental financial markets. The interest of the experimental method in finance is underlined which is linked to the control of the environment, to the control of market institutions and to the access to individual behavior and characteristics. The main fields of research in experimental finance are discussed : tests of the CAPM and of the informational efficiency of markets, microstructure and market rationality.

Cet article propose une synthèse de la littérature sur les marchés financiers expérimentaux. Il souligne l'intérêt de la méthode expérimentate en finance lié au contrôle de l'environnement, au contrôle des institutions de marché et à l'observabilité des comportements et des caractéristiques individuels. Les principaux thèmes de la recherche en finance expérimentale sont abordés : les tests du MEDAF et de l'efficience informationnelle des marchés, la microstructure et la rationalité des marchés.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Portfolio management with guarantee: the optimal allocation in derivative assets

Authors: Bertrand, P.; Lesne, J.-P.; Prigent, J.-L.

In this paper, we study the problem of optimal portfolio selection under an insurance constraint. We assume that investors are not allowed to modify their portfolio composition between initial and terminal date. More precisely, we are interested in the problem of characterizing an optimal payoff function under insurance constraint. We show how derivative securities must be taken into account by investors who maximize expected utility. Especially, we study the effect of risk aversion. We generalize prior results without insurance constraint by Brennan-Solanki (1981) and Carr-Madan (1997). Finally, we consider the problem of optimal portfolio selection when investors can only trade in a finite number of securities. As an illustration, we consider the case of a portfolio invested in a bond, a risky asset and a put on it.

We study the problem of optimal portfolio allocation under a collateral constraint, when the investor has no possibility to modify his management strategy between the initial and terminal dates. For this particular type of portfolio insurance problem, we show how derivative assets should be taken into account in order to maximize the investor's expected utility. In particular, we study the role of his risk aversion. This study, which focuses on the search for an optimal payment under a collateral constraint, generalizes the previous results of the unconstrained model of Brennan-Solanki (1981) and Carr-Madan (1999). We also examine the problem of portfolio insurance when the investor has a priori only a finite number of derivative assets: for this, we examine the case of a portfolio constituted only from a bond, a risky asset and a put on this risky asset.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Operational and stock market performance of IPOs: the French case 1991-1995

Authors: Feels, Patrick

We investigate the short-run underpricing, the long-run performance and the operating performance of recent initial public offering firms in a sample of 61 French firms from 1991-1995. In accordance with the findings for other markets, the average initial returns for French initial public offering firms are significantly positive (9.2%). However, contrary to American studies, we do not find significant underperformance compared with some major market indices (SBF 250, CAC 40, MIDCAC) and compared with matching firms (matching is done by industry and by market capitalization). Morever, a weak significant decline in operating performance subsequent to the initial public offering is found. In general, underpricing is unrelated to long-run performance neither to operating performance.

The financial performance of French companies that go public are addressed through the simultaneous study of undervaluation, long-term stock market performance and operational performance of these companies. A sample consists of 61 French companies that went public in the period 1991-1995. The initial returns calculated at the time of the IPO are significantly positive (9.2%), indicating a pronounced undervaluation of the companies in the sample. However, unlike American studies, companies that go public do not exhibit significantly negative abnormal long-term performance compared to the main indices (SBF 250, CAC 40, MIDCAC) and compared to benchmark companies (the control sample consists of companies with a market capitalization and sector of activity similar to those of the companies in the initial sample). Moreover, a weakly significant decline in operating performance after the IPO is observed for the companies in our sample. In general, the undervaluation observed initially is not related to long-term stock market performance or even to operational performance.

DATE PUBLISHED: 15/06/2001

VOLUME: 22

NUMBER: 1

Asset Substitution, Debt Pricing, Optimal Leverage and Maturity

Authors: Ericsson, Jan

I suggest a continuous time model for debt and equity valuation where leverage and maturity structure are chosen optimally by the firm's management. The capital structure decision involves trading off the tax benefits of leverage, financial distress costs and the agency costs associated with risk shifting incentives. Closed form solutions for the values of corporate securities, the levered firm and agency costs are obtained. I provide quantitative illustrations of how the capital structure decision is influenced by the potential for asset substitution. I show that in a typical scenario, a firm could afford to take on an additional 20% of leverage and use distinctly longer term debt maturity if asset substitution were ruled out. Furthermore I show that when deviations from the Absolute Priority Rule in bankruptcy are present, management is encouraged to increase risk ex post but will compensate ex ante by reducing leverage and using shorter maturity debt.

Je propose un modèle d'évaluation des actifs financiers d'une entreprise en temps continu. L'endettement et la maturité des obligations émises sont choisis par les gestionnaires qui agissent dans l'intérêt des actionnaires. La décision de structure financière comprend un équilibre entre les bénéfices de l'endettement, les coûts de détresse financière et les coûts d'agence liés au problème de substitution d'actifs. Le modèle permet l'obtention de solutions analytiques pour la valeur de la dette et des actions, ainsi que pour les coûts d'agence et la valeur agrégée de l'entreprise. Je développe des illustrations quantitatives de l'impact sur la structure financière du potentiel de substitution d'actifs. Dans l'absence de problèmes d'agence, une entreprise typique pourrait se permettre d'augmenter l'endettement de 20 % et émettre des obligations de maturité nettement plus longue. En outre, je montre que lorsque la règle de priorité absolue des détenteurs de dette sur les détenteurs d'actions n'est pas respectée, les gestionnaires ont tendance à augmenter le risque ex post mais compenseront ceci par un endettement plus bas ex ante.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Bankruptcy Costs, Ex Post Renegotiation and Gambling for Resurrection

Authors: Décamps, Jean-Paul; Faure-Grimaud, Antoine

This paper investigates the consequences of bankruptcy costs and debt renegotiation on the incentives of equityholders to engage in excessive continuation of the firm's activities. We show that bankruptcy costs and renegotiation may sometimes exacerbate this gamble for resurrection, but that they may also lead to excessive exit in other cases. We also examine the impact of the allocation of the bargaining power between different claimholders on these results.

Nous étudions dans cet article le rôle joué par les coûts de faillite et la renégociation de la dette dans la décision des actionnaires de continuer ou d'arrêter l'activité de la firme. Nous proposons une mesure de la destruction de la valeur de la firme endettée due à une décision inefficiente des actionnaires de continuer ou d'arrêter l'activité de firme. Nous expliquons pourquoi coûts de banqueroute et renégociation peuvent conduire, soit à une décision inefficiente de poursuivre l'activité de la firme, soit à une décision inefficiente de liquider la firme. Nous analysons également l'impact du pouvoir de renégociation sur nos résultats.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Bargaining Power and Optimal Leverage

Authors: Hege, Ulrich; Mella-Barral, Pierre

We consider the optimal capital structure of a firm in the presence of a tax advantage of debt and costly liquidation. We construct a continuous time model which allows for dynamic debt renegotiation prior to liquidation and for the full transfer of tax loss. We distinguish the case in which strong creditors decide to forgive their debt, from the one where strong opportunistic debtors force them to do so. We establish that the balance of bargaining power between debtors and creditors in ex-post renegotiations is a major determinant of the ex-ante optimal leverage of the firm. We show that for reasonable parameter values, it is modified by a quarter.

Nous considérons la structure optimale de capital d'une entreprise, en présence de taxes et coûts de liquidation. Nous construisons un modèle en temps continu qui autorise la renégociation dynamique de la dette avant liquidation et le transfert illimité des avoirs fiscaux en cas de redressement. Nous distinguons le cas où les créanciers décident d'éliminer leur propre dette, de celui où ils sont poussés à le faire par leurs débiteurs. Nous établissons que le rapport des forces entre débiteurs et créanciers est un des principaux déterminants de la quantité optimale de dette, puisque pour des valeurs de paramètres raisonnables, celle-ci est modifiée d'un quart.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Corporate Bond Yield Spreads and the Term Structure

Authors: Anderson, Ronald W.; Yonghua Pan; Sundaresan, Suresh

This paper develops a structural model in continuous-time setting for design and valuation of corporate securities. We assume two underlying state variables follow exogenously given stochastic processes: the value of the assets of the firm and the riskless short term interest rate. Our model is flexible enough to cover many corporate securities including straight bonds, callable bonds, convertible bonds or other hybrids. The interest rate process is modeled such that it can be fitted to market data of yield curve. The model also integrates strategic service in corporate debt to address the issue of security design. We implement the model using the stochastic term structure model of Black, Derman and Toy. After calibrating the model to observed term structures we study the problem of design of securities and identify circumstances when callability and convertibility features are particularly attractive.

Nous présentons un modèle structurel en temps continu permettant l'évaluation et la structuration de titres en risque de défaillance. Nous supposons deux processus stochastiques sous-jacents : la valeur de l'actif de l'entreprise et le taux d'intérêt sans risque court terme. Notre modèle peut s'accommoder aux diverses formes de titres -- l'obligation à remboursement in fine, l'obligation avec option de rachat ou l'obligation convertible. Le processus du taux sans risque peut être calibré à la structure par terme de marché. Nous tenons compte de la possibilité de défaut stratégique par la modélisation de banqueroute à la façon de Anderson et Sundaresan. Dans une application concrète, nous utitisons le modèle de taux de Black, Derman et Toy. Après avoir calibré le processus de taux sans risque, nous explorons le problème de la structuration des titres. Nous mettons en évidence les conditions pour lesquelles une option de rachat ou la convertibilité en action sont particulièrement indiquées.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Estimation of default risk by stochastic balance sheet modeling: Application to French industrial firms

Authors: Redone, Catherine

This paper proposes to estimate corporate default risk and to predict bankruptcy via an Asset Liability Management (ALM) method of risk estimation, which is an alternative to multivariate models such as multiple discriminant analysis or neural networks. The method is based on corporate bond valuation models. Whereas ALM is almost exclusively used by banks and insurance companies, we assess probabilities of default for French manufacturing firms. Following Janssen [1992], we suppose that the dynamics for the total assets and the total liabilities can be described by geometric Brownian motions. The probability of insolvency -- ie the probability that net worth is negative -- is then estimated and analyzed as the probability of default. Firms are partitioned into two groups, based on the computed probabilities and a threshold level. The rate of correct classification is assessed from bootstrap samples and compared to other business failure prediction models. The assessed probabilities provide a good indicator of corporate bankruptcy risk for one to three years prior to failure.

An alternative methodology to multi-criteria models based on the economic and financial study of the firm is proposed in order to estimate the default risk of companies and to develop an indicator of the risk of bankruptcy. We use an asset-liability management method for estimating risks inspired by financial asset pricing models. While ALM is almost exclusively applied to banks and insurance companies, we estimate the default probabilities of industrial firms. We have accounting data from French companies of which we know whether they have filed for bankruptcy. Applying the Janssen model [1992], we assume that the net assets and liabilities of equity follow geometric Brownian processes. We then determine the probability of insolvency -- the probability that equity becomes negative -- which we analyze as the probability of default. A classification of companies into two groups -- healthy companies and vulnerable companies -- is carried out from the default probabilities and a threshold probability. This classification is compared to the reality of companies in order to calculate a rate of good classifications. The bootstrap method is used to validate our results. A comparison is made with the results of studies relating to the prediction of bankruptcy; the estimated default probabilities constitute a good indicator of the risk of bankruptcy from one to three years before the filing for bankruptcy.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

Introduction to “Valuation and corporate finance.”

Authors: Hege, Ulrich; Mella-Barral, Pierre

The article discusses various reports published within the issue including one on debt restructuring and another on asset substitution

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

The Timing of Arbitrage: An Options Approach

Authors: Lambrecht, Bart M.

The paper presents a continuous-time model for the timing of riskless arbitrage when the mispricing between two equivalent portfolios follows a jump-diffusion process and when there is a persistent prospect that the arbitrage bubble can "burst". The model endows the arbitrageur with n options to do arbitrage. When endogenously determined arbitrage bounds are violated one or more arbitrage trades bring asset prices back within the bounds. The model is extended to the case where there are two competing arbitrageurs who have incomplete information about each other's opinion on the expected lifetime of the arbitrage bubble. The optimal arbitrage rule is determined by a trade-off between the benefit of waiting and the cost of being preempted due to this delay.

Le papier présente un modèle à temps continu pour calculer le point optimal d'arbitrage quand la marge d'erreur entre les prix de deux portefeuilles équivalents suit un processus de saut-diffusion et quand il y a une possibilité permanente que la bulle puisse éclater. Dans le modèle, chaque arbitrageur a n options d'arbitrage. Les frontières d'arbitrage sont déterminées endogènement, et quand elles sont violées, une ou plusieurs transactions d'arbitrage rendent de nouveau les prix des portefeuilles dans la marge d'erreur. Puis te modèle est élargi pour inclure le cas où il y a deux arbitrageurs concurrents qui ont de l'information incomplète sur l'opinion de leur adversaire concernant la durée moyenne de la bulle d'arbitrage. Le point optimal d'arbitrage balance le bénéfice d'attendre contre le coût de préemption à cause de ce retard.

DATE PUBLISHED: 15/12/2000

VOLUME: 21

NUMBER: 2

A decision theoretical approach to bid-ask spreads: A note

Authors: Roger, Patrick

In this short note, we present an alternative approach to the analysis of bid-ask spreads provided by Kast and Lapied (1997). In the framework of a Choquet expected utility model, in the spirit of Schmeidler (1989), we show that the spread not only depends on the payment of the risky asset but also on the random wealth of the dealer before and after a trade. This approach integrates in a simple way the inventory component of the bid-ask spread. We illustrate this point in the special case of the dual theory of Yaari.

Dans cette note, nous présentons une approche alternative à l'analyse des bid-ask spreads présentée par Kast et Lapied (1997). Dans le cadre d'une espérance d'utilité exprimée comme une intégrale de Choquet, dans l'esprit de Schmeidler (1989), nous montrons que le spread dépend non seulement des paiements de l'actif mais aussi de la richesse du market-maker, avant et après la transaction. Cette approche intègre la composante d'inventaire contenue dans le spread. Nous illustrons ce point dans le cadre spécifique de la théorie duale de Yaari.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Behavior and performance in a bank-centric financial system: a trading game approach

Authors: Guigou, Jean-Daniel

Based on Weinstein and Yafeh (1995, 1998) works and japanese main bank relationships, this paper analyses the effects of banking influence on firms behavior and performance in strategic contexts. We develop a model in which decision making in a firm is described as a bargaining problem between the shareholders and the bank. Bargaining provides the firm with an objective different from that of pure profit maximization. As the interest rate used in the objective function is lower than the true interest rate, the firm derives a strategic advantage and behaves more fiercely on the product market. But a firm will borrow more and pay higher than the average interest rate when under banking influence than when independant. The costs of banking influence are such that it may be profitable for each firm in the market to borrow from a non-influencial bank. These results can be used to explain the erosion phenomenom of principal bank relationships observed in Japan since the liberalisation of financial markets in the early 1980's.

À la lumière des travaux de Weinstein et Yafeh (1995, 1998), cet article met en valeur l'incidence de l'influence bancaire sur le comportement et les performances d'entreprises en situation d'interaction stratégique. Nous développons un modèle dans lequel les décisions sont prises suivant un processus de négociations entre les actionnaires et la banque créancière de l'entreprise. La négociation conduit à retenir un objectif différent de la stricte maximisation du profit. Par ailleurs, le taux d'intérêt pris en compte dans la fonction objectif est inférieur à son niveau effectif. La firme devient plus agressive sur le marché du produit et obtient un avantage stratégique. Mais une firme emprunte davantage et paie des intérêts à un taux supérieur en se plaçant sous l'influence d'une banque qu'en restant indépendante. Les coûts sont tels qu'il peut être profitable pour chaque entreprise de ne pas se placer sous influence bancaire. Ces résultats permettent d'expliquer le phénomène d'érosion des relations de banque principale constaté au Japon depuis le mouvement récent de libéralisation des marchés financiers.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Measuring the risk-return ratio from the Eurocurrency market

Authors: Jondeau, Éric

In this paper, we study the reward-to-risk ratio, using monthly euro-dollar, euro-mark and euro-franc term structures between 1975 and 1997. We test the relationship between excess holding return and volatility in an ARCH-in-Mean framework. We first obtain that the conditional volatility displays a non-stationary pattern, that there is no asymmetric effects from shocks to volatility, and that the conditional density is well represented by a student's t distribution for the euro-dollar and by a GED for the euro-mark and the euro-franc. We then find that the best relation between excess return and risk is obtained when the risk is represented by the logarithm of the conditional volatility. Last the estimates of the reward-to-risk ratio are lower than to those obtained in previous empirical studies on stock returns but similar to those obtained on monetary and bond returns.

Nous étudions dans cet article la relation entre le rendement et le risque pour les marchés de taux sur l'euro-dollar, l'euro-mark et l'euro-franc, de 1975 à 1997. Nous testons la relation entre l'excès de rendement de portage et la volatilité à partir d'une modélisation ARCH-in-Mean. Nous trouvons tout d'abord que la variance conditionnelle évolue selon une dynamique non stationnaire, qu'il n'existe pas d'effets d'asymétrie des chocs de rendement sur la variance et que la distribution conditionnelle la plus adaptée est la loi de Student pour l'euro-dollar et la GED pour l'euro-mark et l'euro-franc. Nous obtenons alors que la meilleure relation entre l'excès de rendement et le risque est obtenue lorsque le risque est représenté par le logarithme de la volatilité pour les trois marchés. Finalement, les estimations du ratio rendement-risque sont plus faibles que celles obtenues à partir des rendements boursiers, mais du même ordre que celles issues de rendements antérieurement monétaires et obligataires.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Practice and theories of financing: the case of France

Authors: Carpentier, Cecile; Suret, Jean-Marc

This study proposes and tests an empirical model of financial choices of large French firms. It differs from previous works by focusing on the medium term behaviors measured by the variation of the debt level between 1987 and 1996. Following the path opened by Fama and French (1997) and Opler and Titman (1996), financial choices are simultaneously explained by variables issued from the two main conceptual framework, the Static Tradeoff Theory and the Pecking Order Theory. We consider that these two conceptual models should be integrated and not opposed to understanding the firm's decisions. In this context, the firm defines a target ratio and the financial choices are linked with the gap between the actual and the target ratio. We empirically find that this gap is significantly associated with the financing decisions, but the hypotheses of a significant impact of POT linked variables on these decisions cannot be rejected. In particular, profitability and size strongly influence the process of return toward the target. Moreover the hypothesis of large significant decrease of leverage of French firms over the period can be rejected.

This study proposes and tests an empirical model of medium-term financial behavior of large French companies. It differs from previous studies by adopting a medium-term dynamic perspective: the explained variable is the variation in debt, measured from 1987 to 1996. It also proposes an explanation of financing choices based on the superposition of the two proposed conceptual frameworks, namely the Static Tradeoff Theory and the Pecking Order Theory, rather than on their opposition. In this respect, this study is in line with the studies of Fama and French (1997) and Opler and Titman (1996). In this framework, companies base their financing decisions on their situation in relation to the target debt ratio, estimated here by the sector average. The deviation from this target is an important and significant explanatory element of financing decisions, but the variables linked to the Pecking Order Theory also guide the financing behavior of companies in France. Profitability and size significantly influence financing choices and condition the process of returning to the target. The study also allows us to invalidate the hypotheses of overall debt reduction of companies in France during this period.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

Agency theory and hedging policy

Authors: Jokung N., Octave; Levasseur, Michel

Through this paper we analyze the demand for hedging in presence of agency problems. The desirability of coverage in order to reduce agency costs is pointed out and the fact that the size of hedge purchased depends not only on the level of risk-aversion of the decision maker, but also on the incentivity of the contract between the principal and the agent.

La demande de couverture est analysée à partir d'un modèle Principal-Agent. Nous montrons que le recours à la couverture peut permettre de réduire les coûts d'agence et surtout que le niveau de couverture n'est pas uniquement fonction du risque et de l'attitude des agents face au risque, mais aussi de l'incitation de ceux-ci à fournir un effort.

DATE PUBLISHED: 15/06/2000

VOLUME: 21

NUMBER: 1

A New Approach to Check the Free Boundary of Single Factor Interest Rate Put Option

Authors: W. Allegretto, G. Barone-Adesi, E. Dinenis, Y. Lin, G. Sorwar

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Analysis and Valuation of Exotic and Real Options: a Survey of Important Results

Authors: M. Bellalah

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Asian Options in a Market driven by a Discontinuous Process

Authors: N. Bellamy

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Lookback and Barrier Options: a Comparison between Black-Scholes and ACB Pricing

Authors: J.L. Prigent, O. Renault, O. Scaillet

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Noisy Information and Investment Decisions: a Note

Authors: L. Gauthier, E. Morellec

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Exotic Options

Authors: N. El Karoui, M. Jeanblanc

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Sovereign Debt Discounts and the Unwillingness to Pay

Authors: E. Clark, A. Zenaïdi

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

A case of 'Hybrid' Rate and Share Options: Performance Complement Options

Authors: E. Valezy, N. Caillat

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Valuation of Options on the Maximum/Minimum of Multiple Assets, Discrete Lookback Options and Equity-Indexed Annuities

Authors: X. Sheldon Lin

DATE PUBLISHED: 15/07/1999

VOLUME: 20

NUMBER: 2

Yield Option Pricing in the Generalized Cox-Ingersoll-Ross Model

Authors: G. Deelstra

DATE PUBLISHED: 15/12/1999

VOLUME: 20

NUMBER: 2

Comparison of methods for extracting information from Franc-Deutschemark exchange options: the case of the French market

Authors: Jondeau, Éric; Rockinger, Michael

The estimation of risk neutral densities yields a precious tool for market participants eager to learn about other investor's expectations. By using FRF/DEM option data surrounding the 1997 snap election we compare various existing methods. These methods are the mixture of log-normal densities, the Hermite approximation of Madan and Milne, the Edgeworth expansion of Jarrow and Rudd as well as the structural model of Malz who assumes a jump-diffusion for the underlying process, and eventually of Heston who uses a stochastic volatility model. Models allowing for skewness and kurtosis in excess of the lognormal one yield improved volatility estimates. The mixture of log-normals provides a good description for the data at hand. Malz' jump diffusion model should be used in parallel because of its ease to provide interpretable parameters. A political event is shown to strongly affect expectations.

L'estimation des densités neutres au risque fournit un outil précieux pour étudier les anticipations des investisseurs. Nous utilisons des données d'option FRF/DEM pour la période encadrant les élections anticipées de 1997 pour comparer diverses méthodes d'estimation de ces densités. Les méthodes étudiées sont le mélange de lois log-normales, l'approximation par les polynômes d'Hermite de Madan et Milne, ou par les expansions d'Edgeworth de Jarrow et Rudd, le modèle structurel de Malz, qui suppose que le sous-jacent suit une diffusion avec saut, et finalement celui de Heston qui autorise une volatilité stochastique. De façon générale, les modèles qui autorisent une skewness et une kurtosis plus larges que celles de la loi log-normale fournissent une estimation moins biaisée du paramètre de volatilité que le modèle log-normal usuel. Le mélange de lois log-normales fournit une bonne description des données. L'utilisation du modèle de diffusion avec saut, dont les paramètres sont aisément interprétables, peut aussi être recommandée. Nous montrons également qu'un événement politique affecte fortement les anticipations.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

Default risk in asset pricing

Authors: Mella-Barral, Pierre; Tychon, Pierre

This paper provides an analytical solution for the impact of default risk on the valuation of realistically intricate claims on time dependent uncertain income streams. It can be used to price defaultable bonds and credit derivatives. Its modular structure allows us to adjust the set of assumptions concerning the event of default to the specificity of the environment which surrounds the asset. The importance of such a flexibility is illustrated in the context of corporate debt, examining the case of finite lived coupon paying corporate bonds with principal repayment at maturity. The magnitude of risk premia, as well as the term structure of credit spreads, are largely determined by the assumed default scenario.

Cet article propose une solution analytique au problème de l'évaluation de l'impact du risque de défaut sur la valeur d'actifs. Les actifs sont ici définis comme la réalisation d'une suite complexe de revenus incertains et variables dans le temps. Cette solution peut être employée pour évaluer des obligations ainsi que des produits dérivés comportant un risque de défaut. Sa structure modulaire permet d'ajuster les suppositions concernant l'événement de défaut aux spécificités de l'environnement. L'importance d'une telle flexibilité est illustrée dans le contexte de la dette d'entreprise, en examinant le cas d'une obligation payant une suite de coupons et assortie d'un remboursement du principal à maturité. L'ampleur de la prime de risque ainsi que sa structure dans le temps apparaissent comme étant largement déterminées par le scénario de défaut supposé.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

FIGARCH modeling applied to the analysis of the term structure of interest rates

Authors: Lardic, Sandrine; Mignon, Valérie

The purpose of this paper is to analyse the dependence structure of the volatility of interest rates term premia series. More specifically, our object is to test whether long-term dependent processes are appropriated for modelling volatility series. To this end, we apply various methods, which are based on the estimation of FIGARCH processes, in order to detect the presence, if any, of long-term memory. Results suggest that the considered series are characterized by a strong dependent structure, which indicate that shocks to volatility have persistent consequences.

L'objet de cet article est de tester le type de la structure de dépendance de la volatilité des primes de terme calculées à partir des séries de taux d'intérêt. Plus spécifiquement, ce travail a pour objectif de déterminer si les séries de volatilité peuvent être caractérisées par un processus fortement dépendant. A cette fin ont été mises en œuvre diverses procédures de détection de la mémoire longue basées sur l'estimation des processus GARCH fractionnairement intégrés (FIGARCH). Les résultats obtenus suggèrent que les séries considérées sont caractérisées par la présence d'un tel phénomène, témoignant ainsi de conséquences durables des chocs sur la volatilité.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

Default probability and interest rate spreads: an empirical study of the French market

Authors: Merli, Maxine; Roger, Patrick

In this paper, we propose a simple methodology to build the term structure of default probabilities for risky coupon bearing bonds. The actuarial interpolated spread is often used by professionals to value the default probability. We propose an alternative measure based on the difference between the price of a bond and its riskless equivalent. The last section is dedicated to an empirical investigation of a sample of French bonds. We show that the typology induced by ratings is not reproduced in the default spreads. Only four classes of risk are necessary to describe the risky bond market.

Dans cet article, nous proposons une méthodologie simple de construction de la structure par termes des probabilités de défaut pour des obligations couponnées à taux fixe. Le spread actuariel interpolé est généralement utilisé dans les salles de marché à cette fin. Nous définissons une mesure basée sur les écarts de prix entre une obligation et son équivalent sans risque. Cette méthode est utilisée sur un échantillon d'une centaine d'obligations en francs, et nous montrons que le classement opéré par les ratings ne se retrouve pas dans les spreads de défaut, sauf à regrouper ces notes en quatre grandes classes.

DATE PUBLISHED: 15/06/1999

VOLUME: 20

NUMBER: 1

Estimation of a Linear Gaussian Model

Authors: Danesi, Vladimir; Genon-Catalot, Valentine; Laurent, Jean-Paul

We address the problem of estimating parameters of the two factors linear Gaussian Heath-Jarrow-Morton model, with time homogeneous volatilities. Since the market prices for risk are not specified, the likelihood of observed data cannot be computed. We thus derive the usual estimators (ME, GMM) based on an auxiliary model where the drifts are set to zero. We show the consistency of these estimators and study their asymptotic properties when the time interval between two observations tends to zero. The approach is applied to interest rates from the French money market, and terms to maturity range between one day and five years. The estimates can be used to measure interest rate sensitivities of a portfolio of assets, in an Asset and Liability Management perspective.

Nous nous intéressons au problème d'estimation des paramètres d'un modèle linéaire gaussien à deux facteurs à la Heath-Jarrow-Morton, avec des volatilités homogènes dans le temps. Comme les prix de marché ne sont pas spécifiés, la vraisemblance ne peut être calculée. Nous dérivons alors les estimateurs usuels (maximum de vraisemblance, moments généralisés) avec un modèle auxiliaire, où les effets de translation sont mis à zéro. Nous montrons la convergence de ces estimateurs et étudions leurs propriétés asymptoliques, lorsque l'intervalle de temps entre observations tend vers zéro. L'approche est appliquée à l'analyse des taux d'intérêt sur le marché monétaire français avec des maturités de un jour à cinq ans. Les estimations peuvent être utilisées pour évaluer la sensibilité d'un portefeuille d'actifs aux variations de taux dans une optique de gestion actif-passif.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Market Volatility Index and Maximum Likelihood Estimation of Stochastic Volatility Models

Authors: Moraux, Franck; Navatte, Patrick; Villa, Christophe

Practical use of stochastic volatility models requires a preliminary estimation of the parameters of the unobservable latent volatility process. First, we present in the stochastic volatility framework of Hull-White [1987]the Renault-Touzi [1996]'s statistical iterative procedure of filtering (of the latent volatility process) and estimation (of its parameters). Second, we apply this procedure to a time series of a Market Volatility Index. Empirical evidence from the French Market Volatility Index shows that this procedure failed to provide estimates of the parameters of the unobservable latent volatility process. We suggest, however to exploit Feinstein [1992] research that demonstrates that the implied volatility approximates the market expectation of the average volatility over the life of the option. In this case, implied volatility is used in the same spirit as yield to maturity on the bonds market and a direct maximum likelihood statistical inference as Pearson-Sun [1994] and Duan [1994] do in the case of interest rate can be applied. Third, this result is extended to the correlated risks case since a negative correlation between the underlying index return and its market volatility index variation, the so-called leverage effect, is observed.

L'utilisation de modèles à volatilité stochastique demande une estimation préliminaire des paramètres du processus latent de volatilité non observable. Nous commençons, dans le contexte du modèle de Hull-White, par présenter la procédure de filtrage itérative développée par Renault-Touzi (1996) pour prévoir le processus de volatilité et la méthode d'estimation associée. Nous appliquons cette approche à une série d'indice de volatilité de marché. L'évidence empirique pour le tas français suggère que la procédure ne permet pas d'obtenir de bons estimateurs des paramètres sous-jacents du modèle de volatilité. Pour résoudre cette difficulté, nous suggérons d'exploiter un résultat de Feldstein (1992), qui montre que la volatilité implicite approche l'anticipation de la volatilité moyennée sur la vie de l'option. Par analogie avec la pratique développée sur les marchés obligatoires, nous pouvons alors appliquer une méthode du maximum de vraisemblance directe comme dans Pearson-Sun (1994) et Duan (1994). Le résultat est étendu au cas de risques corrélés, vu la corrélation négative observée entre le rendement de l'indice sous-jacent et la variation de l'indice de volatilité.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

The very high frequency dynamics of the CAC 40 index

Authors: Teiletche, Jérôme

Using ultra-high frequency on the CAC 40 index, we study the statistical properties of the index for various sampling frequencies. First, we estimate the tail indices of the distribution. Then, we study the intra-daily and intra-weekly patterns of the returns and the volatility. We show that the beginning and the end of the trading day are concerned with an increase of the volatility. The same phenomenon is observable during the release of us macroeconomic news and the opening of foreign stock exchanges. Those seasonalities affect the correlation structure of the volatility. After an appropriate time deformation, the seasonalities disappear and we show the presence of a long memory of the volatility.

A partir de données enregistrées à très haute fréquence (toutes les cinq minutes) sur l'indice CAC 40, nous étudions les propriétés statistiques de l'indice selon la fréquence d'échantillonnage. Après avoir estimé les índices de queue de la distribution, nous nous intéressons à l'évolution intra-journalière et intra-hebdomadaire des rendements et de la volatilité. Nous mettons ainsi en évidence que chaque journée d'échange est caractérisée par une volatilité plus forte en début et en fin de journée, mais aussi par une hausse de la volatilité à l'annonce des principales statistiques macro-économiques américaines et au moment de l'ouverture des bourses étrangères. Cette saisonnalité de la volatilité affecte sa structure corrélative. Après une déformation appropriée du temps, la saisonnalité disparaît et la structure corrélative des rendements fait apparaître une mémoire longue.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Extreme movements of high-frequency financial series

Authors: Robert, Christian Yann

This article presents a study of extreme price movements of Alcatel stock over 1 minute, 5 minutes and 30 minutes time intervals during a trading section. This movements are encountered after the opening, at lunch time around 12:30 a.m. and before the closing. According to extreme value theory, the form of the distribution of extreme movements is precisely known; empirically, the extreme price variations obey the Gumbel distribution. Moreover, we observe that the larger the time interval, the thinner the distribution tails.

Cet article présente une étude des mouvements extrêmes de l'action Alcatel sur des intervalles de temps de une minute, cinq minutes et trente minutes à l'intérieur d'une journée de cotation. Ces mouvements ont lieu généralement en début de matinée, vers midi et en fin d'après-midi. La théorie des valeurs extrêmes nous donne la forme de la distribution des variations de prix extrêmes ; empiriquement, il apparaît que ces variations extrêmes obéissent à la loi de Gumbel. Enfin, l'étude montre que les queues de distribution deviennent de moins en moins épaisses au fur et à mesure que le pas d'échantillonnage s'accroît.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Multiregime Term Structure Models

Authors: Gouriéroux, C.; Scaillet, O.

The Ho and Lee model is the analogue for the study of the term structure of interest rates of the binomial tree introduced by Cox, Ross and Rubinstein in the one risky asset case. This model allows only for a small number of deformations of the term structure between two successive dates, and is therefore incompatible with available data. We propose here to reconcile tree approaches and statistical inference. We consider switching regime models for which the deformation of the term structure may behave randomly in each regime. Question about constraints induced by no arbitrage are also addressed in a context of asymmetric information between traders and the econometrician in charge with the estimation.

Le modèle de Ho et Lee est pour l'étude de la structure par terme des taux d'intérêt l'analogue de l'arbre binomial introduit par Cox, Ross et Rubinstein pour le cas d'un seul actif risqué. Ce modèle ne permet cependant qu'un petit nombre de déformations de la structure par terme entre deux dates, ce qui le rend incompatible avec les données disponibles. Nous nous proposons de réconcilier les approches par arbre et l'inférence statistique. Pour cela nous considérons des modèles à régimes, où la déformation de la structure par terme peut dans chaque régime avoir une certaine variabilité. Les questions de contraintes provenant de l'absence d'opportunité d'arbitrage sont analysées dans un contexte d'information asymétrique entre les intervenants du marché et l'économètre chargé de l'étude.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Persistence in Intertrade Durations

Authors: Jasiak, Joanna

This paper examines long-term dependence in times between trades on financial markets. The autocorrelation functions of several intertrade duration series show a slow, hyperbolic rate of decay typical for long memory processes. For example, a shock to times between trades of the Alcatel stock on the Paris Stock Exchange (SBF Paris Bourse) may persist in the transactions time for a long period of 1,000 or 2,000 ticks. With an average duration of 52 seconds between transactions, this may amount to sixteen or thirty-two hours in calendar time. This paper introduces a fractionally integrated autoregressive conditional duration (FIACD) model for intertrade duration series. It also examines transformed duration processes representing times between consecutive returns to states of null, positive or negative returns. This approach captures the relationship between the duration persistence and return dynamics. The times elapsed between returns to various states feature very similar autocorrelation patterns and do not possess the long memory property. The persistence in durations is also determined by the times spent within specific states of returns. The average visiting time is state dependent, features intraday variation and may be considered as an instantaneous measure of state persistance. The long memory patterns are examined in data on the Alcatel and IBM stocks traded on the Paris Bourse and NYSE, respectively.

Cet article s'intéresse à la dépendance à long terme des durées entre transactions sur les marchés financiers. Les fonctions d'autocorrélation de telles durées présentent en effet des décroissances lentes typiques des processus à mémoire longue. Pour les traiter, nous introduisons des modèles de durée autorégressifs fractionnaires (FIACD). Ils sont appliqués à l'étude des durées entre les changements de sens d'évolution de prix (rendements positifs, négatifs ou nuls), et aux durées passées dans les divers états. Ces phénomènes de mémoire longue sont étudiés empiriquement sur des données des titres Alcaltel et IBM, échangés respectivement sur les bourses de Paris et de New York.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Time-varying Market Price of Risk in the CAPM. Approaches, Empirical Evidence and Implications

Authors: Hafner, Christian M.; Herwartz, Helmut

Times-varying risk premia traditionally have been associated with the empirical fact that conditional second order moments are time-varying. This paper additionally examines another possible source for time-varying risk premia, namely the market price of risk (lambda). For utility functions that do not imply constant risk aversion measures, the market price of risk will in general change over time. We provide empirical evidence for the German stock market in a bivariate GARCH-M framework using alternative specifications for lambda. The results indicate that a model with lambda being a function of typical volatility measures performs best for most series. To facilitate the interpretation of the results, we plot impulse response functions of the risk premia.

Des primes de risque évolutives ont traditionnellement été reliées aux volatilités évolutives observées empiriquement. Ce papier examine une autre source possible de dépendance temporelle de la prime. Pour des fonctions d'utilité qui n'impliquent pas des aversions constantes, le prix de marché du risque (lambda) change généralement avec le temps. Nous mettons empiriquement en évidence ce fait pour le marché d'actions allemand par l'intermédiaire d'un modèle GARCH-M bivarié permettant diverses spécifications de ce prix lambda. Nous montrons qu'un modèle où lambda dépend de mesures de volatilités fournit de meilleurs ajustements pour la plupart des séries. Pour faciliter l'interprétation des résultats, nous effectuons une analyse par fonction réponse de la prime de risque.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

Transparency and Market Interactions

Authors: Boyer, Cécile

In this paper, we use a sequential continuous time model to examine how privately informed agents choose where to trade when two markets with different degrees of transparency are opened, like Paris and London for example, with abstraction of the exchange rate. We suppose that all past and current orders are observable on the first market whereas only the current buy or sell orders are available to public on the second one. We show that the informed agents sometimes adopt mixed strategies in their market choices and derive the properties of liquidity. The absence of orders will be informative for the market makers and hence the system converges to the state of perfect information as if only the transparent market existed.

On étudie un modèle séquentiel en temps continu où des agents détenant de l'information privée peuvent choisir d'échanger sur deux marchés se distinguant par des degrés de transparence différents : tous les ordres présents et passés sont visibles sur le premier marché et seul l'ordre à servir l'est sur le second. Dans ces conditions, les informés peuvent adopter des stratégies mixtes dans le choix du marché où échanger et nous en déduisons des propriétés concernant la liquidité. De plus, l'absence d'ordre est elle-même informative pour les teneurs de marché, ce qui implique une convergence du système vers son état d'information parfaite, comme s'il n'existait que le marché transparent.

DATE PUBLISHED: 15/12/1998

VOLUME: 19

NUMBER: 2

The ex ante and ex post effectiveness of a hedge. The contract on the MATIF CAC 40 index

Authors: Boveroux, Philippe; Minguet, Albert

The analysis concerns the hedging of market risk on an equity portfolio. The objective is to estimate hedge ratios using MATIF's future on CAC 40 index. As usual, the optimal hedge ratio is defined as the risk-minimizing ratio of the covered position, with the short position on future balancing the long position on equity portfolio. First, several econometric methods to estimate risk-minimizing hedge ratios are being compared. Next, the hedging effectiveness of these different methods is measured by comparing the performance for an out-of-sample period. The analysis is also extended to other dynamic strategies.

L'étude porte sur la couverture du risque de marché lié à un portefeuille d'actions. Elle vise à estimer des rapports de couverture au moyen du contrat à terme ferme portant sur l'indice CAC 40, négocié sur le MATIE L'objectif consiste à comparer différentes techniques de détermination du rapport de couverture minimisant la variance de la position couverte, définie comme la somme de la position occupée sur un portefeuille d'actions et de celle occupée en contrepartie sur le contrat à terme. Dans une seconde phase, on envisage l'efficacité d'une protection hors de l'échantillon basée sur diverses estimations du rapport de couverture. Différentes variantes en matière de stratégies font également l'objet de comparaison.

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Valuation model for an asset contingent on interest rates and two risky assets.

Authors: Augros, Jean-Claude; Queruel, Michel

L'objet du modèle présenté dans cet article est de permettre l'évaluation d'un actif contingent à la fois aux taux d'intérêt et à deux actifs risqués. Il repose sur la combinaison de deux modèles de base, celui de Ho et Lee généralisé, développé par Bonnassieux et Brunel (1993) pour modéliser l'évolution de la structure des taux, et celui de Cox, Ross et Rubinstein (1979) pour la modélisation du prix des actifs risqués. La démarche séquentielle proposée constitue une généralisation du modéle de Kishimoto [1989]. Cette approche octonomiale permet de prendre en compte la corrélation des variations du prix des deux actifs risqués sous-jacents avec les taux d'intérêt. En outre, à la différence du modèle de Kishimoto, le modèle développé ici permet de différencier la volatilité des taux d'intérêt en fonction de la maturité à laquelle ils se rapportent. Une application à l'évaluation d'une option sur le maximum (ou le minimum) de deux actifs, en présence de taux d'intérêt stochastiques, est proposée.

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Diffusion processes and discretization bias: an empirical analysis by indirect inference applied to interest rates.

Authors: De Winne, Rudy

This paper compares different continuous-time specifications for the short-term interest rate dynamics on five European markets. Firstly, a classical maximum likelihood approach is used in order to estimate the parameters of nine diffusion processes. The results show the superiority of very simple models like the Ornstein-Uhlenbeck process of Vasicek (1977) or the « Square Root » process of Cox, Ingersoll & Ross (1985). Then we focus on the discretization bias and the indirect inference method is used to account for it. Our results confirm the existence of this bias. Finally, this simulation-based methodology is applied in order to estimate the parameters of two correlated diffusion processes.

Cet article a pour objet la comparaison de divers processus de diffusion de taux d'intérêt à court terme dans un cadre européen. L'estimation par la méthode du maximum de vraisemblance des paramètres des versions discrètes approchées de ces processus nous conduit à accorder la préférence à des processus simples et classiques tels que le processus d'Ornstein-Uhlenbeck de Vasicek (1977) ou le processus « Racine Carrée » de Cox, Ingersoll & Ross (1985). Nous nous focalisons ensuite sur le biais de discrétisation et nous proposons de corriger ce biais par le recours à la méthode d'inférence indirecte. La confrontation des résultats obtenus à partir des deux méthodologies confirme l'existence de ce biais de discrétisation et l'aptitude de la méthode d'inférence indirecte à corriger celui-ci. Finalement, nous montrons que cette méthodologie est applicable dans le cadre de l'estimation des paramètres de deux processus de diffusion corrélés.

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Trading volume and autocorrelation of returns: a Canadian study of contrarian strategies

Authors: Boies, Dominique; Lalancette, Simon; Lavallée, Mario

Recent theoretical contributions have demonstrated the existence of a significant relation between lagged variations in the transaction volume and the first-order autocorrelation of stock returns. Contrarian strategies may generate superior performance as they benefit from an indicator that may be capable of economically forecasting the reversion in stock prices. This approach is empirically tested in a Canadian context by forming winner and loser portfolios whose attributes are driven by the magnitude of lagged volume changes. The impact of the price anomaly on the performance of the contrarian strategy is accounted. Finally, superior performance is assessed in a risk-return framework by resorting to statistical bivariate and multivariate tests that compare Sharpe ratios of winner and looser portfolios to that of a reference stock market index.

Certains travaux menés sur le comportement excessif des opérateurs des marchés financiers ont identifié un lien prévisionnel entre un accroissement du volume des transactions des titres négociés en bourse et l'autocorrélation subséquente de leur rentabilité. Cette hypothèse enrichit l'application des stratégies contraires d'un moyen de prévoir les mouvements inverses de prix des titres. Nous évaluons empiriquement, à l'aide d'une méthodologie articulée sur la formation de portefeuilles dits « gagnants » et « perdants » selon l0es variations du volume des transactions, la relation volume-autocorrélation des rentabilités sur le marché canadien. Les tests empiriques évaluent, entre autres, l'influence de l'effet de prix sur la relation. Finalement, nous analysons la performance des stratégies contraires dans un cadre risquerentabilité par le biais de tests statistiques bivariés et multivariés qui comparent les ratios de Sharpe des portefeuilles contraires et d'un indice boursier de référence

DATE PUBLISHED: 15/07/1998

VOLUME: 19

NUMBER: 1

Debt contract and optional forms of action

Authors: Francois, Pascal

Because of shareholders' limited liability, an equity stock has an optional form. The exercise rule of this option depends on the conditions under which default is declared. The area of this paper is to establish, in a systematic way, the correspondence, initially suggested by Merton (1974), between the debt contract chosen by the firm and the optional form of the stock resulting from it. This optional form is an important stake of the negotiations between bond- and stock-holders when writing the debt contract, in order to reduce the stockholders' incentive to take risks. Commonly used debt provisions as well as common ways of circumventing the debt contract are studied, making the stock a more or less complex option.

Due to the limited liability of shareholders, the action has an optional character. The rules for exercising this option depend on the conditions under which the default situation occurs. The objective of this work is thus to systematically establish the correspondence, initially suggested by Merton (1974), between the type of debt contract chosen by the firm and the optional form of the action that results from it. This optional form is a stake in negotiations between bondholders and shareholders at the time of drafting the debt contract, in order to limit the incentive that the latter have to take risks. We study different commonly encountered bond clauses, as well as certain means available to shareholders to divert the debt contract, which make the action a more or less complex option.

DATE PUBLISHED: 15/12/1996

VOLUME: 17

NUMBER: 2

Convergence or divergence between European currencies and international financial equilibrium

Authors: Artus, Patrick

We examine under which circumstances disturbances affecting the international financial equilibrium (in particular resulting from changes in the situation of the United States: monetary policy, current account balance...) can modify the cross parities of European currencies (specially of strong currencies: Deutschmark, vis à vis weaker currencies: lira...). One can indeed observe that changes in the parity of the dollar (due to changes in interest rates in the us, or in the us trade deficit) sometimes have significant effects of exchange rates between European currencies and sometimes have not. One has therefore to identify the causes of such a non-permanent asymetry.

Nous nous demandons dans quelles circonstances des chocs affectant l'équilibre financier international (et en particulier résultant de modifications de la situation américaine : politique monétaire, balance courante...) peuvent modifier les parités des monnaies européennes les unes vis-à-vis des autres (spécialement des monnaies fortes : mark, par rapport aux monnaies plus faibles : lire...). On a en effet observé à certaines périodes que les mouvements du dollar (induits par des modifications des taux d'intérêt américains, du déficit extérieur américain) avaient de forts effets sur les taux de change en Europe, et à d'autres périodes au contraire que ce n'était pas le cas. Il faut donc identifier les causes de cette asymétrie intermittente.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 2

The impact of divestment operations on shareholder wealth: an information asymmetry approach

Authors: Feels, Patrick

This paper presents findings suggesting that sell-off announcement and transaction price disclosure convey information on the quality of the firm. The asset sell-off is studied in the framework of Myers and Majluf (1984) model. We show that an asset sell-off allows a parent firm to avoid some situations of under-investment. Further, in some cases, under-investment incentives are eliminated by an over-divestment. In this framework, we predict that the good firms disclose transaction price. The stockholder's gain to divestiture is positively related to lack of financial slack and degree of undervaluation. The empirical investigation uses diving French companies sample. Price disclosure has a decisive impact on stockmarket reaction. There is also evidence that sell-off announcements with price declaration are more dramatically preceded by a period of significant negative returns than sell-off announcements without price declaration. In addition, we find degree of financial slack prior to divestment to be inversely related to abnormal return. These findings support our empirical predictions.

This paper presents research suggesting that divestment and transaction price announcements convey information about firm quality. The divestment transaction is studied within the analytical framework of Myers and Majluf (1984). We show that divestment allows the firm to avoid underinvestment situations. These underinvestment situations can sometimes be eliminated by over-divestment. Furthermore, good quality firms disclose the transaction price to the financial market; shareholder gains resulting from divestment are positively related to the lack of financial slack and the degree of undervaluation of the firm. The empirical study is conducted using a sample of French divestment companies. The price announcement has a decisive impact on the stock price. It also appears that companies that announced the transaction price experience a period of weaker stock market performance before the divestment transaction compared to companies that did not announce the price. Moreover, we find that the degree of financial slack is inversely related to abnormal returns. Together, these results tend to confirm the empirical implications related to the information asymmetry hypothesis.

DATE PUBLISHED: 15/12/1996

VOLUME: 17

NUMBER: 2

Measuring liquidity: an application to the Chicago options market (CBOE)

Authors: Poincelot, J. Dominique

This study aims to measure liquidity of the Chicago Board Options Exchange for January and February 1988. A market is liquid if investors could buy or sell immediately without loss. With continuous cotation, the bid ask spread is the cost of immediacy. This structure implies two measures of the liquidity: the spread and the market's depth. The spread is difference between ask and bid prices quoted in the book. For 36 options selected, we find a spread equal to 18,51 cents. But more than 24 % of trades occurs between the bid ask spread decreasing the cost of immediacy. This study is completed by an investigation of spread's factors. We find tree factors: option's price, trading activity and the nature of options (« in » or « out the money »). Market's detph is the ability of a market to absorb increases in trading volume. A low detph implies importants effects on prices. For 264 blocks, we find no effect on bid and ask prices and no spend of price's adjustment. For this period, CBOE has a excellent depth.

Cette étude a pour objectif d'évaluer la liquidité du marché des options de Chicago (CBOE) pour les mois de janvier et février 1988. Un marché est liquide si l'investisseur peut échanger un actif instantanément et sans perte de valeur. Sur le CBOE où les cotations sont continues, c'est l'existence de la fourchette de prix qui garantit l'instantanéité de l'échange impliquant un coût. Dans ce contexte, nous nous intéressons aux deux mesures classiques qui sont la marge de prix et la profondeur. La marge de prix est la différence entre les deux prix de la fourchette cotés à tout instant. Pour les 36 options retenues, nous constatons une marge cotée de 18,51 « cents ». Toutefois, plus de 24 % des transactions sont réalisés au sein de la fourchette réduisant le coût de la liquidité. L'analyse est complétée par la recherche des déterminants de la marge cotée. Nous mettons en évidence trois déterminants : le prix de l'option, l'activité du marché et la nature de l'option (option « en dedans » ou « en dehors »). La profondeur est la capacité du marché à absorber les transactions de toute taille. Si le marché est peu profond, les échanges de blocs d'options auront une incidence sur les fourchettes de prix du marché. Pour les 264 blocs retenus, nous montrons l'absence d'effet sur les deux prix de la fourchette et concluons par l'absence de vitesse d'ajustement des prix. Pour la période, le CBOE présente une excellente profondeur.

DATE PUBLISHED: 15/12/1996

VOLUME: 17

NUMBER: 2

Empirical determination of factors influencing European banking sector stocks; an approach based on international APT

Authors: Seiler, Robert

This study focuses on the factors generating the monthly returns of 128 stocks of the european banking industry (12 countries are represented, including Switzerland). Using Solnik's International APT, we have submitted 50 pre-specified economic and financial variables to an iterative process (forward selection). The results, obtained over the 1988-1995 period, show that 5 IAPT-factors have been identified. Two are linked to interest rates, and three are linked to the trade balance.

Cette étude cherche à identifier la structure factorielle IAPT générant les rentabilités de 128 titres bancaires européens (12 pays, dont la Suisse, sont représentés). Les 50 variables économiques et financières pré-spécifiées sont soumises à un processus itératif (forward selection) qui identifie les facteurs pertinents comme étant ceux qui présentent, notamment, une prime de risque IAPT significative. Les résultats, obtenus sur la période 1988-1995, montrent que 5 facteurs expliquent les variations des portefeuilles bancaires européens : deux sont liés aux taux d'intérêt, et trois à la balance commerciale.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Wealth effect and information effect in the term structure of interest rates

Authors: Bisière, Christophe

Using a discrete time general equilibrium model of the term structure of interest rates, we seek to determine the sign of the liquidity and solidity premiums -- which jointly characterize the term structure -- depending on the nature and structure of the uncertainty. We choose to study two different structures. In the first one, associated with a wealth effect, the messages that the agents can receive only reveal the present state of the economy. In the second one, associated with an information effect, the messages bring an information about the futur state of the economy. We define a polarized information as an information which can be unambiguously viewed as a good or a bad news. We study these effects in different types of economy -- from an exchange economy to a production economy -- using some quite general assumptions on the individuals' preferences. In doing so, we reexamine and extend the work of Woodward (1983), and of Benninga and Protopapadakis (1986). In particular, using the concept of polarized information, we show that the comparison between the short and long bonds, from the point of view of risk management, does not strongly depend on the availability of a production technology.

Dans le cadre d'un modèle discret d'équilibre Général de la structure des taux, nous cherchons à déterminer le signe des primes de liquidité et de solidité -- qui caractérisent conjointement la hiérarchie des taux -- en fonction de la nature et de la structure de l'incertitude qui affecte l'économie. Nous choisissons d'étudier séparément deux structures. Dans la première, associée à un effet richesse, les messages qui sont susceptibles de parvenir jusqu'aux individus leur révèlent leur situation présente. Dans la seconde, associée à un effet information, ces messages leur apportent une information sur la situation future de l'économie. Nous définissons une information polarisée comme une information pouvant sans ambiguïté être interprétée comme une bonne ou une mauvaise nouvelle. Nous analysons ces effets dans divers types d'économie -- de l'économie d'échange à l'économie de production --, en conservant des hypothèses assez générales concernant les préférences individuelles. Ce faisant, nous réexaminons et étendons les études de Woodward (1983) et de Benninga et Protopapadakis (1986). En particulier, utilisant le concept d'information polarisée, nous montrons que les caractéristiques comparées des bons courts et longs, du point de vue de la gestion du risque, ne dépendent pas crucialement de la présence d'une technologie de production.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Optional study of an international call for tenders: an approach to economic risk

Authors: Rouzeau, Étienne

This paper proposes a model for the determination of optimal bids in a two-firm international call for tenders. The construction of this model requires basic notions in game theory and quanto options pricing techniques. An original approach to economic exposure (defined as the sensitivity of a firm's competitivity to exchange rates variations) is also developed.

Cet article présente une méthode de détermination des offres de prix optimales de deux firmes en concurrence dans un appel d'offres duopolistique international. Cette méthode repose sur des notions élémentaires de théorie des jeux ainsi que sur des techniques d'évaluation d'options quanto. Cette modélisation permet une approche originale du risque de change économique (défini comme la sensibilité de la compétitivité de la firme aux variations de taux de change) auquel peuvent se retrouver exposées les deux firmes concurrentes.

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Valuation of interest rate swaps: an application of the Sundaresan (1991) approach to the case where the instantaneous interest rate follows an Ornstein-Uhlenbeck process

Authors: Rainelli-Le Montagner, Hélène

In this paper we use Sundaresan's approach (1991) to obtain closed form solutions for the valuation of interest rate swaps under Vasicek's term structure model (1977). Besides its contribution to our insight into an already highly studied model, the main interest of this paper lies in the methodology we use. We show in particular that applying the partial derivative equation (PDE) approach in Vasicek's framework results in solutions that are fully consistant with the formulae obtained via the martingale approach by El Karoui and Geman (1993) under the hypothesis of the linear gaussian model.

Cet article traite de la question de l'évaluation des swaps de taux sans risque de défaut. Reprenant l'approche de Sundaresan (1991), il donne des formules originales pour le taux d'équilibre de nombreux swaps dans le cadre du modèle de la structure par terme des taux proposé par Vasicek (1977). Outre la contribution qu'il apporte à l'exploitation d'un modèle très étudié, ce papier présente l'intérêt avant tout méthodologique, de montrer comment il est possible, en utilisant la méthode des équations aux dérivées partielles (EDP), d'obtenir, dans le cadre du premier des modèles gaussiens, des résultats en parfaite cohérence avec ceux dérivés au moyen de la méthode des changements de probabilités par El Karoui et Geman (1993) sous les hypothèses du modèle linéaire gaussien dit « de Vasicek étendu ».

DATE PUBLISHED: 15/07/1996

VOLUME: 17

NUMBER: 1

Estimation of the rental value of apartments: an empirical study on the Bordeaux agglomeration

Authors: Hoesli, Martin; Thion, Bernard

According to Lancaster (1966), characteristics of goods rather than goods themselves bring satisfaction to individuals. Thus, the rent charged for housing depends on the characteristics of this housing. The aim of this paper is to define a methodology allowing to identify characteristics affecting rental levels. This methodology, called the hedonic approach, is then applied to apartments in the Bordeaux area. The results of this research can be concretely used to estimate the appropriate rent for an apartment, based on the characteristics of this apartment. This should prove most useful for both landlords and tenants and also in order to estimate the value of a property on the basis of the income approach value.

Selon Lancaster (1966), ce n'est pas un bien en lui-même qui procure de la satisfaction aux individus mais plutôt les caractéristiques de ce bien. Le loyer d'un logement dépend par conséquent des caractéristiques de ce logement. Le but de cet article est précisément de présenter une méthodologie qui permet d'identifier les caractéristiques ayant une influence sur le niveau des loyers. Cette méthodologie, appelée approche hédoniste, est ensuite appliquée au cas des appartements de l'agglomération bordelaise. Les résultats de cette recherche peuvent concrètement être utilisés pour estimer le loyer d'un appartement à partir des caractéristiques de cet appartement. Ceci devrait s'avérer très utile tant pour les propriétaires que pour les locataires, mais aussi pour évaluer les biens immobiliers à partir de la méthode dite de capitalisation des loyers.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

The capital structure of Tunisian companies: an econometric study based on simultaneous equations

Authors: Shabou, Ridha

This article examines the capital structure of a sample of Tunisian firms. Based on the study of Bill, Hillion and Malecot (1991) in the french context, a system of simultaneous equations modelling three debt variables (financial debts, commercial debts and other debts) is proposed. Several capital structure theories and particularly the agency theory of Jensen and Fama (1983) are discussed in relation to their implications on the three debt variables previously selected. Empirical tests are further conducted on three samples of Tunisian corporations. The results show that financial debts, commercial debts and other debts are substitutes and suggest a hierarchic order in debt financing peculiar to each category of firm.

Cet article a pour objectif d'examiner la structure du capital d'entreprises tunisiennes. En se référant à l'étude de Bill, Hillion et Malécot (1991) effectuée dans le contexte français, un système d'équations simultanées modélisant conjointement trois variables d'endettement (dettes financières, dettes commerciales et autres dettes) est proposé. Plusieurs théories de la structure du capital et particulièrement la théorie de l'agence de Jensen et Fama (1983) sont discutées en fonction de leurs implications sur les trois variables sélectionnées d'endettement précédentes. Des tests empiriques sont ensuite conduits sur trois échantillons d'entreprises tunisiennes. Les résultats montrent que les dettes financières, commerciales et les autres dettes sont des substituts et suggèrent un ordre hiérarchique dans le financement par endettement propre à chaque catégorie de société.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

Choosing the Law of Financial Asset Returns: Extreme Values Can Help

Authors: Longin, François

Many statistical distributions have been proposed to model the statistical behavior of asset returns: the unconditional normal distribution, a mixture of normal variables, stable Paretian laws, Student-t variables, ARCH processes... This paper shows that extreme returns can be used to discriminate among these non-nested models. An application to the French equity market shows that the Student-t and the ARCH process can be chosen to model the behavior of daily stock market returns.

La loi normale, les mélanges de lois normales, les lois de Student, les lois stables de Pareto-Lévy, les processus de diffusion avec sauts et les processus ARCH sont des modèles utilisés en finance pour décrire le comportement statistique des rentabilités boursières. Cet article montre comment les observations de variations extrêmes de prix peuvent être utilisées pour différencier ces modèles qui ne sont pas imbriqués les uns dans les autres. Une application au marché boursier français montre que les lois de Student non conditionnelles et les processus conditionnels ARCH peuvent être choisis pour modéliser le comportement des cours. Ce sont les deux seuls modèles compatibles avec la loi de Fréchet obtenue comme loi limite des extrêmes.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

Decline in credit distribution: demand effect or supply effect?

Authors: Artus, Patrick

During the last three years, the credit distributed to french firms has regularly decreased, and the amount outstanding is now diminishing in nominal terms. Corporate investment being very low and the spread between the interest rate on credit and the interest rate on public bonds having widened, it is not clear if it is a decrease in credit demand or in credit supply (or in both) that has led to the observed evolutions. We adress that issue first by analysing the recent data and by using a simple theoretical model of the lender-borrower relationships in the case of bankruptcy risk.

Depuis trois ans, le crédit distribué aux entreprises françaises diminue régulièrement, au point que l'encours de crédit recule maintenant. Parallèlement, l'investissement des entreprises est très faible, et l'écart de taux d'intérêt entre le crédit aux entreprises et les emprunts d'État augmente. Le phénomène observé peut donc provenir soit d'une chute de la demande de crédit, soit d'une chute de l'offre de crédit (soit des deux). Nous essayons d'analyser cette question d'une part en examinant les évolutions récentes, d'autre part en utilisant un modèle théorique simple des relations entre prêteur et emprunteur avec risque de faillite.

DATE PUBLISHED: 15/12/1995

VOLUME: 16

NUMBER: 2

Estimation of the rate structure by simplex and smoothing of forward rates

Authors: Roger, P.; Rossiensky, N.

The estimation of the term structure of interest rates is generally based on zero-coupon prices or on coupon bond prices when the former are illiquid or not transacted on a financial market. We propose two estimation methods, the first being realized by using the simplex algorithm and the second is aimed to smooth the forward rates curve. The two methods are then tested, first on simulated data and then on real prices of treasury bonds. The results are compared to those obtained with a simplified version of the Vasicek-Fong procedure.

L'estimation d'une structure par termes de taux d'intérêt est généralement réalisée à partir de prix de zéro-coupons ou d'obligations couponnées lorsque les premiers sont insuffisamment liquides ou ne sont pas échangés sur un marché. Nous proposons deux méthodes d'estimation de cette structure par termes fondées sur la méthode du simplexe, pour la première et sur le lissage des taux forward pour la seconde. Ces méthodes sont testées sur données réelles et sur données simulées et sont comparées à une version simplifiée du modèle de Vasicek et Fong.

DATE PUBLISHED: 15/07/1995

VOLUME: 16

NUMBER: 1

Neural networks in finance Principles and literature review

Authors: De Bodt, Eric; Cottrell, Marie; Levasseur, Michel

Computer tools used by the financial community have undergone a fantastic evolution during last years. It has stressed the need for a development of new information processing methods. After Expert Systems, originated from works in the field of artificial intelligence, neural networks come now to light. The first part of this review proposes an introduction to these new tools. We show that neural networks (at least some kinds of it) can be seen as an natural extension of regression models, already well-known by the financial community. The second part presents about thirty applications in finance, published during those last years and grouped in four domains: portfolio management, business forecasting, bankruptcy prediction and credit approval. Tables are presented which allow an easy comparison of data and method used as well as results obtained.

Les outils informatiques mis à la disposition de la communauté financière ont connu un développement sans précédent durant ces deux dernières décennies. Cette évolution s'est accompagnée d'un besoin important de développement des méthodes de traitement de l'information. Après les systèmes experts, issus des travaux de l'intelligence artificielle, les réseaux de neurones nous sont aujourd'hui proposés. La première partie de cette revue de la littérature introduit ces nouveaux outils. Les auteurs montrent que certains réseaux de neurones peuvent être analysés comme une extension naturelle des modèles de régression, déjà largement diffusés dans la communauté financière. La seconde partie présente une trentaine d'applications en finance publiées ces dernières années et regroupées en quatre domaines: la gestion de portefeuille, le « Business Forecasting », la prévision de faillite et l'octroi de crédit. Les auteurs présentent des tableaux synoptiques qui permettent une comparaison aisée des données et méthodes utilisées ainsi que des résultats obtenus.

DATE PUBLISHED: 15/07/1995

VOLUME: 16

NUMBER: 1

Can interest rates in Europe and the United States diverge?

Authors: Artus, Patrick

The increase in the interest rates in the US, starting in the middle of 1993, would have a very adverse effect on the european economies if it led to an increase in european interest rates. We examine, using a two country theoretical model, the possibility of disconnecting interest rates between the US and Europe, and also the link between changes in real interest rates and changes in the real exchange rate.

La remontée des taux d'intérêt aux États-Unis depuis la mi-1993 aurait un effet très négatif sur l'économie européenne si elle entraînait celle des taux européens. Nous examinons, à l'aide d'un modèle théorique à deux pays, la possibilité de déconnexion des taux d'intérêt, ainsi que le lien entre les variations des taux d'intérêt réels et celles du taux de change réel.

DATE PUBLISHED: 15/07/1995

VOLUME: 16

NUMBER: 1

Limited liability and portfolio choice of banks

Authors: Goyeau, D.; Sauviat, A.; Tarazi, A.

In this paper the relevancy of bank capital regulation is reexamined when an explicit fixed rate deposit insurance is taken into account. More precisely, the question which is raised is whether capital regulation is the only way to efficiently limit bank risk taking when failure possibility exists. We show that this result, previously obtained in the literature, relies essentially on the choice of a binomial distribution of risk. Indeed, when various states of the world are taken into account mean-variance analysis and thus bank self discipline is relevant again. The necessity of imposing capital constraints cannot therefore be justified by the existence of limited liability and the effect of capital regulation on risk remains ambiguous. Therefore, in the light of this indeterminancy, an alternative system relying on variable rate deposit insurance or market discipline imposed by perfectly informed depositers might be preferable.

On réexamine dans cet article la pertinence de la réglementation des fonds propres des banques en présence d'une assurance-dépôts (à taux fixe) lorsque l'on prend explicitement en compte une clause de responsabilité limitée. Plus précisément, l'existence de la possibilité de faillite fait-elle de la réglementation des fonds propres la seule possibilité de limiter efficacement la prise de risque de la banque? On montre que ce résultat de la littérature antérieure repose essentiellement sur le choix d'une distribution binomiale du risque. En revanche, la prise en compte d'une pluralité d'états de la nature redonne une pertinence à l'analyse en termes d'espérance -variance et donc à une discipline propre à l'activité bancaire. Une clause de responsabilité limitée n'est donc pas une justification du caractère indispensable d'une contrainte de capital dont l'effet reste largement ambigu. Au regard de cette indétermination, on peut souhaiter mettre en place un système alternatif reposant sur une assurance-dépôts à taux variable ou sur la discipline de marché qu'exerceraient des déposants parfaitement informés.

DATE PUBLISHED: 15/07/1995

VOLUME: 16

NUMBER: 1

Overreaction on the French stock market to the Monthly Regulation 1977-1990

Authors: Huu Minh Mai

Overreaction strategies are based on medium-term negative dependence of stock returns. The optimal holding period is between 3 or 4 years. The first practical implication of this return reversal behavior is the classical overreaction strategy: to buy the 3 or 4 years prior period's worst stock return performers (losers) and to sell the prior period's best stock return performers (winners) and, finally, to reverse these positions after 3 or 4 years holding period. This classical overreaction return is attributed to the 15 to 20 prior period's worst and best stock return performers, to capitalization and to systematic risk. These factors allow us to define the other strategies. The new strategies out-perform the classical strategy. The compound strategy, crossing past performance and capitalization over a 3 years holding period is more profitable than that crossing past performance and risk: the annualized returns are 14.44% for capitalization, 13.11% for risk versus 7.11% for the classical overreaction strategy. This strategy is feasible in the French RM market. Transaction costs and the bid-ask errors represent less than 2% per year for the optimal holding period of 3 years.

Overreaction strategies are based on the negative dependence of returns. The optimal overreaction duration is between 3 and 4 years. A first practical application of this phenomenon is to set up a strategy consisting of buying by purchasing the securities that have had negative performances for 3 or 4 years and selling those that have performed the best and reversing these positions after three or four years. The profitability of the classic strategy comes from the fifteen to twenty securities that have had extreme past performances, the capitalization and the risk; these explanatory factors make it possible to define new strategies. The profitability of these new overreaction strategies is higher than that of the classic overreaction strategy. The composite strategy, taking into account both past performance and capitalization over a holding period of 36 months, is itself superior to the composite strategy with risk: 14.44% for capitalization, 13.11% for risk versus 7.11% for the classic strategy of overreaction by quintiles and 10% by division into 9 equiprobable subgroups. This strategy is feasible. Indeed, the implementation of such a strategy requires purchases, but also short sales. However, these are possible on the RM market. Transaction costs and the bias due to spreads represent approximately 2% on average for the optimal duration of 36 months.

DATE PUBLISHED: 15/07/1995

VOLUME: 16

NUMBER: 1

Impact of sampling interval on efficiency tests: application to the French stock market

Authors: Alexandre, Hervé; Ertur, Kamil Cem.

Efficiency of financial markets is one of the most studied subjects in theoretical finance. Formalization of this idea is realised by the random walk model. Numerous tests have been developed to validate the hypothesis of identically and independently distributed innovations. But the results of empirical work are not unanimous; the acceptation of the random walk is not systematic and depends too much on sample features. This leads us to study the impact of the sample frequency on empirical results by distinguishing two different methodologies of tests : the first one is based on unit root (Dickey and Fuller, 1979, 1981) and the other one on variance ratio (Lo and MacKinlay, 1988). The question is the following: does rejection or acceptation of the null hypothesis of random walk depend on the sample frequency and/or on the methodology of test?

L'efficience des marchés financiers est un des thèmes les plus débattus de la recherche en finance. La formalisation de ce concept est réalisée à travers le modèle de la marche au hasard. De nombreux tests ont été développés pour valider l'hypothèse selon laquelle l'innovation est identiquement et indépendamment distribuée. Les résultats des travaux empiriques sont loin d'être unanimes; l'acceptation de l'hypothèse de marche au hasard n'est pas systématique et dépend trop des caractéristiques de l'échantillon. Cette constatation nous conduit à étudier l'impact de l'intervalle d'échantillonnage sur les résultats en distinguant deux méthodologies distinctes de tests: les tests fondés sur la détection de la racine unitaire (Dickey et Fuller, 1979, 1981) et les tests fondés sur le ratio de variance (Lo et MacKinlay, 1988). La question que nous nous posons est donc la suivante: le rejet ou l'acceptation de l'hypothèse nulle de marche au hasard est-il lié à l'intervalle d'échantillonnage et/ou à la méthodologie de test?

DATE PUBLISHED: 15/12/1994

VOLUME: 15

NUMBER: 2

Investments and dividend cuts: market reactions to ex-dividend dates

Authors: Mai, H. M.; Malécot, J.-F.

This paper focuses on market reaction to dividend decreases related with company benefits and investment. Our sample contains 145 dividend decreases (over 577 decreases an 8 009 dividend distributions at Paris Bourse, between 1977 and 1990). We show statistically significant differences between two cases of dividend decreases: benefits and investment increases versus benefits and investment decreases. We used market-adjusted stock returns around ex-dividend day, after attempt for correction of tax biases. Nevertheless, the very low cases of dividend decreases (less than 8 %) show that residual hypothesis for dividend behavior is not credible.

L'objet de cet article est de tester la cohérence des réactions du marché boursier lors d'une baisse des dividendes quand on la met en relattion avec l'évolution comptable de la firme (résultat net comptable, investissement). Après une revue de la littérature théorique, nous présentons une étude empirique qui porte sur 145 baisses de dividende (sur un total de 577 baisses pour 8 009 distributions de dividende à la Bourse de Paris entre 1977 et 1990). Les résultats révèlent une hiérarchisation cohérente des effets: à savoir que le marché évalue (l'évaluation étant faite à la date de détachement, par des mesures de rentabilités en excès par rapport au marché, avec une correction du biais fiscal) moins défavorablement une entreprise dont les résultats et les investissements sont à la hausse, en dépit d'une baisse des dividendes (hypothèse de comportement « résiduel » pour la politique de dividende), qu'une autre firme dont les dividendes, les résultats et le budget d'investissement sont en baisse. Toutefois, le très faible nombre de baisses de dividende rend peu crédible l'hypothèse d'une politique « résiduelle » en matière de versement.

DATE PUBLISHED: 15/12/1994

VOLUME: 15

NUMBER: 2

The day of the week effect on the Paris stock exchange: a Bayesian inference approach

Authors: Barinci, Jean-Paul

During the 80's, numerous empirical studies have documented seasonal pattern in daily stock returns. This empirical regularity, harder to reconcile with the constant expected returns equilibrium model, has been called day-of-the-week effect. This anomaly has been recently observed on the Paris bourse by Solnik and Bousquet (1990) as Hamon and Jacquillat (1992). The lack of validated theorical justifications and the difficulties to rationalize this seasonality within an equilibrium model, led some economists to call in question its authenticity. Futhermore, much empirical work on the day-of-the-week effect rests on the classical testing theory. The sample size can distort the interpretation of classical test statistic unless the significance level is adjusted downward. So, the use of a fixed significance level and a growing sample size can lead to an excessive rejection of the hypothesis under consideration. This paper presents an analysis of the robustness of the day-of-the-week effect. This investigation lies on the use of the bayesian method. The interest of this method is that it proposes a statistical criterion, the posterior odds ratio, which is an explicit increasing function of the sample size. Our empirical results are in contradiction with those reported in many earlier studies. The posterior odds ratios do not lead us to reject the hypothesis of stationarity of the distribution of returns. Thus, we cannot conclude of the existence of a significative day-of-the-week effect on the Paris bourse.

Au cours de la décennie passée, de nombreuses études empiriques ont révélé la présence d'une saisonnalité des rentabilités dans la semaine. Cette régularité empirique, difficilement conciliable avec l'hypothèse-combinée d'efficience et d'égalité des rentabilités espérées dans le temps, fut qualifiée d'effet jour de la semaine. La présence de cette anomalie à la bourse de Paris a été montrée par Solnik et Bousquet (1990) ainsi que par Hamon et Jacquillat (1992). En dépit des nombreuses explications qui ont été avancées et testées, les justifications théoriques dûment validées sont inexistantes. Aussi, face aux difficultés de rationalisation de cette saisonnalité dans le cadre d'un modèle d'équilibre, certains chercheurs ont émis des réserves sur son authenticité. D'autant que la théorie classique des tests d'hypothèse, sur laquelle repose la plupart des études sur le sujet, appliquée à de vastes échantillons peut conduire, en l'absence d'ajustement du niveau de signification, à un rejet excessif de l'hypothèse testée. Sur la base d'une méthode statistique encore peu utilisée, l'inférence bayésienne, cette recherche se propose de vérifier la robustesse de cette anomalie. L'intérêt principal de la théorie bayésienne est qu'elle propose un critère statistique, le rapport de probabilités a posteriori, qui s'ajuste automatiquement à la taille de l'échantillon. Nos différents résultats ne nous permettent pas, en opposition aux études antérieures, de rejeter l'hypothèse de stationnarité de la distribution des rentabilités. En conséquence, nous ne pouvons pas conclure à la présence d'un effet jour de la semaine significatif à la bourse de Paris.

DATE PUBLISHED: 15/12/1994

VOLUME: 15

NUMBER: 2

Non linear general equilibrium models of the term structure: comments and two-factor generalization

Authors: Platten, Isabelle

The introduction of a reflecting boundary on the state variable in the Beaglehole and Tenney' model would allow to express the bond prices as a function of the observable short-term rate. However, we prove that this additional requirement reduces their solution to the well-known Cox, Ingersoll, Ross model. We also exhibit a constraint on the parameters of the « double square root » process introduced by Longstaff, in order to keep an analytical solution for the pricing of discount bonds. Then, we present a generalization of the (constrained) Longstaff's economy. Yields-t-omaturity are non linear functions of two state variables: the short term rate and its volatility.

L'introduction d'une barrière réfléchissante dans le modèle de Beaglehole et Tenney est nécessaire pour permettre l'identification de la variable d'état au taux court; nous prouvons que cette condition réduit leur solution à un cas particulier du modèle de Cox, Ingersoll et Ross. Nous montrons également qu'il faut introduire une contrainte dans les paramètres du processus « double racine carrée » de Longstaff pour conserver une solution analytique au problème de l'évaluation des zéro-coupon. Nous introduisons finalement une extension bivariée de l'équilibre (contraint) de Longstaff, dans laquelle les taux de rendement à maturité sont des fonctions non linéaires du taux d'intérêt court terme et de sa volatilité.

DATE PUBLISHED: 15/12/1994

VOLUME: 15

NUMBER: 2

Intrinsic bubbles, state bubbles: theory and empirical results in the case of the French stock market

Authors: Artus, Patrick; Kaabi, Moncef

We first develop the theoretical model showing that non exogenous rational bubbles can appear on financial markets; those bubbles are linked to the prices or dividends, and have many interesting properties: they can be stochastically stable, they do not necessarily increase the volatility of prices... We then examine from an empirical point of view the possibility that such bubbles exist on the french stock market.

Nous développons d'abord le modèle théorique qui montre que des bulles rationnelles dont le niveau n'est pas exogène mais est lié aux cours peuvent se développer sur un marché financier. Ces bulles ont de nombreuses propriétés intéressantes; en particulier elles peuvent être stochastiquement stables, elles peuvent ne pas accroître la volatilité du prix de l'actif... Nous examinons ensuite empiriquement la possibilité de la présence de telles bulles dans le cas du marché boursier français.

DATE PUBLISHED: 15/07/1994

VOLUME: 15

NUMBER: 1

Real Estate Investment and Portfolio Diversification

Authors: Loubergé, Henri

DATE PUBLISHED: 15/07/1994

VOLUME: 15

NUMBER: 1

Determinants of the risk premium on financial markets: “risk aversion” versus “caution”

Authors: Langlais, Éric

In a partial equilibrium portfolio model of the Merton-Breeden type, an increase in aggregate uncertainty leads to an increase in the equity premium, i. e. to an increase in the return of risky assets in excess of the certain interest rate. This result which reflects a « flight to liquidity », is generally attributed to the risk aversion hypothesis. The result is also obtained in asset prices general equilibrium models of the Lucas type. We establish here that the « flight to liquidity » does not simply result from risk aversion, but rests on an hypothesis of « prudence » from traders on financial markets.

Les modèles de choix de portefeuille en terme d'équilibre partiel à la Merton-Breeden enseignent qu'un accroissement du risque agrégé se traduit par un accroissement de la prime de risque, i. e. par un accroissement du rendement anticipé des actifs risqués en excès sur le taux d'intérêt sans risque. La raison fondamentale de ce « reflux vers la liquidité » est en général attribuée à l'hypothèse d'aversion pour le risque. Ce résultat est égale ment conservé dans les spécifications usuelles du modèle d'équilibre général de détermination des prix des actifs à la Lucas. Nous montrons ici que cet effet de « reflux vers la liquidité » ne résulte pas simplement de cette hypothèse « d'aversion pour le risque », mais qu'il dépend d'une hypothèse de « prudence » de la part des intervenants sur les marchés financiers.

DATE PUBLISHED: 15/07/1994

VOLUME: 15

NUMBER: 1

Options trading and stock price volatility

Authors: Nabar, Prafulla G.; Sang Yong Park

This paper examines empirically whether trading of options has an impact on the volatility of underlying stocks. Employing a log-linear market model in volatility to account for a marker effect on stock volatility, we find evidence that the excess volatility of optioned stocks is on average negative and statistically significant from about the fourth month after inception of options trading. Furthermore, this reduction in volatility can not be attributed to a potential selection bias. This finding thus contradicts a popular belief that options trading increases stock volatility.

Cet article examine l'impact de l'introduction d'options sur la volatilité des actions sous-jacentes. Un modèle de marché log-linéaire est appliqué à la volatilité et montre qu'il n'y a pas d'accroissement de volatilité et que l'effet est même négatif. Ce résultat contredit l'argument fréquemment rencontré selon lequel les impacts accroissent la volatilité.

DATE PUBLISHED: 15/07/1994

VOLUME: 15

NUMBER: 1

Achieving a Pareto-optimal allocation: the case of intertemporally dependent preferences

Authors: Pistre, Nathalie

In this paper, we are interested in obtaining an optimal consumption allocation, when preferences are time interdependent and markets incomplete. We adopt the Ryder and Heal's shape (1973) for interdependence of preferences. In an additive framework, Breeden and Litzenberger (1978) show that an optimal consumption allocation can be obtained by opening a market for European options on aggregate consumption at each time. In our framework, we show hat the Martingale Process underlying the economy is the « global » marginal utility, which determines state prices. We show that a sufficient condition for obtaining an optimal consumption allocation is the creation of a market for European options on the level of the pair of values the aggregate consumption and the agregate standard consumption. Prices of financial assets can be expressed as a function of the prices of these simple options.

Dans cet article, nous nous posons le problème de l'obtention en temps continu d'une allocation optimale de la consommation en marchés incomplets et les conditions sous lesquelles cette obtention pourra se faire quand les préférences sont intertemporellement dépendantes, en adoptant la modélisation de type Ryder et Heal (1973). Breeden et Litzenberger (1978) montrent que dans un univers de préférences séparables une allocation Paréto optimale de la consommation peut être atteinte par un marché d'actifs constitué d'options européennes sur la consommation à chaque date. Dans notre contexte, nous montrons que le processus martingale sous-jacent à l'économie est l'utilité marginale « globale » de la consommation, qui détermine les prix d'états. Ceci nous permet de montrer qu'une condition suffisante à l'obtention d'une allocation optimale de la consommation est la création d'options sur le niveau du couple consommation agrégée, standard de consommation agrégé et que le prix des actifs financiers peut s'exprimer en fonction du prix de ces options simples.

DATE PUBLISHED: 15/07/1994

VOLUME: 15

NUMBER: 1

The Effect of the Increased Bid Rule in Takeovers with Pivotal Shareholders

Authors: Sercu, Piet; Van Hulle, C.

In France, unlike in the US and the UK, each takeover bid must exceed a preceding bid from the same or a rival bidder. If the bidder's reservation price is perceived to be higher than the post-bid security value, this increased-bid regulation rules out a pivotal-shareholder solution with a bid price below the post-bid security value. Rather, the bidder obtains all shares (rather than an exact majority) at a price somewhere between the security value and the reservation price.

En France, contrairement aux Etats-Unis et au Royaume-Uni, chaque tentative d'OPA doit être accompagnée d'un prix supérieur au prix de la tentative précédente. Cet article analyse les effets de cette règle sur la quantité de titres obtenus par l'offreur et sur le prix payé pour ces titres.

DATE PUBLISHED: 15/07/1994

VOLUME: 15

NUMBER: 1

Book analysis

Authors: Pene, Didier

DATE PUBLISHED: 15/12/1993

VOLUME: 14

NUMBER: 2

Definition and valuation of optional coupon reinvestment bonds

Authors: Artzner, Ph.; Roger, P.

Optional Coupon Reinvestment Bonds (OROC) allow the bearer to choose, at each coupon payment date, between payment of coupons in cash and « reinvestment » that is getting similar OROC bonds in an amount equal to a predetermined fraction of the amount of OROC currently hold. These choices constitute a complex portfolio of interest rate options and allow the bearer to get a minimum rate of return over the life of the bond. In order to determine this rate it is necessary to get the correct market value of the OROC when it is issued. Assuming absence of arbitrage and a simple model of interest rate process corresponding to a complete market, the paper shows the intricate relationship between the mathematical definition of the cash flow payments process and the bond pricing process. It provides numerical example of the dynamic procedure of pricing as well as of the sensitivity of prices to interest rate volatility. A final section compares these results with those provided by an approximate approach using only the initial term structure.

Les obligations à réinvestissement optionnel des coupons (OROC) permettent au porteur, à chaque date de paiement de coupon, de choisir entre le paiement des coupons et le « réinvestissement » c'est-à-dire recevoir des obligations OROC similaires, en quantité qui soit une fraction prédéterminée du nombre d'OROC actuellement détenus. Ces choix constituent un portefeuille complexe d'options et permettent au porteur d'obtenir un taux de rendement minimum garanti sur toute la durée de vie de l'OROC. Il faut trouver le prix de marché correct de l'OROC pour connaître ce taux. En l'absence d'opportunités d'arbitrage et avec un modèle simple de processus de taux d'intérêt court correspondant à un marché complet, le papier démontre la relation complexe entre la définition mathématique du processus des paiements et le processus d'évaluation. Il fournit des exemples numériques de la procédure dynamique d'évaluation et de sensibilité des prix à la volatilité du taux d'intérêt. Une dernière section compare ces résultats à ceux fournis par une méthode approchée ne prenant en compte que la structure initiale des taux.

DATE PUBLISHED: 15/12/1993

VOLUME: 14

NUMBER: 2

Bond with optional coupon reinvestment: issue price and position valuation at each moment

Authors: Bertrand, Philippe

Une obligation à réinvestissement optionnel du coupon (ORC désormais) est un titre contingent à l'évolution du taux d'intérêt d'un type particulier. Nous montrerons qu'un tel titre peut s'analyser comme un portefeuille complexe formé d'une obligation ordinaire à coupons et d'une série d'options d'achat européennes indissociables de l'ORC support. Cette caractéristique optionnelle permet de neutraliser le risque de réinvestissement des coupons. Nous obtenons, dans la section 2, une expression du prix d'une ORC en l'absence d'arbitrage au moyen d'une méthode « path independent ». Ce prix est une fonction croissante et convexe du taux de coupon. Nous nous intéressons, dans la section 3, à la valeur d'une position longue en ORC (nous l'appelerons désormais valeur d'une ORC). Les processus du paiement et du nominal associés à cette position longue sont « path dependent ». Nous développons en conséquence une méthode « path dependent » de détermination de la valeur d'une ORC. Nous établissons finalement le lien existant entre prix et valeur d'une ORC. Dans une dernière section, nous avons effectué des simulations qui nous ont permis de retrouver certains résultats de la théorie des options.

DATE PUBLISHED: 15/12/1993

VOLUME: 14

NUMBER: 2

Post-IPO performance: a French appraisal

Authors: Leleux, Benoît F.

This paper investigates the performance of Initial Public Offerings (IPO) of equity shares in the 48 months following their introduction on the Paris Secondary Market. On a comprehensive sample of post-1985 new equity issues, it is shown using both traditional market adjustments and robust estimators of cross-sectional regression parameters that French IPO shares underperform in the long run, results which are very similar to those highlighted in the United States by Aggarwal and Rivoli (1990), Ritter (1991) or Loughran and Ritter (1993). An equal-amount investment in all IPO shares at the beginning of the first complete month of secondary trade would have earned investors an abnormal -- 11.2 % rate of return over three years, to be compared with the -- 29 % reported by Ritter (1991) in the United States over the same buy-and-hold period. Cross-sectional regressions indicate that the method of flotation used, the age of the firm, the state of the market (« hot » vs « cold ») and the timing of the issue (pre- and post October 1987) all play a role in the long-term performance of the shares. The simultaneous estimation of both abnormal performance and systematic risk of the buy-and-hold strategies through robust estimators of RATS regressions support the initial assumption of a beta equal to 1 underlying the market adjustment procedure.

Cet article analyse les performances des actions introduites sur le second marché de la bourse de Paris durant les 48 mois suivant leur introduction. Sur un échantillonnage exhaustif des introductions après 1985, il est montré en utilisant aussi bien un ajustement simple par rapport à la performance du marché en général que des estimateurs robustes des coefficients de régressions transversales que les actions introduites pendant cette période exhibent des performances anormalement négatives sur le long terme, des résultats qui rappellent ceux de Aggarwal et Rivoli (1990), Ritter (1991) ou Loughran et Ritter (1993) sur les marchés secondaires américains. Un investissement équivalent dans chaque action introduite en bourse effectué au début du premier mois complet de négotiation génère pour l'investisseur un taux de rendement anormal de -- 11,2 % durant les trois premières années, alors que Ritter (1991) mentionne un chiffre de -- 29 % sur le NASDAQ aux Etats-Unis. Des régressions effectuées pour expliquer la performance à long terme indiquent l'influence de l'âge de la firme à l'introduction en bourse, du choix de mécanisme d'introduction, de l'état général du marché des IPOS ainsi que du timing de l'introduction par rapport au crash boursier d'octobre 1987. L'utilisation d'estimateurs robustes des coefficients de régressions de type RATS confirment le bien fondé de l'ajustement au marché, les différentes stratégies d'investissement en IPOS exhibant un risque systématique non significativement différent de 1.

DATE PUBLISHED: 15/12/1993

VOLUME: 14

NUMBER: 2

Transaction prices when insiders trade portfolios

Authors: Bossaerts, Peter

Statistical properties of transaction prices are investigated in the context of a multi-asset extension of Kyle [1985]. Under the restriction that market makers cannot condition prices on volume in other markets, Kyle's model is shown to be consistent with well-documented lack of predictability of individual asset prices, positive autocorrelation of index returns, and low cross-sectional covariance. The covariance estimator of Cohen, e.a. [1983] provides the right estimates of the « true » covariance. However, Kyle's model cannot explain the asymmetry and rank deficiency of the matrix of first-order autocovariances. Asymmetry obtains when the insider limits his strategies to trading a set of pre-determined portfolios. If these portfolios are well-diversified, the matrix of first-order autocovariances is asymptotically rank-deficient. If the insider uses only one portfolio (as when « timing the market »), its asymptotic rank equals one, conform to the empirical results in Gibbons and Ferson [1985].

DATE PUBLISHED: 15/12/1993

VOLUME: 14

NUMBER: 2

A variational formula for private sector bonds

Authors: Décamps, Jean-Paul

A new methodology to the pricing of options is introduced, based on a variational approach. This approach facilitates: (i) the comparative statics analysis of the price of the options with respect to the various parameters of the model, (ii) the numerical calculus of these prices. The introduced methodology is applied to the valuation of corporate bonds which, according to Geske (1977) can be priced as compound options. We demonstrate that Geske's formula is a solution of an optimisation problem. This allows us to study the behaviour of the price of corporate coupon bonds as a function of the volatility of the firm, the value of the promised coupon, the maturity of the bond. A study of the spread of a corporate bond is then proposed that includes particularly the behaviour of the spread as a function of the distribution of the total debt on the schedule of the bond.

Une nouvelle méthodologie de valorisation de produits optionnels est introduite à partir d'une approche variationnelle. Cette approche facilite : (i) l'étude de la statique comparative du prix des produits optionnels par rapport aux paramètres du modèle, (ii) la détermination numérique de ces prix. La méthodologie introduite est plus particulièrement appliquée aux obligations à coupons du secteur privé que l'on peut valoriser d'après Geske (1977) comme des compositions d'options. Nous démontrons ainsi que la formule de valorisation des obligations à coupons du secteur privé de Geske (1977) peut s'écrire comme solution d'un problème de minimisation. Ceci nous permet par la suite d'étudier le comportement du prix d'une obligation du secteur privé en fonction de la volatilité de la firme émettrice, du montant des coupons promis, de la maturité de l'obligation. Une étude du spread d'une obligation du secteur privé est ensuite proposée. Elle comprend, plus particulièrement, une analyse des variations du spread en fonction de la répartition de la dette sur l'échéancier de l'obligation considérée.

DATE PUBLISHED: 15/12/1993

VOLUME: 14

NUMBER: 2

Descriptive analysis of serial dependence on stock market returns

Authors: Louvet, Pascal; Taramasco, Ollivier

In this paper a new look on the serial dependence of daily and weekly returns is provided using data analysis, more precisely correspondence analysis. French stock index is studied during the 1969-1991 period. Results show non-linearity in dependence. Two dimensions characterised this phenomenon: one affects the drift and the other one the volatility. This dependence could explain heavy tails in the distribution of returns and lead to an AR-ARCH representation of daily returns process.

L'article, à l'aide de techniques d'analyse de données, étudie la dépendance des rentabilités (journalières à hebdomadaires) consécutives de l'indice CAC entre 1969 et 1991. Sur la base d'un tableau de contingence entre les déciles de la rentabilité d'une période donnée et celle de la suivante, une analyse factorielle des correspondances permet de caractériser la nature de la dépendance sans préjuger de la loi de probabilité des rentabilités. Les résultats montrent que la dépendance ne peut se réduire à une corrélation linéaire; elle affecte principalement les rentabilités extrêmes et comporte deux dimensions: un effet d'entraînement sur la tendance et un effet d'entraînement sur la volatilité. Cette dépendance pourrait expliquer les queues lourdes observées sur les distributions empiriques des rentabilités et conduit à une représentation AR-ARCH du processus des rentabilités journalières.

DATE PUBLISHED: 15/06/1993

VOLUME: 15

NUMBER: 2

The forward-looking information contained in the term structure of interest rates in France

Authors: Artus, Patrick; Kaabi, Moncef

The spread between long term and short term interest rates depends in principle on the future volution of the economy, hence incorporates information concerning this evolution. We examine, using different theoretical models, which information can be extracted from the term structure (future inflation or growth, interest rate volatility, exchange rate expectations...); we analyse in the french case from an empirical point of view the informational content of the yield curve and discusse the underlying mechanisms.

L'écart entre les taux d'intérêt correspondant aux maturités longues et les taux d'intérêt à court terme dépend en théorie de l'évolution future de l'économie, donc doit contenir de l'information quant à ces évolutions ou à la manière dont elles sont anticipées. Nous examinons, à l'aide de quelques modèles théoriques alternatifs, quel type d'information peut être recherché dans la pente de la structure des taux (inflation ou croissance future, politique monétaire anticipée, volatilité des taux, évolution des changes, de la structure de financement de l'économie...). Nous recherchons ensuite empiriquement, dans le cas français, dans quelle mesure certaines évolutions économiques peuvent être prévues à l'aide de l'observation de la structure des taux courante : sur quelles variables contient-elle de l'information, à quel horizon ? Quels sont les mécanismes économiques qui semblent cohérents avec l'observation statistique?

DATE PUBLISHED: 15/06/1993

VOLUME: 15

NUMBER: 2

Linear Programming Models for Portfolio Optimization

Authors: Speranza, M. G.

In this paper we introduce a linear model, in which the risk is measured by means of a linear combination of the semi absolute deviations from the portfolio rate of return. The model does not require any assumption on the distribution of the rates of return and may represent a risk averse, a risk neutral and a risk seeking investor in dependence of the values of the coefficients of the linear combination. In the case the coefficients identify a risk averse investor the model is shown to be equivalent to a linear model proposed by Konno and Yamazaki (1991), which in turn they showed to be equivalent to Markowitz's model, if the rates of return are multivariate normally distributed. A suitable choice of the parameters generates an equivalent model with a substantially reduced number of constraints. A weighted version of the model based on the linear combination of the semi absolute deviations is proposed which takes into account in a simple way the non-stationary nature of the rates of return. Finally, results from computational experience on a set of stocks of the Milano stock market are presented which compare Markowitz's model with different linear models. The ex-post analysis shows that the weighted models have a better performance.

Dans cet article on propose un modèle linéaire dans lequel la fonction de risque est une combinaison linéaire des demi déviations absolues moyennes de la rentabilité du portefeuille. Le modèle ne demande pas des hypothèses sur la loi de probabilité des rentabilités. Dans ce cas les coefficients de la combinaison linéaire identifient un investisseur contraire au risque, on montre comment le modèle est équivalent au modèle linéaire proposé par Konno et Yamazaki (1991), qui est équivalent au modèle de Markowitz si les rentabilités ont une loi de probabilité normale. On montre comment on peut obtenir un modèle équivalent avec un nombre substantiellement réduit de contraintes. En plus, on propose une version pesée du modèle qui tient en considération la nature non stationnaire des rentabilités. Enfin, on montre les résultats de la validation des modèles qui ont été testés sur le marché d'actions de Milan.

DATE PUBLISHED: 15/06/1993

VOLUME: 15

NUMBER: 2

Transfers on the monthly settlement market: market reactions

Authors: Dubois, M.

An event-time study of « Second Marché (SM) » and « Marché au comptant (MC) » stocks that listed on the « Marché à Règlement Mensuel (RM) » over the period 1979-1989 is performed. Positive abnormal returns before listing and negative the week after are observed. Similar conclusions are obtained in earlier empirical studies for the US markets. In constrast, abnormal returns are not different from zero after listing. Expected increase in trading volumes after listing could induced positive abnormal returns. This hypothesis is confirmed but there is not a monotonous relation between abnormal returns and turn-over increases. Short selling is virtually impossible on SM and MC markets but allowed with some restrictions on RM. If heterogeneous beliefs among investors prevail on the SM or MC they may be eliminated by short-sales after listing on the RM. This explanation for abnormal returns at time zero is rejected.

Une étude d'événement autour du transfert des titres du Second Marché (SM) ou du marché au comptant (MC) en direction du marché à Règlement mensuel (RM) est réalisée sur la période 1979-1989. Des rentabilités anormales positives sont observées avant le transfert, elles deviennent négatives la semaine où il a lieu. En revanche aucune réaction anormale n'est trouvée après le transfert. L'augmentation attendue du volume de transaction peut expliquer des rentabilités anormales positives. C'est effectivement ce qui est observé mais il n'y a pas de relation monotone entre l'augmentation des volumes de transaction et les rentabilités anormales observées. Les ventes à découvert sont virtuellement impossibles sur le SM ou le MC mais autorisées moyennant quelques restrictions sur le RM. Si des investisseurs ont des anticipations hétérogènes pour les titres du SM ou du MC, elles peuvent être réduites après le transfert par des ventes à découvert. Cette explication, relative aux rentabilités négatives la semaine du transfert, est rejetée.

DATE PUBLISHED: 15/06/1993

VOLUME: 15

NUMBER: 2

Understanding N(d1) and N(d2): Risk-adjusted probabilities in the Black-Scholes Model

Authors: Nielsen, Lars Tyge

This paper uses risk-adjusted lognormal probabilities to derive the Black-Scholes formula and explain the factors N(d1) and N(d2). It also shows how the one-period and multiperiod binomial option pricing formulas can be restated so that they involve analogues of N(d1) and N(d2) which have the same interpretation as in the Black-Scholes model.

Cet article utilise les probabilités lognormaux corrigées du risque pour dériver la formule de Black-Scholes et expliquer les facteurs N(d1) et N(d2). Il montre aussi comment les modèles binomiaux des prix d'options d'une et de plusieurs périodes peuvent être exprimés d'une façon telle qu'ils impliquent des analogues de N(d1) et N(d2) qui ont la même interprétation que dans le modèle de Black-Scholes.

DATE PUBLISHED: 15/06/1993

VOLUME: 15

NUMBER: 2

The Quasi Random Walk

Authors: Alexandre, Hervé

The intention of this article is to take advantage of recent discoveries in econometrics (ARCH processes) to reformulate classical tests about the efficiency of financial markets. It is also intended to improve the quality of stock index forecasts. Classical tests about the efficiency are carried out from random walk. The change occurs here, considering the innovation of the random walk not like a white noise but like an ARCH process whose characteristics are such that they respect conditions given by Granger and Morgenstern (1970) to test the market's efficiency. This model, the Quasi Random Walk, allows a less restrictive approach to the notion of efficiency. The other advantage of the Quasi Random Walk is that it will help to refine the forecast, owing to confidence interval of forecast which aren't constant anymore. An empirical study based on five financial indexes (Germany, the United States, France, Great-Britain and Japan) shows a bigger tolerance of the Quasi Random Walk in tests of financial market's efficiency and a better approach to forecast.

The aim of this article is to take advantage of recent discoveries in econometrics (ARCH process) to reformulate the classic tests of efficiency of financial markets. It is also attempted to improve the quality of stock market index forecasts. Classic efficiency tests are carried out using the random walk model. The change occurs here by posing the innovation of the random walk process no longer as white noise but as an ARCH process whose characteristics are such that they respect the conditions set by Granger and Morgenstern (1970) to test the efficiency of markets. This model, the Quasi Random Walk, allows a less restrictive approach to the notion of efficiency. The other advantage of the Quasi Random Walk is that it will allow the forecast to be refined, thanks to the forecast confidence intervals which are no longer constant. An empirical study based on five global stock indices (Germany, United States, France, Great Britain and Japan) will reveal a greater tolerance of the Quasi Random Walk in the efficiency tests of financial markets and a better understanding of forecasting.

DATE PUBLISHED: 15/12/1992

VOLUME: 13

NUMBER: 2

Probabilistic evaluation methods and state variable models: a synthesis

Authors: Bajeux-Besaninou, Isabelle; Portrait, Roland

This paper shows the links between the different methods currently used for pricing contingent claims. These methods are all grounded on the no arbitrage assumption. The first approach changes the historical probability into a martingale measure. The second starts from a state variable framework and yields prices as solutions of a partial differential equation. We show how these two methods can be derived from a general state variable-APT model and how the latter leads to the expression of the appropriate martingale measure through the Radon-Nicodym derivative. Hence, all major pricing models are presented within a unified framework.

This article highlights the articulation and complementarity of the different methods of contingent asset valuation, all based on the hypothesis of Absence of Arbitrage Opportunities. The first approach implements probabilistic methods involving a change in probability that makes the relative prices of the different securities martingales. The second approach is based on state variable models resulting in prices defined as solutions to partial differential equations. We show how these two methods can be deduced from a general state variable model of arbitrage valuation and how the latter makes it possible to explain the change in probability that makes the prices expressed in the chosen numeraire martingales. All the classic valuation models are thus presented in a unified framework.

DATE PUBLISHED: 15/12/1992

VOLUME: 13

NUMBER: 2

Credit rationing, information asymmetry and separating contracts

Authors: Gillet, Roland; Lobez, Frédéric.

In the context of a credit market with asymmetric information, we develop a microeconomic model in which credit rationing is an element of an incentive contract allowing lenders to identify borrowers' risk. In this respect, our approach goes beyond the debate between Stiglitz and Weiss (1981) and Bester (1985). For the latter, the use of separating contracts is a way to discriminate between borrowers and to avoid the rationing phenomenon implied by the use of mixing contracts à la Stiglitz-Weiss (1981). The model developed in this article, on the contrary, presupposes the coexistence of separating and rationing contracts. In this context, we characterize precisely the form of incentive contracts and we show the essential role played by the supply of credit.

DATE PUBLISHED: 15/12/1992

VOLUME: 13

NUMBER: 2

The dominance in France of portfolios of stocks with low market capitalization or low PER

Authors: Girerd-Potin, Isabelle

This study shows that the small firm effect and the PER (Price Earning Ratio) effect exist in France: firms with small market value or low PER experiment positive abnormal returns. It seems inconsistent with market efficiency. The anomalies on the portfolios of stocks sorted by market value and PER are robust to several measures of abnormal performance, with adjustment for total or systematic risk. The results for two subperiods and the study of the stationarity of the excess returns (by a Kalman filtering technique) show that the PER effect is weak at the beginning of the period and strong later. Stochastic dominance tests show that small firms and firms with PER less than the median are dominant. Any model theoretically related to stochastic dominance cannot solve the anomalies, especially the CAPM and its developments. A possible explanation of these results is that the empirical distribution is unable to replace the theoretical distribution. If it is not the case and if the market is efficient, it remains only one explanation: the investors do not select stocks by maximizing their expected utility.

Consacrée aux anomalies taille et PER, cette étude montre que les titres des sociétés françaises à faible capitalisation boursière ou à bas PER. (Price Earning Ratio) proposent des rentabilités anormalement élevées, en apparente contradiction avec la théorie de l'efficience. Les anomalies détectées sur les portefeuilles d'actions classées par taille ou PER résistent aux différentes mesures de performance anormale avec ajustement pour le risque total ou systématique. Les résultats du découpage en sous-périodes et l'étude de l'évolution temporelle de la rentabilité anormale par la technique des filtres de Kalman montrent que l'effet PER est faible sur les premières années d'étude et fort ensuite. Les tests de dominance stochastique font apparaître une dominance des petites firmes et des firmes à PER au-dessous de la médiane. Tout modèle lié théoriquement à la dominance stochastique est incapable de résoudre les anomalies, en particulier le CAPM et ses extensions. La dominance peut provenir d'une représentation inadéquate de la distribution théorique par la distribution empirique. En excluant cette cause et en conservant l'hypothèse de marchés efficients, la seule explication possible réside dans le rejet de la représentation des comportements par la maximisation de l'utilité espérée.

DATE PUBLISHED: 15/07/1992

VOLUME: 14

NUMBER: 2

The reaction of stock prices to major industrial crises

Authors: Suret, Jean-Marc; Pauchant, Thierry C.

This paper investigates the effects of large industrial catastrophes en stock prices behaviour. Eighty two crises covered in New York Times from 1970 to 1990 are examined. A significant negative effect on stock returns is exhibited and policy implications are drawn.

L'apparent accroissement de la fréquence et des effets des crises industrielles pose avec acuité une question qui n'a pas, jusqu'ici, reçu de réponse satisfaisante : les marchés financiers sont-ils en mesure de discipliner les dirigeants en les forçant à minimiser le risque des accidents? La théorie financière suggère que cela est possible. Elle énonce en effet que le prix d'un titre est égal à la valeur actualisée de ses promesses futures. Or, la perte de matériel et d'achalandage qui découlent d'un sinistre ainsi que les poursuites et l'augmentation des primes d'assurance qui peuvent en résulter devraient réduire les cash flows des entreprises touchées. De plus, l'incertitude qui entoure les conséquences exactes des sinistres et l'éventualité d'interventions gouvernementales devraient accroître le niveau de risque et par conséquent le taux d'actualisation implicite de ces cash flows. La réduction des cash flows et l'augmentation du risque devraient se conjuguer pour provoquer une baisse rapide et durable des cours. Si le produit de cette perte de richesse par sa probabilité d'occurence s'avérait supérieur au profit tiré de l'adoption d'un comportement risqué, les dirigeants seraient conduits à minimiser le risque des accidents. Il est donc important d'évaluer l'effet de l'annonce des crises sur les rendements boursiers. C'est l'objectif de cette recherche. Elle est basée sur l'analyse des rendements des titres autour de l'annonce de 82 crises qui ont été rapportées en première page du New York Times, entre 1970 et 1990. Elle propose plusieurs améliorations par rapport aux études antérieures, soit une définition plus rigoureuse du concept de crise industrielle qui conditionne la composition de l'échantillon; l'étude et la prise en compte des variations du niveau de risque lors de l'annonce de l'accident; l'étude à court et moyen terme des effets de la crise; la mise en évidence des effets de simultanéité; l'analyse par secteur d'activité et la vérification de la robustesse des résultats face aux diverses méthodes d'estimation. L'étude met en évidence un effet des crises industrielles sur la valeur des titres. Cet effet est négatif, statistiquement significatif durant plusieurs mois et perdure pendant au moins huit mois. Il n'est pas permanent et les prix retrouvent leur niveau antérieur après environ une année. Les titres perdent en moyenne deux à trois pour cent de leur valeur au cours de cette période. L'ampleur de la baisse ainsi que sa durée implique la possibilité de transferts de richesse importants au détriment des anciens actionnaires. Cela peut être interprété comme un facteur propre à inciter les dirigeants à limiter les risques de crises majeures.

DATE PUBLISHED: 15/07/1992

VOLUME: 14

NUMBER: 2

The French stock market

Authors: Briys, Eric

DATE PUBLISHED: 15/07/1992

VOLUME: 14

NUMBER: 2

Risk and stock price fluctuations in transaction-constrained models

Authors: Villieu, Patrick

This paper investigates the impact of increases in riskiness on asset prices in so-called cash-in-advance models. Some paradoxical results are derived. An explanation in terms of asset liquidity is offered.

Cet article examine l'impact du risque sur les cours boursiers dans deux versions de modèles à contrainte de transactions monétaires (modèles dits « cash-in-advance »). Les deux versions envisagées diffèrent selon l'ordre séquentiel de tenue des différents marchés (processus de Lucas (1980) et de Svensson (1985)). Lors d'une augmentation temporaire du risque réel, le prix des actions réagit de manière opposée dans les deux versions. Le risque monétaire, en revanche, suscite toujours une augmentation du prix des titres. Lors d'un accroissement permanent du risque monétaire ou réel, les deux versions redeviennent compatibles, la réaction des cours boursiers demeurant qualitativement identique. La divergence énigmatique des réactions du prix des actions au risque temporaire réel peut alors être élucidée par les caractéristiques de liquidité des actifs, qui diffèrent selon la séquence d'ouverture des marchés envisagée.

DATE PUBLISHED: 15/07/1992

VOLUME: 14

NUMBER: 2

The risk and the price volatility of real assets in an overlapping generations economy with fiat money

Authors: Eckwert, Bernhard

Within the framework of a stochastic version of the overlapping generations model a general choice theoretic portfolio approach is presented. In this set up we explore how the variability of real and nominal equilibrium stock prices is related to the riskiness of the financial instruments. It is shown that the characterization in terms of relative risk of nominal price volatility differs significantly from the characterization of real price volatility. Our results suggest that an underrepresentation in common stock price indices of small firms with above average dividend risks may produce a spurious excess volatility of nominal stock prices relative to dividends.

Cet article explore comment la volatilité des dividendes d'un actif est reliée à la volatilité du prix d'équilibre de cet actif. Le cadre d'investigation est celui d'une économie monétaire à générations imbriquées. Les résultats obtenues généralisent ceux de Drees et Eckwert (1990).

DATE PUBLISHED: 15/07/1992

VOLUME: 14

NUMBER: 2

Application of diffusion statistics to an interest rate model

Authors: Fournié, Éric; Talay, Denis

We present estimation methods of the parameters of the term structure of interest rates corresponding to the model of Cox, Ingersoll & Ross, issued from the statistics of diffusion processes: maximum likelihood and moments methods. We study their quality from different points of view: theoretical (by showing their strong consistency and their asymptotic normality), numerical (by testing them on simulated data), practical (by using them on real data). We also describe results obtained by running nonparametric estimation procedures.

Nous présentons des méthodes d'estimation des paramètres de la gamme des taux correspondant au modèle de Cox, Ingersoll & Ross, issues de la statistique des processus de diffusion : méthodes du maximum de vraisemblance et des moments. Nous en étudions les performances d'un point de vue théorique (en établissant leur consistance forte et leur normalité asymptotique), numérique (en les testant sur des données simulées), pratique (en les utilisant pour des données réelles). Nous décrivons également les résultats obtenus par la mise en œuvre d'estimateurs non paramétriques.

DATE PUBLISHED: 15/12/1991

VOLUME: 12

NUMBER: 2

Insurance demand and the microeconomics of uncertainty

Authors: Gollier, Christian

DATE PUBLISHED: 15/12/1991

VOLUME: 12

NUMBER: 2

Portfolio management in an infinite horizon binomial model

Authors: Bajeux-Besnainou, Isabelle

This paper develops a binomial consumption and portfolio selection model with an infinite horizon. The considered agent is supposed risk-averse, but we do not need to particularize his utility function. We provide economic conditions under which the model does not diverge when the horizon of the agent tends to infinity. The solution of the infinite-horizon program is obtained as the limit of the solutions of the finite-horizon ones. Then, we deduce the existence, the unicity and the convergence of the solution. Moreover, the optimal strategy of the agent is given explicitly and its formulation can be interpreted as the extrapolation of the solution of the corresponding finite-horizon model.

Cet article s'intéresse à une problème de choix optimal de consommation-épargne en horizon infini pour une résolution binomiale de l'incertitude. L'agent considéré est supposé risquophobe, sans toutefois qu'il ne soit nécessaire de particulariser sa fonction d'utilité. On s'attache à restreindre les hypothèses retenues à celles correspondant à l'intuition économique permettant au modèle de ne pas diverger quand l'horizon d'investissement de l'agent devient infini. Le programme d'optimisation est résolu en prouvant que sa solution est la limite des solutions des programmes analogues en horizon fini. On obtient donc à la fois l'existence, l'unicité et la convergence de la solution. De plus, la résolution de la stratégie optimale de l'agent est explicite et la solution est donnée par extrapolation à un horizon infini de la solution du modèle en horizon fini.

DATE PUBLISHED: 15/12/1991

VOLUME: 12

NUMBER: 2

Does business investment have stable determinants?

Authors: Artus, Patrick; Avouyi-Dovi, S.; Kaabi, M.

We analyse the possible mechanisms that can disturb the short term relationship between investment and its basic determinants: relative prices, profitability, real interest rates. They result from the evolution of the global short run equilibrium, from the influence of expectations (future expected production for instance has an influence on current private demand), or from substitution effects (increase in investment whereas the evolution of price depresses profitability). Several cases are analyzed: small open economy or world economy; substitutability or complementarity between production factors; influence or not of the changes in the share of labor in value-added on the equilibrium ; flexibility or rigidity of real wages... The difficulties encountered in empirical work to explan the evolution of investment can be explained by the fact that the above mentioned mechanisms often lead to an ambiguous effect of the usual determinants of capital accumulation.

On analyse les raisons qui peuvent perturber la relation attendue de court terme entre l'investissement et ses déterminants de base (prix relatifs et surtout profitabilité et taux d'intérêt réels). Elles résultent de ce qu'il faut considérer l'équilibre global de l'économie et faire intervenir les anticipations des équilibres futurs (la production future par exemple conditionnant la demande aujourd'hui) ou les effets de substitution (accroissement de l'investissement alors que l'évolution des prix déprime la profitabilité). On distingue différents cas de figure : petit pays ouvert ou équilibre mondial; facteurs de production substituables ou complémentaires; partage de la valeur ajoutée entre salaires et profits jouant un rôle ou non; flexibilité ou rigidité du salaire réel. On peut comprendre les difficultés qu'il y a dans les travaux empiriques à rapprocher l'investissement de ses déterminants usuels en observant qu'en théorie, et compte tenu des mécanismes mentionnés ci-dessus, l'effet de ces déterminants est souvent ambigu.

DATE PUBLISHED: 15/12/1991

VOLUME: 12

NUMBER: 2

Analytical model for evaluating early repayment options

Authors: D'Andria, Pierre; Elie, Laure; Boulier, Jean-François

Difficulties which arise when pricing prepayment options are related first to the determination of an adequate model for customer behavior as to prepayment, second to the valuation of interest rate contingent claims. This paper has two main objectives: -- It proposes realistic models describing the prepayments and long term fluctuations of interest rate which are specially suitable for the French market. -- It presents in case of an Ornstein Ulhenbeck process the full derivation of the solution which leads to an analytical but rather complex solution. The approximation made in order to obtain such closed-form solution are carefully checked by means of a comparison with Monte Carlo simulations. The proposed solution appears to be very accurate and it requires much less computing time than usual techniques.

The difficulty in evaluating an early repayment option for a fixed-rate loan is due to the modeling of debtor behavior and the fact that it is a contract contingent on interest rate fluctuations. This paper has two objectives: -- On the one hand, it proposes a realistic evaluation framework by selecting a statistical model of debtor behavior and a stochastic model of rate curve fluctuation that are adapted to many situations, particularly the French situation. -- On the other hand, it presents explicit calculations in the case of an Ornstein Uhlenbeck process that result in a complex but analytical valuation formula at the cost of an approximation. The relevance tests of this approximation and the comparison of this solution with results from a Monte Carlo method in a large number of situations show that this solution is very accurate. In addition, its implementation allows for very substantial savings in calculation time.

DATE PUBLISHED: 15/12/1991

VOLUME: 12

NUMBER: 2

CAPM, periodicity of the risk premium and size anomaly: the Swiss case

Authors: Cornioley, Claude; Pasquier-Dorthe, Jacques

Empirical tests of the Capital Asset Pricing Model, performed on different stock markets, have produced mixed results. However, these analysis agree usually on two points: the beta risk premium is significantly positive in January and the firm size, measured by its market value, is an additional relevant factor. Generally, the premium associated to the size is also concentrated in January. This paper presents some evidence of such phenomenons on the Swiss stock exchange. The analysis is performed with the help of a multivariate statistical method applied to a sample of 153 stocks. Monthly returns were computed over a 15 years period. The results presented here are quite similar to those reported on other stock exchanges. However, it appears that the size anomaly is not only concentrated in January but also in February. Additionnally, the analysis shows that the size anomaly is more related to the fundamental value of the firm than to the technical characteristics of the security itself.

Les tests empiriques du « Capital Asset Pricing Model », réalisés sur différents marchés financiers, ont fourni des résultats contradictoires. Les analyses s'accordent cependant sur deux points : la prime associée au risque bêta est significativement positive en janvier et la taille des firmes, mesurée par la capitalisation boursière, constitue un facteur additionnel rémunéré par le marché. D'une façon générale, la prime liée à la taille se concentre également en janvier. L'objet de ce travail est l'identification et l'étude de cet ensemble de phénomènes sur le marché des actions suisses. L'analyse est menée à l'aide d'une méthode statistique multivariée appliquée à un échantillon de 153 titres dont les rendements mensuels ont été relevés sur une période de 15 ans. Les résultats rapportés sont assez semblables à ceux obtenus sur les aurtres places financières. Il apparaît cependant que la prime associée à la taille est également significative en février. D'autre part, l'analyse montre que l'anomalie de taille est déterminée par les caractéristiques de la firme plutôt que par les attributs techniques du titre lui-même.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

ERRATUM

Authors: Fontaine, P.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

European Path Dependent Options: The Case of Geometric Averages

Authors: Viswanathan, Antoine Conze

This paper studies the pricing of European options whose strike price and/or underlying asset are geometric averages. Theoretical results obtained by J. M. Harrison and S. Pliska enables us to price these options. The most interesting cases lead to closed form solutions.

Cet article traite de l'évaluation d'options européennes d'un type particulier : les options sur moyenne géométrique. Le prix d'exercice et/ou le prix du sous-jacent sont considérés comme des moyennes. L'approche par les martingales permet d'obtenir des solutions analytiques.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

Heterogeneity of expectations, short selling and security prices: a literature review

Authors: L'Her, Jean-François; Suret, Jean-Marc

This article surveys the literature on short sales constraints. More specifically, this survey examines whether constraints or short selling do have an impact on the transmission of information by market prices.

The challenge to the assumption of homogeneity of expectations in the equilibrium model of financial assets, the Capital Asset Pricing Model (CAPM), has several consequences, the most direct of which concerns the composition of the optimal portfolio of investors. While in the CAPM framework, all investors hold non-negative quantities of securities, this is different under the assumption of heterogeneity of expectations where, in equilibrium, investors can have short positions. Short sales therefore become a central element of the analysis. Depending on whether they are considered unlimited, restricted or simply prohibited, equilibrium prices reflect the consensus expectations of all investors or the expectations of investors not constrained by restrictions on short sales. This article provides a synthesis of the knowledge productions which, in a context of heterogeneity of expectations, have examined whether restrictions on short sales slow down the process of information transmission through prices.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

Inferring volatility from option prices

Authors: Galai, Dan

Volatility has become a major issue in risk management for all financial activities including portfolio management, trading securities, hedging risk exposures, etc. Measuring volatility is not a simple matter since events in the market place and in corporate life affect the distribution of rates of return. In the paper, the method of inferring volatility from option prices is described, and, applications of the method to estimate the future volatility of the market, and to measure the information content of corporate events, as well as market-wide events, is surveyed. It is shown in many studies that despite inconsistencies between the models basic asumptions and the empirical results, specifically the observed nonstationarity of the estimated implied standard deviation, the tool may be very useful.

La volatilité est devenue le facteur clé dans la gestion des risques d'activités financières telles la gestion de portefeuille, le « market-making », la couverture d'un stock de titres financiers, etc. La mesure de la volatilité n'est pas chose facile dans la mesure où des événements imprévus survenant sur les marchés et dans la vie des entreprises viennent perturber la distribution des rendements. Dans ce papier, on décrit la méthode consistant à extraire la volatilité des prix d'options (volatilité implicite), et son application à la prévision de la volatilité future de marché, ainsi qu'à la mesure du contenu informationnel des nouvelles concernant les entreprises et les marchés dans leur ensemble. On montre à partir de nombreux travaux empiriques que cette méthode est particulièrement robuste et utile, et ceci malgré le décalage observé entre les hypothèses du modèle et la réalité des marchés, notamment concernant la nonstationarité de la votatilité implicite estimée.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

Stock data from the AFFI-SBF stock market database

Authors: Hamon, Jacques; Jacquillat, Bertrand

The stock database is developped by the French Finance Association (AFFI in collaboration with the French Stock market authority « Société des Bourses Françaises » (SBF). It includes daily prices and volumes, dividends and features of equity capital changes for French securities since 1977. Transaction data with second time precision are included for continuously priced securities since 1988. An inventory of these data, particularly adapted for financial research, is presented in this paper.

La banque de données actions développée par l'Association Française de Finance avec le soutien de la Société des Bourses Françaises, contient les données quotidiennes de cours, de volume de transaction, les dividendes et les caractéristiques des modifications du capital pour tous les titres français cotés depuis 1977. A partir d'avril 1988, sont également incluses les données de transactions avec horodatage à la seconde pour les titres en cotation assistée en continu. Cet article réalise un inventaire des données et présente les principales caractéristiques de cet ensemble principalement destiné à la recherche financière.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

Seasonality of profitability during the week and the session on the Paris stock exchange

Authors: Hamon, Jacques; Jacquillat, Bertrand

This study finds a significantly negative Monday-return for 30% of the largest capitalized French stocks. Negative Monday close-to-close returns increased mainly between the Friday close and the Monday open: -0.129% during the weekend and -0.044% between Monday open and Monday close. Hence, this is mainly a weekend effect. The intradaily pattern in stock returns, with 5-minute intervals, for continuously priced stocks, is different on Monday compared with the other days: it is decreasing from open till 4.15 pm. Moreover, in the last ten minutes of every day, prices are going up. Volatility is significantly higher when stock exchange is open than when it is closed. Moreover, trading volume and volatility are significantly lower on Monday than the other days.

This study shows that Monday profitability is significantly negative and lower than that of other sessions for 30% of the most highly capitalized stocks on the Paris Stock Exchange. Most of the negative Monday profitability is observed between the close of Friday and the opening of Monday; this strong Monday effect can be broken down into -0.129% from the close of Friday to the opening of Monday and -0.044% during the Monday session: it is therefore essentially a weekend effect. The analysis of the profitability rates by five-minute intervals, for securities with continuous assisted quotation, shows that the price development on Monday deviates from that of other sessions: a continuous decline is observed from the opening until 4:15 p.m. All sessions are also characterized by a sharp rise in prices in the last 10 minutes of the trading session. In-session volatility is significantly higher than inter-session volatility. Moreover, the Monday session is characterized by a number of traded securities as well as a significantly lower volatility than the other days of the week.

DATE PUBLISHED: 15/07/1991

VOLUME: 14

NUMBER: 1

Macroeconomic determinants of interest rate structure

Authors: Artus, Patrick

We try to explain the evolution of the spread between the long term and the short term interest rates by macroeconomic factors, namely the changes in the level of public expenditures, inflation, domestic and foreign monetary policies, the determinants of the supply of goods... A theoretical model is built, where we focus on the dynamic responses of public debt, the exchange rate, prices and interest rates to various disturbances. Dynamic stability, and short-term and long term changes in the term structure of interest rates are analyzed.

Ce papier est un essai d'explication de l'évolution de l'écart entre le taux d'intérêt à long terme et le taux d'intérêt à court terme par des facteurs de type macroéconomique (niveau de dépenses publiques, inflation et politique monétaire, déterminants de l'offre de biens, taux d'intérêt étranger...). Un modèle théorique est développé, centré sur l'évolution dynamique de la dette publique, du taux de change, des prix et des taux d'intérêt en réponse à des chocs anticipés ou non. La stabilité de l'économie et l'évolution instantanée et de long terme de la structure des taux sont analysées dans divers cas de figure.

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

EV, β, MM

Authors: Briys, Eric

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

The “day of the week on the Paris Stock Exchange” effect: an approach using moving averages

Authors: Louvet, Pascal; Taramasco, Ollivier

An international survey of the studies going through daily returns of stock exchange prices shows a great diversity in the efficiency anomalies. These anomalies are independent of each other and cannot be explained. Most of the studies use a traditional analysis of variance which implies that the returns follow a stationnary process. This article propose a more general methodology based on the asumption that the prices follow a non stationnary process with a slow deformation: it lies on the use of the moving average method, of Hotelling's parametrical tests and of non parametrical tests. The study uses the cAc index of Paris stock exchange between 1969 and 1988. The results confirm the existence of a negative effect of the returns on tuesday and as a compensation, shows a positive effect on thursday. This anomaly cannot be explained by the « réglement mensuel » procedure. After the following correction of the returns: + 0.15 % for the tuesday ones and - 0.15 % for the thursday ones, the « day of the week » effect does not appear any more.

Une synthèse internationale des travaux examinant les rentabilités journalières des cours boursiers révèle une grande diversité dans les anomalies d'efficience toutes sans explication satisfaisante. La plupart des études emploient une analyse de variance traditionnelle qui suppose que l'espérance et la variance des rentabilités ne change pas au cours du temps. Cet article se propose de recourir à une méthodologie plus générale fondée sur l'hypothèse selon laquelle les rentabilités obéiraient à un processus non stationnaire à déformation lente : elle consiste en l'utilisation de la technique des moyennes mobiles et de tests statistiques paramétrique de Hotelling ou non paramétrique. L'étude porte sur l'indice CAC de la Bourse de Paris entre 1969 et 1988. Les résultats confirment l'existence d'un effet négatif sur le rendement du mardi et font apparaître un effet positif le jeudi en forme de compensation. L'anomalie n'est pas explicable par la procédure de règlement mensuel. Après correction des rendements du mardi de +0,15 % et du jeudi de -- 0,15 %, aucune anomalie significative n'apparaît plus sur toutes les sous-périodes.

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

Stock Market Volatility

Authors: Fontaine, Patrice

Following the strong fluctuations of stock markets in the recent past years, we have analyzed the volatility of five stock markets (France, Germany, Great-Britain, Japan and United States) and examined if this volatility is normal. Our tests indicate that the volatility of stock markets in the period 1984-1987 is higher than that of the period 1976-1982 but comparable to that of the years 1972-1975, and apart from Japan, the volatility of stock markets is excessive.

A la suite des fortes fluctuations des marchés d'actions ces dernières années, nous avons analysé l'évolution de la volatilité de cinq marchés d'actions (Etats-Unis, France, Grande-Bretagne, Japon, RFA) et examiné si cette volatilité est normale. Nos tests indiquent que la volatilité des marchés d'actions pendant la période 1984-1987 est supérieure à celle des années 1976-1983 mais comparable à celle des années 1972-1975, et qu'en dehors du Japon les marchés d'actions ont une volatilité excessive.

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

Insider Confidence Indices and Stock Selection in Canada

Authors: Suret, Jean-Marc; Cormier, Élise

Some empirical studies have used insider trading activity information to evaluate the performance of stock portfolios. The evidence concerning these insider information based strategies is rather mitigated. On top of that subsequent costs are incurred if one really wants to carefully follow this type of information. In this paper we examine the case of the Canadian Capital Market. We show that some abnormal returns can be earned but their magnitudes is rather small and do vary overtime.

Plusieurs études ont montré l'intérêt de l'exploitation des transactions des initiés aux fins de gestion des portefeuilles. Cependant, les stratégies employées dans les études antérieures sont basées sur un suivi constant des transactions des initiés. Les coûts de ce suivi, qui peuvent être fort élevés, ont généralement été négligés. Dans cette étude, nous montrons qu'il est possible d'exploiter aux mêmes fins les indices de confiance calculés par certaines maisons de courtage. Ces indices récapitulent les transactions d'initiés survenues au cours des mois précédents, et les condensent en une valeur qui est transmise aux investisseurs. Au cours de la période 1986-1988, une stratégie basée sur ces indices aurait permis de réaliser de légers rendements anormaux. Cependant, le contenu informatif des indices n'est pas constant, et dépend de l'évolution générale du marché. Il est donc prématuré de conclure à une inefficience du marché canadien.

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

Interest Rate Options. Rate Dynamics and Valuation

Authors: Poncet, Patrice

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

Triangular relationships between option values

Authors: Chesney, Marc

The aim of this note is to develop and to test triangular relationships between European currency options. In order to obtain these relationships arbitrage procedure are used.

Cet article est consacré au développement et aux tests de relations dites triangulaires, que sont censées vérifier les options sur devises de type européen. De simples raisonnements d'arbitrage permettent d'obtenir ces relations.

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

The relationship between risk-return characteristics of mutual funds and their size

Authors: Khoury, N. T.; Martel, J.-M.

This paper presents a multicriterion model for ranking the performance of mutual funds and examines the correlation between this ranking and the size of funds. Performance is defined using the classical risk-return characteristics of this type of investment. The model used permits the analysis of several aspects of portfolio performance simultaneously. A multidimensional performance index derived from the model is also developed in the paper and applied to the sample under study. An analysis of this index against the Treynor index shows that a positive relationship between size and performance emerges when relatively less weight is given to average return than to the risk characteristics. Thus, by allowing the relative weights given to the various risk-return characteristics to be varied, the approach used here adds more flexibility and provides and added insight into the analysis.

Cet article présente l'utilisation des méthodes multicritères pour évaluer les performances des fonds mutuels. L'avantage de cette approche est d'autoriser une grande variété de critères.

DATE PUBLISHED: 15/12/1990

VOLUME: 11

NUMBER: 2

Technical analysis and efficiency of foreign exchange markets: an empirical test

Authors: De la Bruslerie, Hubert

The purpose of this article is to empirically test if a class of technical tools can beat the foreign exchange market. Different double moving averages strategies were simulated from an ex ante viewpoint. Market efficiency can be questionned only if a class of decision making tools, designed to be performing well on past data, are systemically leading to excess profit on future data. The test was performed on 14 different currencies during the period 1983-1988 under the joint hypothesis of null risk premium. The result is globally in favor of the efficiency of the forex market. Rational use of moving averages as technical tools can only be explained by large and negative exchange risk premiums.

L'objet de cet article est de tester empiriquement la pertinence d'un ensemble d'outils d'analyse technique, sur le marché des changes. Des stratégies de moyennes mobiles sont simulées en se situant dans le cadre d'une profitabilité ex ante. L'efficience pourrait être remise en question si un ensemble d'outils, jugés efficaces sur le passé, conduisent à espérer systématiquement des profits futurs significatifs. Le test a été effectué sur 14 taux de change au cours de la période 1983-1988, sous hypothèse d'une prime de risque nulle. Le recours à des outils d'analyse technique fondés sur les moyennes mobiles ne pourrait s'expliquer rationnellement que par l'existence d'une prime de risque de change importante et de signe le plus souvent négatif. Les résultats obtenus apparaissent cohérents avec la notion d'efficience des marchés des changes.

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

Lender-borrower risk sharing: a countingents contract approach

Authors: Artus, Patrick; Freixas, Xavier

The caracteristics of mortgage loans (indexation, amortizement...) that lead to an optimal risk-sharing between borrowers and lenders are analyzed. Risks appear both at the microeconomic (borrowers'income for instance) and macroeconomic levels (interest rates and prices).

On tente dans ce papier de définir les modalités (calendrier d'amortissement, clauses d'indexation, cas où l'hypothèse doit jouer) que devraient avoir les prêts hypothécaires afin de partager optimalement les risques entre banques et emprunteurs. Ces risques sont de deux natures : microéconomiques (affectant les revenus de l'acheteur de logement) et macroéconomiques (affectant les taux d'intérêt et les prix).

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

Do stock market prices follow a random walk?

Authors: Fontaine, P.

The aim of this article is, on the one hand, to sum up the recent tests of random walk and, on the other hand, to apply the variance ratio tests to monthly prices in nominal and real terms, on five stocks markets. Contrary to the recent analyses of random walk based on weekly or annual data, our tests indicate that random walk is not rejected with the montly data for the five stocks markets considered. A possible extension of this research would consist in examining if these contradictory results are rather linked to the hypotheses on the returns and periodicity of the data and to the related statistical patterns or to a real inefficiency of the markets (do strategies exist wich beat the market from the finding produced?).

L'objet de cet article est d'une part de faire le point sur les tests récents de la marche au hasard, et d'autre part d'appliquer les tests du ratio de variance aux cours mensuels, en termes nominaux et réels, de cinq marchés d'actions. Contrairement aux analyses récentes de la marche au hasard basées sur des données hebdomadaires ou annuelles, nos tests indiquent que la marche au hasard n'est pas rejetée avec des données mensuelles pour les cinq marchés d'actions considérés. Un prolongement possible de cette recherche consisterait à examiner si ces résultats contradictoires sont plutôt liés aux hypothèses sur le processus des rentabilités et la périodicité des données, aux problèmes statistiques y afférant, ou bien à une réelle inefficience des marchés (existe-t-il des stratégies battant le marché à partir des constatations réalisées?).

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

Market Serial Correlation and the Valuation of Index Options

Authors: Berglund, Tom; Lilkeblom, Eva; Hedvall, Kaj

In this paper the impact of market serial correlation on the usefulness of the Black and Scholes (1973) model for the pricing of call options on indexes are investigated. The analysis is performed on the OMX-index for the Stockholm Stock Exchange. The magnitude of the mispricing produced by market serial correlation is demonstrated by applying a speculative filter for prices of Black-Scholes call options on the OMX. The simulation experiments reveal that market serial correlation constitutes a significant problem in the pricing of index options. It is shown that risk considerations, in fact, strengthen this result.

Ce document étudie l'impact de la corrélation sérielle de marché sur l'utilité du modèle de Black et Scholes (1973) pour l'évaluation des call options indexées. L'analyse est exécutée sur l'indice OMX de la Bourse de Stockholm. L'ampleur des erreurs de prix provoquées par la corrélation sérielle de marché est démontrée par l'application d'un filtre spéculatif sur les prix des options d'achat sur l'OMX. Cette simulation met en relief le problème que provoque la corrélation sérielle de marché sur l'évaluation des options sur indice. L'on montrera qu'en fait la prise en compte du risque confirme cette conclusion.

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

Principles of Corporate Finance/Financial Theory and Corporate Policy/Corporate Finance

Authors: Malecot, J.F.

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

What is the value of the signature of large bond issuers? A valuation model

Authors: Billy, Jean-Baptiste; Meunier, François

This article sets out a method for estimating bond yields according to the specific rating of the issuer. The theoretical yield curve for the French bond market is determined by an econometric model taking into account the most relevant factors (time to maturity, coupon, fiscal elements, etc.). Since the rating of any issuer, and therefore its own class of risk, is one of these factors, the model makes it possible to give a proper measure of this rating corrected for the elements that usually blur any comparison of bond yields. Such a procedure, applied to French data, gives considerable insight into the specific features of the French bond market.

Le présent article propose une méthode de mesure de la hiérarchie des taux de rendement obligataire selon la signature de l'émetteur. A l'aide d'un modèle économétrique retenu pour sa robustesse, on évalue la structure théorique des taux obligataires en fonction de leurs principaux éléments explicatifs. Parmi ces facteurs figurent des variables indicatrices de la qualité de signature (ou notation, ou rating) de chaque émetteur. La méthode permet de l'estimer, en éliminant les éléments qui faussent habituellement la comparaison des emprunts. Cette méthode fournit des outils d'arbitrage pour le négoce obligataire et illustre les principaux traits du marché obligataire français.

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

Undervaluation of securities and methods of introduction to the secondary market (1983-1986)

Authors: Husson, Bruno; Jacquillat, Bertrand

The French Unlisted Securities Market (Second Marché) has innovated in several ways compared to the new listing system prevaling on the French official market: greater diversity in the new issues offering procedures and possibility of contracting between the unlisted firm and the financial intermediaries to have a greater liquidity in post offering period. This paper examines the abnormal returns and performances of all new issues on the « Second Marché » for the whole sample as well as for subsamples taking the institutional differences into account.

Le second marché a innové sur le plan institutionnel par rapport à l'introduction des sociétés à la cote officielle, notamment quant à la diversité des procédures d'introduction et à la possibilité qu'ont les sociétés de passer des contrats de liquidité avec leurs intermédiaires financiers pour la période post-introduction. Cet article examine les rendements anormaux et les performances des titres introduits au second marché depuis sa création en 1983 jusqu'en 1987, à la fois globalement et en tenant compte des différences institutionnelles.

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

Stock options and signaling: the French case

Authors: Desbrières, Philippe

Stock-options give the salaried-workers and managers the right to purchase shares of their company for a specified price and for a specified period of time. For the firm, it is an incentive system which can be used to solve agency problems. In France, it can also be an alternative route of paying higher wages without bearing corporate and personnal taxes on salaries. Finally, in a world of asymmetric information, managers may initiate an executive stock option plan to signal to the stockholders the future prospects of the firm. The first part of this article presents the French system of stock-options, and its use in the incentive, taxes and signalling hypothesis. The second part proposes a signalling model.

Le système des stock-options offre aux salariés et mandataires sociaux la possibilité d'acquérir des actions de leur société à un prix fixé une fois pour toutes et dans un certain délai. Pour les entreprises, ce système est un moyen d'intéresser et de fidéliser leurs cadres et dirigeants. Il peut aussi être un mode de rémunération fiscalement plus avantageux pour la firme comme pour les bénéficiaires des options. Enfin, dans un contexte d'asymétrie informationnelle, il peut permettre aux dirigeants de signaler aux actionnaires externes les véritables caractéristiques des firmes qu'ils gèrent. Après une présentation des caractéristiques actuelles des plans d'options en vigueur sur le marché français, et des conditions d'utilisation de ce système dans une perspective fiscale, d'incitation ou de signalisation (partie I), un modèle de signalisation est ensuite proposé (partie II).

DATE PUBLISHED: 15/07/1990

VOLUME: 11

NUMBER: 1

A Shortcut to Itô's Lemma for Financial Applications: The Case of Hedging with Interest Rate Futures

Authors: Pieptea, Dan R.

This paper presents an application of Itô's lemma to hedging with interest rate futures and provides a primer in stochastic calculus for the financial economist interested to derive the dynamics of a function of known diffusion processes. The paper is a shortcut to Itô's lemma in that it presents the framework, states and proves Itô's lemma for single and multiple stochastic processes. An application is provided for the derivation of the minimum volatility hedge ratio for hedging a fixed-income instrument with interest rate futures when spot and futures interest rates follow correlated diffusion processes.

Cet article présente une application du lemme d'Itô à la couverture sur les marchés à terme de taux d'intérêt. L'objectif de cet article est essentiellement pédagogique et a pour but de familiariser le lecteur néophyte avec une technique de plus en plus utilisée en finance.

DATE PUBLISHED: 15/12/1989

VOLUME: 10

NUMBER: 2

International capital markets

Authors: Albouy, Michael

DATE PUBLISHED: 15/12/1989

VOLUME: 10

NUMBER: 2

Random Volatility Model and Option Pricing

Authors: Dehapiot, Tanguy; Manchet, Stéphane

In this paper, we use statistical tests in order to show that the main processes used to model stocks or interest rate returns are rather inadequate. Yet, we can obtain a noticeable improvement by relaxing the constant volatility hypothesis. Therefore, we build a model in which the volatility follows a very simple stochastic process and we explain how to determine its parameters. This enables us to price European call options with a new formula which leads to differences with the Black-Scholes price and seems to fit the market better. This model is simple but complete enough to explain the effects of a stochastic volatility.

Dans cet article, nous montrons au moyen de tests statistiques que les principaux processus utilisés pour rendre compte de l'évolution des cours ou des taux d'intérêt sont mal adaptés. On obtient cependant une amélioration notable en relâchant l'hypothèse d'une volatilité constante. Nous construisons donc un modèle où cette volatilité suit un processus aléatoire très simple et nous détaillons une méthode permettant d'en estimer les paramètres. Cela nous permet de calculer, par une nouvelle formule, le prix d'une option d'achat européenne, qui diffère sensiblement de ce qu'on obtiendrait par application de la formule de Black et Scholes et paraît plus cohérent avec les prix réels du marché. Le modèle proposé est simple mais suffisamment complet pour rendre compte des effets d'une volatilité stochastique.

DATE PUBLISHED: 15/12/1989

VOLUME: 10

NUMBER: 2

Credit rationing and implicit contracts: theory and econometric tests

Authors: Lobez, Frederic

In this article, we consider the relationship between risk-neutral lenders and risk-averse borrowers. Implicit contracts that insure borrowers against interest rates volatility are shown to be optimal. In some circumstances, such a rate rigidity induces credit rationing. Empirical investigation provides theoretical support for results.

In this article, we explain credit rationing by the differences in risk aversion between financial intermediaries and borrowers. We show the optimality of implicit insurance contracts allowing banks to insure their clients against excessive volatility in lending rates. The rigidity of rates then does not allow convergence towards a market equilibrium situation with adjustment by rates, and leads under certain conditions to quantitative rationing. An econometric study validates these conclusions.

DATE PUBLISHED: 15/12/1989

VOLUME: 10

NUMBER: 2

The Canadian Tax Reform and Dividends: A Re-examination

Authors: Suret, Jean-Marc; Gagnon, Jean-Marie

This article examines the impact of the canadian tax reform on the dividend payout ratio of Canadian Corporations. Empirical evidence suggests that this impact has been minor for the two reforms of 1972 and 1977.

Cet article examine l'impact des réformes fiscales canadiennes de 1972 et 1977 sur le comportement de versement de dividendes des firmes canadiennes. Les résultats empiriques de cette étude montrent que l'impact a été négligeable.

DATE PUBLISHED: 15/12/1989

VOLUME: 10

NUMBER: 2

The evaluation and management of a portfolio comprising MATIF, BTAN contracts and options on BTAN and MATIF contracts

Authors: Portrait, Roland; Allemane, Rémy

This article deals with interest sensitive instruments including long terme and medium term government bonds and bills as well as futures and options written on these cash instruments. The first part of the article compares alternative methods of pricing options on government bonds and bills. The second part presents a theoretical framework useful for the analysis of the risks of a complex interest sensitive position (interest rate, spread and volatilities risks). This framework is used to describe different arbitrage and pseudo-arbitrage strategies.

Cet article s'intéresse à la gestion de positions impliquant des instruments financiers sensibles aux taux d'intérêt et contenant, plus particulièrement, des BTAN, des OAT et des titres dérivés de ces supports (options, contrats à terme). La première partie compare des méthodes alternatives d'évaluation des options sur BTAN et compare les options MATIF aux options sur BTAN dans l'optique d'évaluation de ces dernières, ainsi que dans la perspective d'un éventuel pseudo-arbitrage. La deuxième partie définit un cadre théorique permettant d'analyser les différents risques affectant une position complexe (risques de taux, de psread et volatilité) et de construire des stratégies d'arbitrage ou de pseudo-arbitrage.

DATE PUBLISHED: 15/07/1989

VOLUME: 10

NUMBER: 1

Tradable options

Authors: Louvet, Pascal

DATE PUBLISHED: 15/07/1989

VOLUME: 10

NUMBER: 1

Insider Trading: A Surplus Analysis

Authors: Bajeux, Isabelle; Rochet, Jean-Charles

A recent contribution by Kyle (1985) provides a simple framework in which it is shown how an insider can take advantage of his privileged information. The present paper extends this basic model by explicitly balancing the prejudice borne by outsiders and the profits realized by insiders.

Un article récent de Kyle (1985) fournit une modélisation très simple de la façon dont un initié peut tirer profit, sur un marché financier, de son information privilégiée. Nous proposons ici une extension du modèle de Kyle permettant de mettre en balance le préjudice subi par les petits porteurs du fait de cette opération d'initié avec le profit réalisé par l'initié. Nous montrons que l'interdiction des opérations d'initiés peut, dans certains cas, causer une perte limitée d'utilité collective. Par contre, l'autorisation systématique de ces opérations peut avoir dans d'autres cas des effets catastrophiques.

DATE PUBLISHED: 15/07/1989

VOLUME: 10

NUMBER: 1

Risk and return on Canadian capital markets: seasonality and size effect

Authors: Calvet, AL; Lefoll, J.

This paper studies the seasonality and size effect on Canadian equity markets during the period 1963 to 1982. We find a seasonal pattern in January and December with the traditional two-parameter model. The seasonality persists after controlling for size, which captures only part of the seasonal element. With a multi-parameter model, residual risk turns significant in January, but size is no longer priced -- a pattern also obtained with the total risk model. Non-systematic risk and size appear highly correlated, and we cannot reject the hypothesis that the non-systematic risk could be, at least in part, behind the size effect. However, residual risk may ultimately represent the effect of factors themselves linked to size. The seasonality in risk premia could nevertheless depend on the standard methodology used in this paper.

This paper studies the effect of size and seasonal variations in risk premia on the Canadian equity market during the period 1963 to 1982. Risk premia increase in January and December with the traditional two-parameter model. This seasonality persists in the presence of the size factor, although size captures some of these seasonal variations. With a multifactor model, the coefficient of residual risk is statistically significant in January while that of size is no longer significant, a result also verified with the total risk model. Unsystematic risk and size appear to be strongly correlated. Thus, one cannot reject the hypothesis that this risk could in fact be the origin -- at least in part -- of the size effect, although unsystematic risk may in turn depend on factors related to size. The seasonality of risk premia, however, could depend on the standard methodology used in this paper.

DATE PUBLISHED: 15/07/1989

VOLUME: 10

NUMBER: 1

The crisis in Spanish private banks: A logit analysis

Authors: Rodriguez, José Miguel

As the democracy began to consolidate, Spain was confronted with an important banking crisis. This paper gives a brief review of the subject and an ex post empirical study of the corresponding banking failures. A logit-type qualitative response model based on accounting ratios is presented. The explanatory power of a linear combination of the following three ratios expressed as percentages is shown: earnings after tax/average total assets; free equity capital/total loan portfolio; fixed assets/total assets. Within a focus of a descriptive and exploratory nature, the analysis leads to encouraging results.

En même temps que la consolidation de la démocratie, l'Espagne dut affronter une importante crise bancaire. Cet article fait un rapide survol du sujet, pour aboutir à une étude empirique ex post de l'insolvabilité des banques espagnoles. On présente un modèle de réponse qualitative type logit fondé sur ratios comptables, qui montre le grand apport explicatif d'une combinaison linéaire des trois ratios suivants : résultat net de l'exercice/actif total moyen; capitaux propres non engagés/crédits à la clientèle; immobilisations/actif total. Dans une optique descriptive et exploratoire, cette analyse conduit à des résultats encourageants.

DATE PUBLISHED: 15/07/1989

VOLUME: 10

NUMBER: 1

Financial analysis and securities management

Authors: Albouy, Michel

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

New theories for managing business

Authors: Albouy, Michel

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

Uncertain and information

Authors: Allaz, Blaise

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

International Investments

Authors: Fontaine, P.

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

Credit rationing: a summary

Authors: Lobez, Frederic

This paper covers the recent developments on credit rationing. It examines the various market imperfections which can lead to credit rationing. The supply of incentives loan contracts in then studied and its interaction with credit rationing is detailed. Some macroeconomic implications are also derived.

This review of credit rationing first highlights the causes of this phenomenon, with particular emphasis on market imperfections. We then discuss the relevance, in a context of asymmetric information, of offering incentive loan contracts that include guarantees and the impact of such strategies on rationing. Finally, in a final part, we examine the macroeconomic aspects of rationing.

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

Currency options: a review of theoretical models and empirical work

Authors: Chesney, Marc; Loubergé, Henri

The purpose of this article is to present the state of the art and draw some conclusions from recent theoretical and empirical research in currency option pricing over the years 1983-1987. The authors first present foreign exchange options and indicate their usefulness for various operators. They also recall some rational pricing relationships which should be met at every instant on currency option markets. Special importance is devoted to the pricing formula proposed by Garman and Kholhagen for European currency options. Recent models, no longer based on the simplifying assumption of a lognormal distribution for the exchange rate, are also presented. The last section summarizes the principal results from empirical work on currency option markets efficiency and the predictive accuracy of pricing models.

Le but de cet article est de faire le point sur les enseignements que l'on peut tirer des recherches théoriques et empiriques consacrées aux options sur devises durant la période 1983-1987. Après avoir présenté les options sur devises et souligné leur intérêt pour différentes catégories d'opérateurs, les auteurs exposent quelques relations fondamentales qui doivent être vérifiées en tout temps sur ce marché. Une attention toute particulière est accordée à l'examen de la formule de Garman et Kohlhagen, permettant de déterminer, sous certaines hypothèses, le « juste prix » d'une option de type européen. Les auteurs présentent également de nouvelles formules qui, contrairement à la précédente, ne reposent pas sur l'hypothèse simplificatrice d'une distribution log-normale du taux de change. La dernière partie passe en revue les principaux résultats des travaux empiriques portant sur l'efficience des marchés d'options sur devises et sur l'adéquation des formules d'évaluation proposées.

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

Do takeovers in the French market enrich shareholders?

Authors: Husson, Bruno

The study rests on a sample of takeovers (cash and exchange tender offers and controlling block trades) that occurred between 1972 and 1983 on the French market. Its purpose is to measure the market reaction to the announcement of these operations using the event study methodology. The results obtained show significant gains for target shareholders and indicate that the offer premium is a function of the means of payment (cash or stock) and the bidder objective (gain of control or increase of a prior shareholding). Concerning the bidding firms, the abnormal performance are much lower and often statistically insignificant. Therefore, the ability of takeovers to generate synergies is questionable.

L'étude s'appuie sur un échantillon de prises de contrôle (offres publiques d'achat, offres publiques d'échange et négociations de blocs) intervenues sur le marché français au cours de la période 1972-1983. Elle a pour objet d'analyser la réaction du marché financier à l'annonce de ces opérations. Les résultats obtenus font apparaître des gains importants pour les actionnaires des sociétés acquises et montrent que les primes obtenues dépendent à la fois du mode de paiement proposé par l'acquéreur (règlement en espèces ou échange de titres) et de l'objectif poursuivi (obtention du contrôle ou consolidation d'une participation préexistante). En revanche, les performances enregistrées par les entreprises acquéreuses sont peu significatives, si bien qu'il subsiste un doute sur l'aptitude des opérations analysées à dégager des synergies.

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

Economic Theory of Nationalization and Privatization

Authors: Rosa, Jean-Jacques

An optimization model of rational government behavior in a political equilibrium framework is presented. The optimal allocation of assets between private shareholders and the State is derived. In full equilibrium the value of firms is the same for both types of investors. On the government side, the budget and the public sector being alternative instruments for maximizing political support, the scope of the public sector is continuously adapted, determining a nationalization or privatization move, according to the evolution of costs of taxation and debt.

Cet article explique les politiques de nationalisation et de privatisation d'un gouvernement rationnel dans le cadre d'un modèle d'optimisation politico-fiscal. L'allocation optimale du capital des entreprises entre les actionnaires privés et l'État détermine, à l'équilibre, une parité de valeur pour chaque type d'enchérisseur. Du côté de l'État, comme le secteur public constitue un instrument alternatif au budget dans la poursuite de la maximisation des votes, la valeur de l'entreprise à vendre ou à acheter évolue en fonction du coût social de l'impôt et du coût de l'endettement. Les mouvements de privatisation ou de nationalisation seront donc déterminés par l'évolution de ces variables.

DATE PUBLISHED: 15/12/1988

VOLUME: 9

NUMBER: 2

Common shares, subordinate shares: the price of voting rights and the factors that determine them

Authors: Dumontier, Pascal

Does the value of common stocks depends on the degree of control they confer to the stockholders over the firm activities ? This hypothesis is tested with a sample of Canadian firms that have two classes of common stocks which differ in the voting rights. The results show that the class of common stocks with superior voting rights generally had traded at a premium relative to the other class. The paper tries to provide a consistent explanation for the level of this premium.

La valeur des actions dépend-elle du niveau de contrôle exercé par les actionnaires sur l'entreprise ? Cet article répond à cette question en se basant sur un échantillon d'entreprises canadiennes qui ont émis des actions ordinaires et des actions subalternes (à droits de vote limités ou nuls), toutes deux cotées en Bourse. Les résultats montrent que les actions qui attribuent le plus grand nombre de droits de vote se négocient avec une prime. L'article tente d'expliquer le niveau de cette prime.

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

Arbitration and international valuation of financial assets

Authors: Charreaux, Gérard

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

Stock market: negotiable options/Stock options

Authors: Poncet, Patrice

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

Generalization of the international arbitration model

Authors: Fontaine, Patrice

The aim of this paper is to generalize the international arbitrage pricing theory formulated by Solnik (1983). We start from the assumption that the values of common factors, which are believed to influence the return on financial assets, vary as a fonction of the currency in which these return are measured. We demonstrate that additionnal factors, linked to fluctuations in exchange rates, are required. Moreover, these factors are priced.

L'objectif de cet article est de généraliser le modèle international d'arbitrage proposé par Solnik (1983). Nous supposons que les valeurs des facteurs communs, censés influencer les rentabilités des actifs financiers, varient en fonction de la monnaie dans laquelle les rentabilités sont exprimées. Nous mettons alors en évidence que des facteurs supplémentaires dus aux variations des taux de change apparaissent. De plus, ces nouveaux facteurs sont appréciés.

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

The clientele effect of dividends on the French market: an empirical test

Authors: Desbrières, Philippe

Dividends and capital gains are usually not taxed the same way. Not surprisingly investors seem to care about this difference. Indeed, some kind of clientele effect is generally detected in empirical studies. This article presents an empirical test on french data based on the model first proposed by Elton and Gruber. The main results do confirm those of previous studies.

Les dividendes et les plus-values de cession subissent un traitement fiscal différent. Compte tenu de cette différence, les investisseurs peuvent ne pas être indifférents entre percevoir le même montant sous forme de dividendes ou de gains en capital et se regrouper au sein de « clientèles fiscalement spécifiques ». Cet article présente un test empirique de l'effet de clientèle des dividendes sur le marché français à l'aide du modèle d'Elton et Gruber. Les résultats obtenus confirment ceux d'études antérieures.

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

Financial decisions in the company/Financial management of the company

Authors: Albouy, Michel

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

Efficient Market Theory and Information Asymmetry: A Literature Review

Authors: Roger, Patrick

Efficient markets theorists have written a number of papers during the last ten years. Our purpose is a survey of this important body of financial litterature. After pointing out the limits of the « classical » notion of informational efficiency we analyse this concept in economies where agents have diverse information and consequently heterogeneous expectations. This approach drives us to the analysis of transfer and aggregation of information by equilibrium prices.

L'analyse théorique de l'efficience des marchés s'est considérablement enrichie lors des dix dernières années. Nous tentons dans cet article de réaliser une synthèse de ce courant de littérature financière ; après avoir mis en évidence les limites de la conception classique de l'efficience informationnelle, nous introduisons les asymétries d'information et par conséquent les divergences d'anticipations des individus qui conduisent à une approche du concept d'efficience en termes de transmission et d'agrégation d'information par les prix d'équilibre sur un marché compétitif.

DATE PUBLISHED: 15/07/1988

VOLUME: 9

NUMBER: 1

Controlling interest rate risk. New Techniques and Applications for Money Management

Authors: Augros, Jean-Claude

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Equilibrium models of the interest rate structure: an attempt at synthesis

Authors: Gibson-Asner, Rajna

This paper provides a detailed and critical survey of the methodology and the basic hypotheses underlying equilibrium models of the term structure of interest rates. By successively analyzing one and two factor models of the term structure it allows a better understanding of their theoretical foundation. It also enables us to position these models against traditional theories of the term structure of interest rates. We then discuss the main theoretical and practical contributions of these models as well as their major weaknesses both from conceptual and empirical standpoints. This discussion enables us to assess the potential and limits associated to further extensions of equilibrium models of the term structure of interest rates.

Cet article est consacré à une présentation détaillée et critique de la méthodologie et des hypothèses spécifiques aux modèles d'équilibre de la structure des taux d'intérêt. En analysant successivement les modèles d'équilibre à une puis à deux variable(s) d'état, l'article facilite la compréhension de l'assise théorique de ces modèles et nous permet ainsi de les situer par rapport aux théories classiques de la structure des taux d'intérêt. Au terme de cette synthèse, l'article s'attache à mettre en évidence les principales contributions d'ordre théorique et pratique des modèles d'équilibre de même que leurs principales faiblesses sur le plan conceptuel et méthodologique. Ces constatations nous permettent d'évaluer le potentiel et les limites associés aux développements ultérieurs des modèles d'équilibre de la structure des taux d'intérêt.

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Handbook of Financial Markets and Institutions

Authors: Charreaux, Gérard

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Investing in junk bonds

Authors: Fontaine, Patrice

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Inflation anticipation and short-term interest rates

Authors: De Freitas, A. J. M.; Solnik, Bruno

This article presents an empirical estimation of inflation based on short term interest rates. It relies on a Fisherian model where the real interest rate is assumed independent of inflation but is allowed to follow a random walk. The model is tested over the period January 1972 - December 1983 for France as well as Germany, Japan, UK, USA, Brazil and Mexico. The results differ across countries and time periods but do not provide overwhelming support for the theory.

Cet article présente une analyse économétrique de l'inflation à partir des taux d'intérêt à court terme. Le point de départ de l'analyse est un modèle d'inspiration fisherienne où le taux d'intérêt réel est supposé suivre une marche au hasard indépendante de l'inflation. Ce modèle est testé sur la période janvier 1972 - décembre 1983 pour la France ainsi que les pays suivants : Allemagne, Japon, Royaume-Uni, États-Unis, Brésil et Mexique. Les résultats diffèrent selon les pays et la période estimée ; ils semblent souvent peu conformes avec la théorie postulée.

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Budget management

Authors: Thion, Bernard

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Financial instrument futures markets: some clarifications on the theories of hedging and equilibrium

Authors: Poncet, Patrice; Portrait, Roland

In the literature devoted to investment and hedging with financial futures contracts, the latter are usually treated as forward contracts. This article examines in depth the merits and limitations of this model, on the one hand, and proceeds to certain generalizations on the other. In particular, since the futures market is inactive in those situations that lead to the standard CAPM, we introduce differential taxation and/or constraints on investors' port-folios to reactivate it. Lastly, treating a futures as a forward is shown to be inappropriate to deal with the basis risk hedging problem.

Dans la littérature consacrée à l'utilisation des instruments à terme financiers, il est d'usage de modéliser les contrats futures comme des opérations forward. Cet article délimite le champ de validité et d'application de ce modèle d'une part, et le généralise à certaines situations plus complexes, d'autre part. En particulier, puisque sur des marchés parfaits le marché à terme est inactif à l'équilibre quand les agents ont un horizon commun et des anticipations homogènes, on introduit des contraintes sur les positions de certains investisseurs ou des fiscalités hétérogènes pour réactiver les opérations à terme. Enfin, on montre que la modélisation du futures comme un forward n'est pas adaptée à l'étude du risque de base.

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Options on Futures Contracts Introduction of a Mixed Diffusion Process and Application to Currencies

Authors: Bito, Christian

Most empirical studies about option pricing are based upon the assumption that the underlying stock follows a Wiener process. This article introduces and tests a mixed stochastic process including both Wiener and Poisson disturbances. This model seems more appropriate with respect to options on currency futures contracts. The first section describes the valuation model. It is followed by a presentation of the estimation method and the numerical algorithm. The final section summarizes the results of an empirical study using data from the IMM.

Les modèles d'évaluation des options utilisés depuis quelques années reposent principalement sur l'hypothèse selon laquelle les aléas autour de la tendance d'évolution des prix du titre sous-jacent suivent un processus de Wiener (distribution normale). Cet article propose d'étendre la modélisation de l'incertain en utilisant des processus de diffusion mixtes avec deux sources d'aléas : ceux générés en continu par un processus de Wiener et ceux provenant d'un processus de sauts de Poisson caractérisant l'apparition d'événements rares (brusque et importante variation de cours). Elle concerne un problème concret et complexe pour lequel l'apport de cet outil supplémentaire devrait améliorer sensiblement l'évaluation : les options sur contrats futures de devise (IMM). La première partie de cette étude développe le modèle d'évaluation. La deuxième partie explique la méthode de résolution. Enfin, dans la troisième partie, nous proposons des tests empiriques du modèle ainsi qu'une analyse de ses performances dans le cadre de son utilisation pour la gestion.

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Futures Market, Options, and Stability of the Spot Interest Rate Market

Authors: Artus, Patrick

In this paper, we address the question of the stabilizing properties of futures and options markets on the spot price of bonds. The effects of several disturbances (changes in the interest rate, in the volume of bonds issued...) are examined. This approach implies that the behavior of the various market participants (arbitragers, speculators, hedgers,...) must be analyzed as well as the conditions for market equilibrium and the way expectations are formed.

On se demande dans cette note si l'introduction d'un marché à terme ou d'un marché d'options de taux d'intérêt a une influence stabilisante ou déstabilisante sur le marché au comptant (sur la formation du taux d'intérêt à long terme). On évalue donc les effets de différentes perturbations (variations du taux d'intérêt sur le marché monétaire, variations des émissions d'obligations ou des interventions sur les marchés financiers) sur le taux long au comptant dans les différents cas. Ceci implique qu'on doit analyser le comportement des intervenants sur le marché : arbitragistes, spéculateurs, émetteurs ou gérants de portefeuille qui se couvrent...

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Measuring the Market Value of a Blank, a Primer

Authors: Dermine, Jean

The object of the paper is to provide a concise but explicit analysis of the determinants of the market value of a bank. These include the current value of assets net of the liabilities, a franchise value and three terms related to the corporate tax system that operates through equity financing, inflation and tax savings on unrealized capital gains on assets and liabilities. The paper ends with an application on the case of an international banking firm.

L'objet de cet article est de présenter une analyse concise mais explicite des facteurs explicatifs de la valeur d'une banque. Ceux-ci comprennent la valeur courante nette de l'actif, la valeur du fonds de commerce et trois termes liés à la fiscalité des entreprises qui opèrent via le financement par fonds propres, l'inflation et l'économie fiscale sur les gains en capital non réalisés. L'article conclut avec une application au cas d'une banque internationale.

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Stock Price Reactions to Announcements of Stock Dividends and Rights Issues: a Test of Liquidity and Signaling Hypotheses on the Helsinki Stock Exchange

Authors: Berglund, Tom; Liljeblom, Eva; Wahlroos, Björn

This paper is based on the notion that announcements of stock dividends and underpriced rights issues include a signal concerning the future cash flow of the firm. In order to be credible such a signalling device must offer the market some guarantee against widespread misuse. This paper identifies such a cost on the Finnish stock market. A measure of the power of the signal derived from this restriction, proves highly significant in explaining the excess returns observed in connection to announcements of stock dividends and underpriced rights issues on the Finnish stock market. However, some support for the alternative liquidity hypothesis is found as well. Finally, the results are shown to be largely independent of the method by which supernormal returns are defined.

Cet article fait l'hypothèse que les annonces de distributions gratuites d'actions et de droits de souscription contiennent un signal concernant les flux monétaires futurs de l'entreprise. Pour être crédible, un tel mécanisme doit offrir au marché une garantie contre son utilisation abusive. Nous identifions une telle garantie dans le cas du marché finlandais sous la forme d'un coût. Nous proposons une mesure de l'intensité du signal qui permet d'expliquer les rendements anormaux observés lors des annonces. L'hypothèse alternative, celle de la liquidité, est aussi retenue. Finalement, nous montrons que nos résultats sont indépendants de la méthode utilisée pour calculer les rendements anormaux.

DATE PUBLISHED: 15/12/1987

VOLUME: 8

NUMBER: 2

Information asymmetry, taxation and debt in Canada

Authors: Gagnon, Jean-Marie; Suret, Jean-Marc; St-Pierre, Josée

This paper presents a cross-sectional study of the financial structures of Canadian firms. It suggests that the determinants are firm size, growth and profit rate. The main objective was to assess the impact of the tax laws. However, none of the proxies suggested by the current literature is statistically significant.

Ce mémoire propose une étude en coupe instantanée des structures financières des entreprises canadiennes. On conclut qu'elles sont statistiquement liées à la taille, la croissance et le taux de profit. Le but principal de la recherche était de mettre en évidence le rôle de la fiscalité, mais aucune des variables que suggèrent les travaux récents sur ce sujet n'est significative.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

Commodity exchanges and futures markets

Authors: Richard, A.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

Consumption, risk aversion and stock returns: theory and tests

Authors: Echchihab, Slimane; Jacquillat, Bertrand

In a multiperiod economy, discounted cash flow valuation models cannot explain the observed variability of prices because of two simplifying assumptions: investors are assumed to be risk neutral and the real rate of interest is constant. In this article, the role of the marginal rate of substitution of consumption is shown as a discount factor in the stochastic Euler equation. The equation parameters are tested using two econometric methods applied to french stocks from 1937 to 1983. These are two stage least square regression and the maximum likelihood method. The hypothesis of rational expectation on the Paris Bourse cannot be respected.

Dans une économie multipériodes, les modèles d'actualisation ne permettent pas de rendre compte de la variabilité des prix parce qu'ils imposent des restrictions très sévères sur le comportement des investisseurs (neutralité vis-à-vis du risque) et sur le taux d'intérêt réel (constant). Cet article met en évidence le rô1e du taux de substitution à travers l'équation d'Euler stochastique. Les paramètres de celle-ci sont ensuite testés à l'aide de deux méthodes économétriques : modè1e linéaire en deux étapes et maximum de vraisemblance sur le marché français des actions. L'hypothèse d'anticipation rationnelle des opérateurs ne peut être rejetée.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

Financial management

Authors: Hirigoyen, G.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

Handbook of Corporate Finance

Authors: Albouy, Michel

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

Empirical evidence of the term structure of interest rates

Authors: Bruslerie, Hubert De La; Gellusseau, Laurence

Equilibrium bond prices should be equal to the present value of their future cash-flows using the correct discount coefficients. These discount factors are estimates of the spot interest rates. Testing the term structure of interest rates is basically an empirical problem which consists in calculating the discount function at a given date. Different methodologies are given by the literature. One of the latest is the exponential function of polynomials used by the Caisse des Dépôts et Consignations and improved by Chambers, Carleton and Waldman (1984). A current model developed by Vasicek and Fong (1982) proposes the use of a polynomial of exponential terms to fit the discount function. This article first analyses the characteristics of these three models. Thereafter a comparative test is performed, using two different sets of data: one is made of us Treasury bonds, the other of euro-dollar bonds. The comparison is done through 29 cross sectional estimations during the 1983-1985 period. The main empirical conclusion of this study is that the Vasicek and Fong methodology gives better results in revealing the discount function.

Sur un marché obligataire, les prix constatés sur un ensemble de titres homogènes doivent être égaux à la valeur actuelle des flux futurs actualisés pour tenir compte de leur éloignement dans le temps. Les coefficients d'actualisation sont des estimations des taux d'intérêt purs. La mise en évidence de la structure à terme des taux d'intérét est un problême d'ordre empirique qui consiste à calculer la fonction d'actualisation à une date donnée. Diverses méthodologies ont été proposées dans la littérature. Parmi les plus récentes, la méthode mise en oeuvre à la Caisse des Dépôts et Consignations et améliorée par Chambers, Carleton et Waldman (1984) utilise une fonction exponentielle de polynômes. La méthode de Vasicek et Fong (1982) retient, pour sa part, un polynôme d'exponentielles pour ajuster la fonction d'actualisation. Après avoir rappelé les caractéristiques des trois modules, on a effectué une série de tests empiriques comparatifs. Deux échantillons ont été constitués dans ce but : le premier d'obligations domestiques du Trésor des Etats-Unis, le second d'euro-obligations en dollar. La comparaison des résultats est faite au travers de 29 ajustements sur la période 1983-1985. La conclusion empirique de cette étude est que, malgré quelques imperfections qui restent à é1iminer, les modèles du type Va.sicek et Fong apparaissent nettement plus performants que les deux précédents.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

The role of collateral in the bank loan contract

Authors: Deshons, Michel; Freixas, Xavier

Adverse selection in the credit market has provided a basis for understanding the existence of credit rationing since with adverse selection an increase in the interest rate may imply a decrease in the average quality of the projects to be financed and thus a decrease in the bank's expected profit. The aim of this paper is to extend this analysis by introducing the collateral. This is interesting because it allows truthful revelation schemes to be used to discriminate among borrowers. Namely, mechanisms associating higher collaterals to lower interest rates in some specific way are shown to be strategy-proof. It is then possible for the bank to make use of these mechanisms. Nevertheless, it is shown that it is not always interesting for the bank to do so, so that for some distributions of the quality of the projects, the bank's optimal contract will entail credit rationning.

L'hypothése d'asymétrie d'information avec sélection adverse constitue une explication intéressante de l'existence de rationnement sur le marché du credit, la sélection adverse pouvant avoir pour consequence que tout accroissement du taux d'intérét détériore la qualité moyenne des emprunteurs et augmente le risque de défaillance des prêts. Cet article se propose de mener plus loin cette analyse en considérant les possibilités offertes par la garantie en tant que mécanisme de révélation. En effet, en associant aux garanties les plus élevées les taux d'intérét les plus faibles de façon adequate, la famille de contrats ainsi obtenue est incitative et permet donc de discriminer entre les emprunteurs potentiels. Il est alors possible d'é1iminer l'information imparfaite du banquier en utilisant ce type de mécanismes, mais cependant, le mécanisme optimal peut rationner le crédit pour certaines distributions de risque dans la population des emprunteurs potentiels.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

The real determinants of financial risk

Authors: Bessis, Joel

Uncertainty in modem financial theory is given with no direct connection to the real characteristics and behavior of firms, as if it were independent of their real decisions. Financial and real spheres remain separated, which does not provide a clear understanding of the influence of the real behavior of firms on the risk of financial assets and the cost of capital, or of the influence of uncertainty in real markets on the policies of firms guided by financial objectives. The purpose of this research is therefore to analyze, both theoretically and empirically, the determination of financial (systematic) risk based on the real behavior of firms. The research includes three types of contributions. A model of the determination of systematic risk, based on the analysis of partial equilibrium of the firm under uncertainty and including both real and financial parameters, syntheses and extends available recent works. An empirically testable version is then derived using the links between financial risk, real (accounting) profitability, and Tobin's Q. The empirical analysis is conducted for a population of French firms along these lines. It shows that capital intensity reduces risk and that higher real profitability is associated with higher risk. It is thus shown that market and production structures affect risk and the cost of capital.

Modern financial theory integrates uncertainty without linking it to the real characteristics and behaviors of companies, as if it were independent of their real decisions. This approach leaves the real and financial spheres disjointed and does not allow us to understand how real behaviors affect financial risk and the cost of financing, nor how uncertainty on real markets influences behaviors guided by financial objectives. The purpose of this research is therefore to explore, at the theoretical and empirical levels, the mechanisms for determining financial (stock market) risk based on the real behaviors of companies. It includes three types of contributions. A model for determining systematic risk, based on the analysis of the partial equilibrium of the company in an uncertain universe and integrating real and financial parameters, synthesizes and completes recent theoretical work. A testable version is derived by exploiting the links between financial risk, real (accounting) profitability and Tobin's Q ratio. An empirical analysis of the determinants of risk is carried out on these bases for a set of listed French companies. It shows, in particular, that capital intensity has a reducing effect on risk and that the prospects of high edelle profitability are associated with increased risk. The whole establishes the role of production structure and market variables on risk and the cost of capital.

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

Theory of Finance

Authors: Dumontier, Pascal

DATE PUBLISHED: 15/07/1987

VOLUME: 8

NUMBER: 1

'News' and its Impact on Spot Exchange Rates: 1970-1982

Authors: Apel, Emmanuel

In an informationally efficient foreign exchange market, economic 'news' which is defined as the surprise or unanticipated component of an economic indicator, should have a significant and immediate impact on the spot exchange rate, whereas the anticipated component of the economic indicator should not. Such a proposition is tested for the SCannadian/$us spot rate for the period 1970-1982, using the following Canadian economic indicators: the administered Bank rate changes prior to 1980 and the weekly market determined Bank rate changes since 1980, the monthly Canadian merchandise trade balance, and the monthly change in the Canadian official international reserves. Similarly, the proposition is tested for the French franc/$us spot rate (1973-1982) for the monthly French merchandise trade balance and the monthly change of the French official international reserves. The regression of the spot rate forecast error on the unanticipated nd anticipated economic indicator shows a significant, immediate impact of the 'news' component of the economic indicator for all cases, except for the Canadian official international reserves, and shows, in all cases, no significant impact of the anticipated economic indicator--which is consistent with the hypothesis of an informationally efficient foreign exchange market. The exception in the case of the Canadian international reserves is probably due to a sort of insider information on the part of the market participants in the foreign exchange market.

Sur un marché des changes qui réagit efficacement à l'information, cette dernière, qui est définie comme étant l'élément surprise -- autrement dit imprévu -- de l'indicateur éco- nomique devrait, contrairement à l'élément prévu, se répercuter immédiatement sur les cours au comptant. Cette proposition est restée dans un premier temps dans le cas du taux de change au comptant du $Canada/$vs pour la période allant de 1970 à 1982, et, dans un deuxième temps, dans le cas du taux de change du franc français/Sus pour la période allant de 1973 à 1982. Les indicateurs économiques utilisés sont, pour le Canada, les variations du taux d'escompte administré par la Banque du Canada avant 1980, les variations hebdoma- daires du taux d'escompte flottant depuis 1980, la balance commerciale mensuelle du Canada, et les variations mensuelles des réserves officielles de liquidités internationales du Canada ; pour la France, la balance commerciale mensuelle de la France et les variations mensuelles des avoirs officiels de change. La régression de l'erreur de prévision du taux de change au comptant sur l'élément imprévu de l'indicateur économique révèle d'importants effets immédiats dans chaque cas, sauf dans celui des réserves officielles de liquidités internationales du Canada, tandis que sur l'élément prévu, elle ne révèle nulle part d'influence significative, ce qui soutient l'hypothèse d'un marché de change réagissant efficacement à l'information. L'exception observée dans le cas des réserves internationales du Canada s'explique vraisem- blablement du fait que, sur le marché des changes, les opérateurs ont accès à des informations privilégiées.

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

A General Equilibrium Model of Asset Pricing with Partial or Heterogeneous Information

Authors: Detemple, Jérôme B.

In this paper we address the issue of the informational content of asset prices in dynamic economies with heterogeneously informed investors. As in Grossman (1978), equilibria where prices are strongly informationally efficient can be analyzed by introducing an artificial economy where investors pool their information. By using the correspondence between the, two economies we show, via an example, that there are dynamic environments with Gaussia information structures in which financial markets are efficient in the strong form sense Fama (1970).

Cet article aborde la question du contenu informationnel des prix financiers dans le contexte d'économies dynamiques où les investisseurs collectent de l'information privée. Comme dans Grossman (1978), des équilibres off les prix sont « fortement » eflïcients peuvent être analysés par l'introduction d'une économie artificielle dans laquelle les investisseurs dévoilent leur information privée. En utilisant cette correspondance entre ces deux économies, il est démontré, par un exemple, qu'il existe des environnements avec structures d'information gaussiennes où les prix sont efficients au sens fort de Fama (1970).

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Financial management and economic changes

Authors: Simon, Yves

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Industry and Firm-Specific Factors in Canadian Corporate Acquisitions

Authors: Calvet, A. Louis; Lefoll, Jean

This paper examines the Canadian market for corporate control in the 70's. It assesses the wealth effect of business re-organizations on the stockholders of acquiring and acquired firms. Furthermore, the wealth effect is traced back to industry and firm-specific factors in an effort to identify the source of acquisition gains. There are indications that the behavior of firms involved in takeovers differs greatly depending on whether firms are classified by pro- cedure of acquisition, type of acquisition, economic sector to which they belong, or time period. Some evidence is also reported on other factors, such as the means of payment used to purchase the target firm, and their relationship with the results found.

Cet article étudie le marché des prises de contrôle pendant les années 70, et plus parti- culièrement les gains de richesse obtenus par les actionnaires des sociétés acquéreuses et acquises lors de réorganisations de sociétés. Afin de tenter d'identifier la source de ces gains, on examine le rôle joué par des facteurs spécifiques aux sociétés ou aux secteurs économiques. Des différences importantes dans les gains réalisés lors d'opérations d'acquisitions sont relevées, suivant la procédure d'acquisition suivie, le type d'acquisition et le secteur économique auquel appartient chacune des entreprises concernées, les moyens de paiement utilisés, et la période pendant laquelle a eu lieu l'opération.

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Firms' reluctance to lower dividends: the Canadian case

Authors: Adjaoud, Fodil

We tested with Canadian data the hypothesis that firms are reluctant to cut their dividend level. We studied the dividend changes of 259 firms over the period 1963-1981 and found their distribution skewed toward positive dividend changes. The firms maintained or increased their dividends even when the earnings decreased. We also examined the sequence of dividend changes over time by each firm and found that many firms showed relatively long periods wherein dividends were increased, the exceptions being partly explained by consecutive earnings deficits. These findings support the idea that canadian firms avoid dividend cuts.

Nous avons étudié avec des données canadiennes l'hypothèse selon laquelle les firmes seraient réticentes à baisser le niveau de leur dividende. Nous avons analysé les changements des dividendes de 259 firmes de 1963 à 1981 et avons constaté que leur distribution est asymétrique vers les changements positifs et que les firmes stabilisaient ou mëme augmentaient leur dividende en dépit d'une baisse de leurs bénéfices d'exploitation. En outre nous avons caractérisé les fréquences des changements de dividendes de chaque firme et avons relevé que le nombre d'années consécutives de hausses de dividendes dominait très largement celui de baisses ce qui signifie que les réductions de dividendes seraient des événements rares. Tous les résultats soutiendraient l'hypothèse que nous voulions tester.

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Explicit interest rate forecasts in France: an empirical study over the period 1981-1985

Authors: Colletaz, Gilbert

In this paper, we analyse the expectations of interest rates in France. Based on survey data conducted periodically since 1981, we give some empirical insights about errors of prediction, rationality and dispersion of expectations, and Meiselman's error-learning model.

Dans cette recherche, nous traitons des caractéristiques des anticipations de taux d'intérêt en France. Les prévisions utilisées sont issues de données d'enquêtes réalisées périodiquement depuis 1981. Ceci nous permet d'aborder des questions relatives aux erreurs de prévisions, à la rationalité et à la dispersion des attentes, et au modèle d'apprentissage de Meiselman.

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Pricing Policies of Financial Intermediaries

Authors: Bessis, Joël

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Equilibrium prices and efficiency in the Swiss foreign exchange options market: theoretical analysis and empirical tests

Authors: Chesney, Marc

This paper presents empirical evidence regarding the pricing of European call options on the us dollar/Swiss franc spot rate quoted in Geneva by Credit Suisse First Boston. The pricing formula used for the tests is a standard option pricing equation in the spirit of Black and Scholes. The conclusions are first that the pricing equation performs relatively well and second that the hypothesis of market efficiency can only be ambiguously supported by the results.

L'article présente des résultats empiriques concernant l'évaluation des options d'achat européennes de dollars en francs suisses, cotées à Genève par le Crédit Suisse First Boston. La formule d'évaluation utilisée pour les tests s'inspire de celle élaborée par Black et Scholes dans le cadre des options sur actions. Les conclusions sont relativement positives pour ce qui est de l'aptitude de la formule à cerner les valeurs de marché. Quant à l'hypothèse d'efficience du marché, elle ne semble ëtre vérifiée que de manière ambiguë.

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Risk Management and Insurance

Authors: Briys, Eric

DATE PUBLISHED: 15/12/1986

VOLUME: 7

NUMBER: 2

Book analyses

Authors: Marois, B.

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

European Equity Markets: Price Behavior and Efficiency

Authors: Hamon, Jacques

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

Evaluation of Treasury Renewable Bonds

Authors: Bito, Christian

The purpose of this article is to estimate the price of a new type of government security introduced recently on the Paris Stock Exchange and called ORT (obligations renouvelables du Trésor). The aim is to provide a formal procedure which describes the characteristics of this type of complex products. The continuous time hedging model of O. Vasicek has been adapted to the ORT option terms. The article then shows how, taking taxation into account, it is possible to improve the basic valuation model. Finally, the model is tested using daily market prices from June 1983 to January 1985. The practical implications of the results are discussed.

Cet article se propose d'estimer le prix rationnel d'un actif financier nouvellement apparu sur le marché boursier de Paris : les obligations renouvelables du Trésor. Il s'attache à décrire la procédure de formalisation des caractéristiques de ce type de produits complexes. Le modèle d'arbitrage en temps continu de O. Vasicek est étendu aux clauses optionnelles des ORT. Il montre ensuite comment il est possible, en tenant compte de la fiscalité, d'améliorer sensiblement cette évaluation. Il indique la procédure à suivre pour estimer le modèle sur la base des cours quotidiens de juin 1983 à janvier 1985. Enfin, il insiste sur l'interprétation pratique des résultats.

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

Introduction

Authors: Dumas, Bernard

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

Financial management of groups

Authors: Charreaux, Gérard

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

Prices Instead of Yields to Model the Term Structure

Authors: Boyle, Phelim P.

A new method is proposed for analyzing term structure changes. Four basic types of movement in the series of pure discount bonds generated by a particular term structure are considered. Each of these movements is directly linked to a parameter of a four parameter family of transformations. Within this context yield curve changes are analyzed.

Nous proposons dans cet article une nouvelle méthode d'analyse des changements dans la structure des taux d'intérêts. Nous analysons quatre types fondamentaux de changements dans la série d'obligations à coupon nul implicite dans une structure donnée de taux d'intérêts. Chacun de ces changements est directement lié à un paramètre d'une famille de transformations à quatre paramètres. C'est dans ce contexte que les changements dans la structure des taux sont analysés.

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

Pricing US Treasury Securities with Tax Effects Using the Likelihood Function

Authors: Kanemasu, Hiromitsu; Litzenberger, Robert H.; Rolfo, Jacques

This paper presents and implements a likelihood-based approach to the pricing of Treasury securities in an incomplete market with taxes. It solves the various statistical problems in a unified manner, using cubic splines to represent the discount function. The Jacobian of the transformation from errors to bond prices distinguishes the resulting maximum likelihood estimation of this paper from ordinary least-square estimates. A time-varying treatment of heteroskedasticity is introduced in a flexible Box-Cox form. A parsimonious use of knot-points (2 or 3) is recommended to prevent an unjustifiably complex (and overestimated) term structure. This method is applied to the estimation of the locus income and capital gain tax rates providing an identical explanatory power over all bonds, and is used to identify a tax-induced clientele effect on par and premium bonds.

Cette étude présente et applique une méthode d'estimation des prix des obligations du Trésor américain basée sur le principe de vraisemblance dans un modèle de marché incomplet avec taxes. Les différents problèmes statistiques sont résolus de manière unifiée, utilisant une représentation de la courbe de rendement par des splines cubiques. Le jacobien de la transformation des erreurs aux prix des obligations représente la différence entre l'estimation obtenue par ce modèle et celle de la méthode des simples carrés. Un traitement de l'hétéroskédasticité du modèle qui dépend du temps et qui utilise la transformation flexible de Box et Cox est introduit. Un nombre limité de nœuds (2 ou 3) est recommandé pour éviter une représentation de la structure des taux d'intérêt injustifiablement complexe (et surestimée). Cette méthode est appliquée à l'estimation du lieu des taux d'imposition des revenus et des gains en capital qui offre la mëme qualité d'estimation pour l'ensemble des obligations, et est utilisée pour identifier un effet de clientèle induit par le système de taxation sur les obligations traitant au pair ou au-dessus du pair.

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

Testing a systematic arbitrage strategy on the Eurobond market

Authors: Bruslerie, Hubert De La

The purpose of this paper is to test whether a continuously swapping strategy can be profitable on bond markets. The analysis is based on a sequence of yield curves taking into account both maturity and coupon. These data have been calculated on the euro-bond market during the period 1981-1983. Different strategies were defined to take positions on abnormally priced issues. The net result after transaction costs of all these strategies is negative, The information set used in that study does not allow the efficiency hypothesis to be rejected.

Cet article se propose de tester si une stratégie d'arbitrage systématique peut conduire à des profits nets sur un marché de titre à revenu fixe. L'analyse a porté sur une série de courbes de taux de rendement calculées sur le marché euro-obligataire en dollars en intégrant la maturité et le coupon des titres. Sur ces données, diverses stratégies de prises de positions de titres sur(sous)-évalués ont été simulées sur la période 1981-1983. Les résultats nets, compte tenu des frais de transaction, auxquels on aboutit sont négatifs.

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

A synthesis of bond option pricing models

Authors: Courtadon, Georges

In this article we show how the Black and Scholes model has been generalized in the financial literature to address the problem of debt option valuation. The models that have been proposed are based on a set of assumptions regarding the term structure of interest rates. Some of these models derive the term structure of interest rates from a single state variable (the short term rate of interest) and its evolution over time. Others model the term structure with two state variables (the short term rate of interest and the rate of return on a consol bond) as well as their evolution over time. Both categories of models are presented in this article as well as the numerical methods necessary to solve them. We also present in this article the methods necessary for estimating the parameters used by these models to describe the evolution of the state variables over time. Finally, simulation of a model from each of these two categories allows us to draw conclusions regarding the applicability of these two ways of modelling the term structure of interest rates when one wishes to value call and put options on default free bonds.

Dans cet article nous montrons comment la méthode de Black et Scholes a été généralisée dans la littérature financière pour répondre au problème de l'évaluation des options sur obligations. Les modèles qui ont été proposés sont basés sur un ensemble cohérent d'hypo- thèses concernant la structure des taux d'intérêt. Certains de ces modèles modélisent la structure des taux d'intérêt à partir d'une seule variable d'état (taux d'intérêt à court terme) et de son évolution au cours du temps. D'autres modélisent cette structure à partir de deux variables d'état (le taux d'intérêt à court terme et le taux de rendement d'une rente perpé- tuelle) et de leur évolution au cours du temps. Les deux catégories de modèles sont présentées dans cet article ainsi que les méthodes numériques nécessaires à leur résolution. Nous pré- sentons aussi dans cet article les méthodes nécessaires à l'estimation des paramètres utilisés par ces modèles pour décrire l'évolution au cours du temps des variables d'état. Finalement, une simulation d'un modèle appartenant à chacune des deux catégories nous permet de conclure sur l'applicabilité de ces deux différentes manières de modéliser la structure des taux d'intérêt lorsque l'on veut évaluer des options d'achat ou de vente d'obligations.

DATE PUBLISHED: 15/12/1985

VOLUME: 6

NUMBER: 2

A geometrical exposition of the credit setting strategies of the banking firm under loan rate uncertainty

Authors: Do, Toan Q.; Chateau, John Peter D.

The mean-standard deviation-of-profit approach is used to derive four propositions of the comparative statics of (optimal) credit supply for a depository financial intermediary (DFI) that faces loan rate uncertainty and displays decreasing absolute risk aversion (DARA). The propositions are: i) the credit supply set optimally by a DARA-intermediary varies inversely with its branch-banking fixed cost: ii) its optimal credit accommodation varies inversely with its variable liability-funding cost; iii) the DARA banking firm raises its equilibrium loan accommodation in response to an increase in loan demand: and iv) for the DARA-DFI, the optimal credit supply varies inversely with any marginal change in rate uncertainty. The analytical developments underlying the geometric exposition are presented in appendix.

L'approche espérance/écart type est utilisée ici pour obtenir quatre propositions concernant le comportement optimal d'offre de crédit d'un intermédiaire financier confronté au risque de taux et ayant une aversion au risque absolue décroissante. Les propositions sont : i) l'offre de crédit de l'intermédiaire varie inversement avec le coût fixe de ses guichets ; ii) elle varie inversement avec les coûts de financement ; iii) l'offre de crédit s'ajuste à la hausse lorsque la demande de crédit augmente ; iv) elle varie en raison inverse de l'incertitude sur les taux futurs. Les développements mathématiques qui sous-tendent l'explication graphique sont présentés en annexe.

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

Financial management of groups

Authors: Charreaux, Gérard

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

Monetary policy in an open economy with imperfect capital mobility and the reaction of authorities in the foreign exchange market

Authors: Artus, Patrick

This article is an attempt to analyze the dynamics of inflation in an open economy. The dynamic behavior is a product of the interaction between prices, wages, interest rates and production. The point of departure is the Dornbusch model which is expanded to encompass more realistic and more easily testable specifications. As in Dornbusch's articles, the main focus is the possibility of overshooting of the exchange rate after a monetary expansion. In the Dornbusch paper the overshooting is due to the conflict between the money and capital markets where adjustement is instantaneous on the one hand and the goods markets where adjustement is sluggish on the other. Additional rigidities are introduced here (affecting demand, wages, prices, capital flows, money demand); the analysis is thus rendered more exhaustive and overshooting does not necessarily occur.

Cet article est un essai d'analyse de la dynamique de l'inflation dans une économie ouverte. Cette dynamique y résulte de l'interaction entre la formation des prix, des salaires des taux d'intérêt et de la production. Le point de départ est le modèle de Dornbusch, qui est développé afin d'obtenir des spécifications réalistes et qui puissent raisonnablement être estimées. Comme dans les articles de Dornbusch, le point central de ce papier est l'étude de la possibilité de surajustement du change à court terme après une expansion monétaire. Dans le papier de Dornbusch, le surajustement résulte de l'opposition entre les marchés des capitaux et de la monnaie où les ajustements sont instantanés et le marché des biens caractérisé par de fortes rigidités. On introduit ici un plus grand nombre de possibilités de rigidités (sur la demande, les salaires, les prix, les flux de capitaux, la demande de monnaie) qui complètent l'analyse et font que le surajustement n'est plus automatique.

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

The issue price of new shares: an application of options theory to capital increases

Authors: Ginglinger, Édith

An equity issue is usually underwritten by a bank. In France, the underwriting fee is the same for all stock issues. This parameter provides a theory determining the equilibrium issue price which is acceptable both to the issuing firm and to the bank: if the issue price is low, the placement risk is negligible and the predetermined fee is unwarranted; if the issue price is high the placement risk is high and the fee is insufficient to reward the bank for bearing it.

Les émissions d'actions nouvelles sont habituellement garanties par une banque. En France, la commission de garantie est fixe quel que soit le risque et donc quel que soit le prix d'émission choisi. Ce paramètre fournit alors un mode de détermination du prix d'équilibre acceptable à la fois par la société émettrice et par la banque : si le prix d'émission est faible, le risque d'échec de l'opération est négligeable et la commission injustifiée ; si le prix d'émission est élevé le risque d'échec de l'opération est lui aussi élevé et la commission fixe est insuffisante pour dédommager la banque.

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

Determinants of financial structure: the case of large French companies

Authors: Dubois, Michel

This paper contains an empirical cross-sectional investigation of the determinants of financial structure. Financial structure is measured both in accounting and market value terms. The explanatory variables investigated are: rate of return, risk, growth, asset structure, size and type of activity. The rate of return is found to be the most important determinant.

Cet article comporte une étude empirique en coupe instantanée des déterminants de la structure financière. Celle-ci est mesurée soit en termes comptables, soit en termes de valeur de marché. Les variables explicatives utilisées sont : la rentabilité, le risque, la croissance, la structure de l'actif, la taille et le secteur d'activité de l'entreprise. La rentabilité ressort comme le déterminant le plus important.

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

Capital structure and the compensation hypothesis: a critical perspective

Authors: Malécot, J.-F.

In a previous article published in Finance, the author had measured default and liquidation costs for bankrupt firms in France. His conclusion had been that these could reach 65 % of nominal debt claims. The current paper draws the consequences of this measurement as far as the optimal capital structure is concerned. Simulations based on option pricing models indicate that the value maximizing structure is attained for very low levels of debt.

Dans un précédent article publié dans Finance, l'auteur avait mesuré les coûts de faillite et de liquidation des firmes françaises. Il était arrivé à la conclusion que ceux-ci pouvaient atteindre 65 % du nominal de la créance. Le présent article tire les conséquences de cette observation en ce qui concerne le choix de la structure du capital. Des simulations fondées sur des modèles d'évaluation d'options indiquent que la structure qui maximise la valeur se situe à un très faible montant de dette.

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

International financial techniques

Authors: Jacquillat, Bertrand

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

A test of the international arbitrage model and financial integration

Authors: Fontaine, P.

A test of the international arbitrage model proposed by Solnik (1983) is carried out in this article. The results of the test do not reject the model. Thus, in a second stage, it seemed interesting to perform an empirical analysis of the financial integration in the theoretical framework of this model. However, this analysis indicates that the world market is not integrated.

Un test du modèle international d'arbitrage proposé par Solnik (1983) est réalisé dans cet article. Les résultats ne permettent pas de rejeter ce modèle. Aussi, dans une deuxième étape, il a paru intéressant de réaliser une analyse empirique de l'intégration financière dans le cadre théorique de ce modèle. Ce test, par contre, indique que le marché mondial n'est pas intégré.

DATE PUBLISHED: 15/07/1985

VOLUME: 6

NUMBER: 1

Comparative analysis of the financial intermediation function of banks and insurance companies

Authors: Husson, Bruno

Elaborating on the observation that insurance companies may be regarded as true financial intermediaries, this article presents a comparative analysis of the intermediation function respectively performed by banks and insurance companies. The relative weights of these two kinds of firms are first examined on the basis of data concerning their raising of funds and their contribution to the financial needs of the economy. Then the author draws upon the results of recent empirical researches conducted in Canada and in the United States on the fair return on insurance under-writing to investigate whether French insurers do not benefit from cost advantages over banks in their funds-raising activity.

Partant du constat que les entreprises d'assurances peuvent être identifiées comme des intermédiaires financiers à part entière au même titre que les banques, ce papier présente une analyse comparative du rôle d'intermédiation financière exercé par l'Assurance et la Banque. Le poids relatif de ces deux catégories d'entreprises est tout d'abord examiné sous le double aspect de la collecte des ressources et de la contribution au financement de l'économie. Puis, sur la base des conclusions présentées par des recherches empiriques effectuées aux Etats-Unis et au Canada, recherches qui permettent d'évaluer le niveau de marge technique que les entreprises d'assurances doivent dégager dans un contexte concurrentiel, la question est posée de savoir si les entreprises d'assurances en France ne bénéficieraient pas d'un avantage décisif sur les banques en matière de coût des ressources collectées.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Competition between banks and insurance companies in the field of life insurance

Authors: Simonnet, François

In France, within the past six years banks' market shares of the insurance industry showed tremendous growth : from 11 to 22 % for capitalisation, 2 to 4 % for individual life, 3 to 12 % for group insurance. This pace slowed down in 1983 ; continuation of such a growth would mean huge menace for the insurance companies. However, the near future will be changed by computerisation which will modify customer behaviour. Rather than being competitors, insurers and bankers would be better to cope together with their common technical revolution : the end of counter, the surge of home terminal.

Au cours des six dernières années en France, les compagnies d'assurances créées par les banques ont très fortement développé leur part de marché, de 11 à 22 % en capitalisation, de 2 à 4 % en vie individuelle et de 3 à 12 % en assurances collectives. Si ce rythme de progression continuait, la situation serait grave pour les assureurs, mais il semble que l'on peut constater en 1983 un ralentissement certain de la progression. En ce qui concerne l'avenir, ce sont les progrès de la télématique qui modifieront le comportement du client. Les assureurs et les banquiers ont donc intérêt à préparer ensemble cette révolution dans le comportement du client. C'est la fin des guichets et l'avenir des terminaux à domicile.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Management control and business planning

Authors: Levasseur, M.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Preferability criteria and portfolio selection: an empirical confrontation

Authors: Charreaux, Gérard

The determination of portfolio preferability criteria follows two main kinds of rationality principles : maximum expected utility and safety-first principles. The preferability criteria are of two kinds, either efficiency criteria which determine efficient sets, or performance measures allowing to rank portfolios. The aim of the present article is to empirically compare the different criteria for a sample of French mutual funds (SICAV) in order, on the one hand, to display the differences between the recommended choices and, on the other, to demonstrate that the use of performance mesures and more specifically Treynor and Jensen performance measures frequently leads to choices opposed to the maximum expected utility criteria (represented by the second degree stochastic dominance criteria) and that consequently it would be better to abandon them.

La détermination de critères de préférabilité des portefeuilles obéit à deux grands types de principes de rationalité : la maximisation de l'espérance d'utilité et le principe de « sécurité d'abord ». Les critères de préférabilité utilisés sont de deux natures, soit des critères d'efficience, qui aboutissent à construire des ensembles efficients, soit des mesures de performance qui permettent un classement des portefeuilles. L'objet du présent article est de confronter empiriquement sur un échantillon de SICAV les différents critères existants afin, d'une part, de faire apparaître que l'utilisation des mesures de performance, en particulier celles de Treynor et Jensen, conduit fréquemment à des choix non conformes au principe de maximisation de l'espérance d'utilité (illustré par le critère de dominance stochastique de second ordre) et qu'en conséquence il est préférable de les abandonner.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Financing business development

Authors: Ginglinger, E.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Financial management of the company

Authors: Olivaux, J.-L.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Empirical measurement of bankruptcy costs: A note

Authors: Malecot, J.-F.

This article focuses on the costs associated with the liquidation of a business firm. They are measured as the liquidation value of the assets relative to the nominal value of the liabilities. Based on a survey of a number of previous studies and on a separate sample of questionnaires filled by professional trustees, the author concludes that liquidation costs may represent up to 63,7 % of liabilities.

Cet article porte sur les coûts associés à la liquidation d'une entreprise. Ils sont mesurés en comparant la valeur de liquidation des actifs à la valeur nominale des passifs. Sur la base d'une synthèse d'études précédentes et d'un nouvel échantillon de questionnaires remplis par des syndics, l'auteur conclut que les coûts de liquidation peuvent atteindre 63,7 % du passif.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Does the size of insurance companies influence their financial behavior?

Authors: Briys, Éric; Loubergé, Henri; Regli, Philippe

This article draws on the economic theory of risk aversion to investigate the relationship between French insurance companies size and their investment behavior. The theoretical model shows that the effect will depend on the relative influences of two risk aversion measures : absolute risk aversion and partial relative risk aversion (or size-of-risk aversion). The empirical work produces some evidence that the investment of French private insurance companies in risky assets (stocks and real estate) is positively correlated with their premium income. On the other hand, State-owned and mutual companies invest mainly in bonds, whatever their size.

Cet article s'appuie sur la théorie économique de l'aversion pour le risque afin d'étudier le lien entre la taille des compagnies d'assurances françaises et leur comportement d'investisseur institutionnel. Le modèle théorique montre que l'effet, s'il existe, va dépendre de deux facteurs qui jouent en sens inverses : l'aversion absolue pour le risque et l'aversion partielle pour le risque. L'étude empirique montre que les compagnies anonymes et les mutuelles avec intermédiaires investissent une part plus grande de leur portefeuille en actifs risqués (actions et placements immobiliers) lorsque leur taille (volume de primes) augmente. Au contraire, les compagnies nationalisées et les mutuelles sans intermédiaires surinvestissent, relativement à leur taille, en obligations.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Financial behavior of insurance companies: according to their legal form

Authors: Gougeon, Patrick

This article analyzes the influence of French insurance companies' juridic form on their financial behavior. The empirical results confirm the predictions based on theoretical analysis. Mutual societies, more interested in the quality of their insurance services than in their financial performance, invest mainly in fixed-income securities. State-owned companies are mainly attracted by investments in public bonds. Finally, private insurance companies diversify their investments and seem to pay more attention than the former types of companies to the prospect of an increase in the value of their assets portfolio.

Cet article met en évidence l'influence du statut juridique des compagnies d'assurances françaises sur leur comportement financier. Les résultats empiriques permettent de confirmer la réflexion théorique. Les sociétés mutuelles, plus soucieuses de la qualité de leurs services d'assurance que de la performance de leurs placements, investissent principalement en valeurs à revenu fixe. Les sociétés nationales manifestent une préférence pour les placements en valeurs publiques. Enfin, les sociétés anonymes pratiquent des placements plus diversifiés et semblent plus sensibles aux perspectives de revalorisation de la valeur de leur portefeuille.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Have insurance companies protected their assets and policyholders against inflation?

Authors: Giraud, Claude

This article pictures the behavior of life insurance companies' investments in France, the United Kingdom and the United States during two periods : a period of moderate inflation (1961-1972) and a period of high inflation (1973-1980). During these two periods stocks have provided the best hedge against inflation, even if the variability of their return introduces a serious risk of losses. Life insurances companies did not select the optimal strategies during these periods, but their lack of flexibility is probably due to the regulatory constraints.

Cet article retrace l'évolution des actifs financiers des compagnies d'assurance vie américaines, anglaises et françaises durant deux périodes : une période d'inflation moyenne (1961-1972) et une période de forte inflation (1973-1980). Durant ces périodes, ce sont les actions qui ont le mieux protégé les assurances contre l'inflation, même si leur variabilité introduit un risque élevé qu'il faut pouvoir gérer. Les compagnies d'assurances n'ont pas eu, durant ces périodes, un comportement optimal à cause des contraintes de la réglementation.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Technical losses and financial profits of insurance companies: chance or necessity?

Authors: Valin, Gérard

The problem of long term equilibrium in the technical and financial results of insurance companies depends largely on inflation. An ideal asset, the return of which would be perfectly correlated with the increase in the value of insurance liabilities, has still to be invented. An original solution would be to create a new security, linked to the specific inflation faced by insurance companies. At least, added flexibility in the regulation of French insurance companies investments would be welcome.

Le problème de l'équilibre à long terme des résultats techniques et financiers des entreprises d'assurances est largement conditionné par l'inflation. Il reste à trouver le placement idéal dont l'évolution serait suffisante pour compenser le renchérissement des passifs. Une solution originale pourrait être trouvée grâce à un actif indexé sur l'inflation propre aux entreprises d'assurances. A défaut, un plus grand libéralisme en matière de réglementation des placements serait bienvenu.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Thesis summaries

Authors: Ginglinger, Édith; Gugenheim, Daniel

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Setting up abroad

Authors: Minquet, J.-P.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Insurance companies and the functioning of financial markets

Authors: Pfeiffer, Didier

M. Pfeiffer emphasizes the meaningful weight that insurance companies take in financial markets due to the big share of their assets invested in equities and bonds. This worldwide trend, especially true in France, is, according to M. Pfeiffer, mainly linked to the security and liquidity related to these assets. As for the French primary markets, M. Pfeiffer is pleased about their recent creativeness related to a good dialogue between financial middlemen and investors. At this stage of development, he is coming down in favour of a break and emphasizes the need for institutional investors to act with judgment, refering to public demand on markets, especially when modestly capitalized stocks are being listed. Concerning the secondary markets and their demanded balance the speaker emphasizes the essential part played by insurance companies acting as natural counterpart of the private investors. He is stressing the role that insurance companies will have to take in preparing the presently studied reforms in France. To conclude, M. Pfeiffer recalls that the financial service has picked up a great place inside insurance companies, adding that it is an integrated and non separable component of the whole in which it is taking part.

M. Pfeiffer souligne la place importante occupée sur les marchés financiers par les compagnies d'assurances en raison de la forte proportion des actifs qu'elles détiennent en valeurs mobilières. Il attribue cette tendance, internationalement constatée et particulièrement vraie en France, principalement à la sécurité et à la liquidité que représentent ces actifs. Abordant les marchés primaires français, M. Pfeiffer se félicite de la créativité dont ils ont témoigné récemment grâce à une bonne concertation entre intermédiaires financiers et investisseurs. A ce stade de leur développement, il se prononce en faveur d'une pause et insiste sur la nécessité pour les investisseurs institutionnels d'agir avec discernement, en prenant en considération la demande sur les marchés du public, en particulier à l'occasion d'introduction de titres représentant une modeste capitalisation. Evoquant les marchés secondaires, l'orateur insiste sur le rôle essentiel dévolu dans la recherche de leurs équilibres aux compagnies d'assurances, contreparties naturelles des particuliers. Il met l'accent sur la part que ces sociétés auront à prendre dans les réformes à l'étude en France à l'heure actuelle. En conclusion, M. Pfeiffer rappelle que la fonction financière a pris une place importante dans les compagnies d'assurances et qu'elle est une composante intégrée et indissociable de l'ensemble à laquelle elle participe.

DATE PUBLISHED: 15/10/1984

VOLUME: 5

NUMBER: 2

Financial Crises. Theory, History and Policy

Authors: Ferrandier, R.

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Taxation and return on capital invested in companies during periods of inflation

Authors: Dietsch, Michel

The rapid inflation of the last few years has brought into focus fiscal distortions which are induced by price increases. In particular, recent debates over inflation accounting have exhibited the impact on corporate taxation of depreciation, inventories and interest charges which are deductible on the basis of historical cost rather than replacement or real cost. Less emphasis has been put, however, on the distortions of the personal taxes paid by security holders. They are nonetheless sizeable. For instance, as debt is depreciated in real terms, inflation creates real capital gains for stockholders and these are not taxed or are taxed at a reduced rate. But the effective taxe rate of debtholders increases with inflation since taxes on the interest are hased on its nominal value. As it distorts the computation of taxes, inflation modifies the real rate of return of financial securities and therefore the propensity to channel savings towards business investment. This study measures these distortions at the various stages of the fiscal process and determines the overall impact on the real return on equity and debt securities.

L'inflation rapide des dernières années a attiré l'attention sur les distorsions des règles fiscales induites par la hausse des prix. En particulier, les débats récents autour de la réévaluation des bilans ont bien mis en évidence les déformations de l'assiette de l'impôt sur les sociétés qu'entraîne l'évaluation des amortissements, des stocks et des charges d'intérêt déductibles au coût historique et non au coût de remplacement ou coût réel. En revanche, les déformations de la fiscalité personnelle des détenteurs de titres ont été moins évoquées. Ces déformations sont pourtant sensibles. Ainsi, en raison de la dévalorisation des dettes, l'inflation fait naître des plus-values réelles pour les actionnaires qui ne sont pas taxées ou ne le sont qu'à taux réduit. Par contre, le taux d'imposition effectif des prêteurs augmente proportionnellement au taux d'inflation puisque l'impôt sur les intérêts est assis sur la valeur nominale de ces derniers. En déformant l'assiette des impôts payés par les entreprises et par les épargnants, l'inflation tend à modifier les taux de rendements réels des placements et, par conséquent, l'incitation à investir l'épargne dans les entreprises. L'objet de cette étude est de mesurer les distorsions fiscales induites par l'inflation aux divers stades de la chaîne d'imposition des revenus de l'épargne placée en entreprise et de déterminer l'impact final de ces distorsions sur les rendements des fonds propres et des dettes des entreprises.

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

International Finance Handbook

Authors: De la Baume, Charles

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Properties of the Efficient Frontier with Short-Sales Restriction

Authors: Solnik, Bruno

In Asset Pricing Theory, the efficient frontier approach has recently received considerable attention. It stresses the fact that the economic content of the theory lies in the composition of the efficient portfolios. A simple analytical formulation of the mean-variance efficient frontier has been derived, under the assumption that no restriction existed on the investments in every asset and that short sales were fully allowed. Then, the efficient frontier is a hyperbola in the mean-standard deviation plane and the efficient portfolio composition, as well as the beta of all assets relative to any efficient portfolio, are simple functions of the return of the efficient portfolio. No closed form solutions of the efficient frontier exist, however, if there are constraint on the asset proportions in the portfolio and especially if short sales are not allowed. Interesting properties of this “positive efficient frontier” are derived from the observation that it is made up of segments of efficient frontiers constructed from various sets of assets. This paper studies the properties of the asset risk (beta) computed relative to a positive efficient portfolio. It shows that the relationship between asset returns and betas (relative to a positive efficient portfolio) is not linear and the performance measures are either null or negative. For example, if the stock market portfolio is positive efficient, the alphas of all excluded assets (bonds, gold, real estate, ...) must be negative. Assuming that investors hold homogeneous expectations, equilibrium relations are then derived when some investors or/and some assets are under short selling constraint. The market portfolio of all assets will generally hot be efficient (and the traditional CAPM will not hold); plus the assets which cannot be shorted will tend to have a lower expected return for the same level of risk relative to the market portfolio.

In asset pricing theory, efficient frontier analysis has recently received much attention. It is based on the idea that the entire economic content of the theory lies in the composition of efficient portfolios. A simple analytical formulation of the efficient frontier is known under the assumption of complete freedom of investments in different assets and the possibility of short selling. Then the efficient frontier is a hyperbola in the expectation-standard deviation plane and the composition of the efficient portfolio, as well as the beta of each asset, measured relative to any efficient portfolio, are simple functions of the expected return of the considered efficient portfolio. However, there is no explicit formulation of the efficient frontier if there are constraints on the composition of the portfolio and in particular if short selling is prohibited. Interesting properties of this "positive efficient frontier" are derived from the fact that it consists of fragments of efficient frontiers constructed from subsets of assets. This paper studies the properties of asset risk (beta) calculated relative to a "positive efficient" portfolio. It shows that the relationship between the expected return of an asset and its beta, calculated in this way, is not linear and that the performance measures are either zero or negative. For example, if the market portfolio is "positive efficient", the alphas of all excluded assets (bonds, gold, real estate, etc.) must be negative. Assuming that investors have homogeneous expectations, equilibrium relationships are obtained for the case where some investors and/or some assets cannot sell or be sold short. The market portfolio of all assets will not generally be efficient (and the traditional CAPM will not be valid): moreover, assets that cannot be sold short will have a lower expected return for the same level of risk, measured relative to the market portfolio.

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Proportional vs. Logarithmic Models of Asset Pricing

Authors: Hawawini, Gabriel; Vora, Ashok

Empirical tests of models such as the Capital Asset Pricing Model and the Market Model of Sharpe require measuring securities' return over differencing intervals of given length. One can calculate either a proportional return (percentage change in prices, including any dividend) or a logarithmic return (natural logarithm of wealth relatives). There is little theoretical reason to prefer one over the other. Some of the implications of the results reported in this paper are that : 1) An item as innocuous as the definition of returns may, in the final analysis, affect the estimated statistics of a pricing model more the model itself; 2) Goodness-of-fit to the data cannot be used to determine the choice between the proportional and logarithmic models since no systematic « superiority » of one over the other exists : the behavior of the general market movement (up or down market) affects the goodness-of-fit of the data differently for different return specifications; 3) With a market price of risk exogenously given, a logarithmic beta from short return intervals (say monthly) will yield higher estimates of a firm's cost of equity if its beta is below one (say a public utility) than a proportional beta from lengthy return intervals (say quarterly). The opposite is true if the firm has a beta coefficient above one.

Les tests empiriques du Modèle d'Evaluation des tests Financiers (MEDAF) ou du Modèle de Marché de Sharpe supposent que l'on mesure les rendements des titres sur une période de temps finie. On peut calculer un rendement proportionnel (pourcentage d'augmentation du prix, plus dividende éventuel) ou un rendement logarithmique (logarithme népèrien du rapport des richesses en début et fin de période). Il y a peu d'arguments théoriques permettant de faire ce choix. L'article publié ici aboutit aux résultats suivants : 1) Un élément aussi anodin que la définition des rendements peut affecter les résultats des tests plus que la spécification du modèle lui-même; 2) L'adéquation du modèle aux données ne permet pas de trancher le débat car aucune méthode n'est systématiquement supérieure à l'autre : la tendance générale du marché affecte le degré d'adéquation différemment selon la méthode de calcul choisie; 3) Le prix de marché du risque étant donné, un bêta logarithmique calculé sur des intervalles courts (par exemple un mois) produira des estimations plus ou moins élevées du coût des capitaux propres d'une entreprise, que ne le fera un bêta proportionnel calculé sur des intervalles longs (par exemple sur trimestre) selon que le vrai bêta est plus petit ou plus grand que un.

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Thesis summary

Authors: Gaugain, Marc

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Signals, mandates and financial management: a literature review

Authors: Jacquillat, Bertrand; Levasseur, Michel

This survey of agency theory covers five different topics. The first one is signalling : some of the decisions made by corporate management (e.g. choice of leverage or dividend payment) may be explained by their desire to communicate information about the firm to the investing public, to segregate themselves into « good » and « bad » firms. The second topic pertains to the relationship between the firm and its debtholders. Since power is in the hands of stockholders who are protected by limited liability, debtholders may be taken advantage of, unless legal or contractual arrangements are introduced to provide them with some protection. The third topic is agency theory per se : management and stockholders are dissociated and managers are allowed to pursue their own goals subject only to an agreement, or mandate, whieh binds them to the owners. The fourth topic deals with market responses to managerial misbehavior : take-over bids and various ways to acquire corporate control. The fifth topic is regulation : where market responses have failed, it is necessary to introduce overseeing bodies which protect the investing public.

La théorie financière de l'entreprise suppose traditionnellement que les gestionnaires prennent leurs décisions de façon à maximiser la valeur de marché de la firme (somme totale des titres émis). Cette théorie mène alors à des résultats qui sont simples (invariance de la valeur totale par rapport au levier ou par rapport à la décision de dividende) mais qui ne sont pas toujours vérifiés empiriquement. L'article publié ici remet en question l'hypothèse de base et poursuit successivement cinq directions de recherche. La première repose sur l'idée que la valeur de la firme dépend de façon cruciale des informations que possèdent sur elle les investisseurs. Les gestionnaires peuvent alors avoir intérêt à prendre des décisions qui représentent pour eux des paris sur l'avenir de l'entreprise et communiquent ainsi aux investisseurs des informations sur su santé économique. Cette direction de recherche s'appelle la « théorie des signaux » ou des messages. La deuxième direction analysée introduit une distinction entre les titres émis par l'entreprise : les actions, à la différence des dettes, confèrent un pouvoir de décision à leurs porteurs et leur accordent la protection de la responsabilité limitée. Ces deux éléments permettent aux actionnaires de léser les créanciers. Divers arrangements légaux ou contractuels sont nécessaires pour les garantir contre ces agissements. La troisième direction de recherche est la « théorie des mandats » proprement dite : elle dissocie les gestionnaires des actionnaires et les premiers poursuivent alors leurs objectifs propres sous la seule contrainte de l'accord, ou mandat (ayant le plus souvent trait à leur rémunération), qui les lie aux propriétaires de la firme. La quatrième direction de recherche porte sur les mécanismes sécrétés par le marché libre pour contrôler les gestionnaires : Offres publiques d'Achat ou d'Echange et autres moyens d'acquérir le contrôle d'une entreprise. La cinquième direction examine l'arsenal réglementaire : là où les mécanismes de marché s'avèrent insuffisants, il est nécessaire de mettre en place des organismes de contrôle qui protègent les intérêts de l'épargnant.

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Short term cash flow

Authors: Olivaux, J.-L.

DATE PUBLISHED: 15/04/1984

VOLUME: 5

NUMBER: 1

Alternative methods for valuing debt options.

Authors: Brennan, Michael J.; Schwartz, Eduardo S.

With the development of organized trading in options on bonds it is natural to consider how the techniques which have been applied so successfully to the valuation of stock options can be adapted to the pricing of options on debt securities. In this paper we demonstrate the theoretical relationship between three different debt option valuation models and show how the option values yielded by the three models differ under plausible assumptions.

Etant donné la croissance rapide du marché des obligations à bon de souscription et plus généralement du marché des options sur obligation, on est amené à se demander comment les techniques qui ont été appliquées avec tant de succès à l'évaluation des options sur action peuvent être adaptées à celle des options sur obligation. Cet article met en évidence la relation théorique qui existe entre trois modèles différents d'évaluation d'option sur obligation et décrit les divergences qui peuvent s'établir entre les valeurs de l'option fournies par les trois modèles, dans des circonstances jugées vraisemblables.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

Call option prices in Canada: some empirical evidence

Authors: Mandron, Alix; Perreault, Yves

The main objective of this paper it to explore the consequences of the extreme thinness of the Canadian market on the pricing of options. Even though Black and Scholes' formula may be theoretically adapted to the Canadian context -- this is empirically checked first -- the lack of active transactions creates distortions in actual option prices. These distortions are investigated to uncover possible patterns and regularities.

L'objectif principal de cet article est d'explorer les conséquences du volume très faible de transactions du marché canadien pour ce qui concerne l'évaluation des options. Bien que la formule de Black et Scholes puisse être adaptée au contexte canadien (cela fait tout d'abord l'objet d'une vérification empirique), la rareté des transactions provoque des distorsions dans les prix effectivement observés. Ces distorsions sont examinées pour déterminer si elles présentent un quelconque caractère systématique.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

Mergers and takeovers in the Federal Republic of Germany, 1970-1976

Authors: Blaettchen, Wolfgang H.

This research tries to evaluate the impact of mergers on Germanshare holders' risk and return. No empirical research exists for the German market even though inferences from studies of bigger financial markets may not necessarily be valid. Using an equilibrium model, we test the double hypothesis of a perfect acquisitions market and of market efficiency. Different legal mergers are considered. Taking into account the structure of the acquisitions market, we look at prior shareholdings in the merged company. Market efficiency is examined to find out if “profit opportunities” exist when information has already been publicly available.

This research attempts to assess the impact of merger-absorption operations on the performance and risk of shares. It focuses on the German market for which the consequences of these operations for shareholders have not yet been studied. Within the framework of a financial model, we test the dual hypothesis of a perfect acquisition market and the efficiency of the financial market. Other cases are examined according to the different modes of legal groupings and the type of growth of the companies selected. To specify the distribution of the effects and take into account the structure of the acquisition market of the companies, we consider prior shareholdings. The efficiency of the market during such operations is addressed to verify whether they can be exploited by a portfolio management strategy. There are, in fact, one-off opportunities for gains when the market does not take into account "public" information when they arrive on the market.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

Corporate Investments and Divestitures Practices and Methods

Authors: De la Bruslerie, H.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

General accounting

Authors: Richard, J.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

The insurance contract as a sale option

Authors: Briys, Éric; Loubergé, Henri

Insurance contracts and options are typical conditional claims : their return is contingent upon the occurrence of a future state of nature. In this paper, the conceptual analogy between property insurance and put options is used to evaluate the insurance contract in an option pricing framework. It is shown that the binomial option valuation model is better adapted to insurance applications than the conventional Black and Scholes formula. Starting from this model, it is possible to derive a simple insurance pricing equation under risk aversion, and to show that the equilibrium insurance price is linked to the equilibrium price of insurable assets through the risk premium observed on financial markets.

Les contrats d'assurance et les options d'achat ou de vente sont des créances conditionnelles types : leur rendement dépend de l'état de la nature futur. Dans cet article, on se sert de l'analogie conceptuelle qui existe entre les contrats d'assurance dommages et les options de vente pour analyser l'assurance dans le cadre de la théorie des options. Il est démontré que le modèle binomial d'évaluation des options est mieux adapté que le modèle de Black et Scholes aux applications à l'assurance. Le recours à ce modèle permet de déterminer une équation du prix d'équilibre de l'assurance dans un univers d'aversion pour le risque, et de montrer qu'il existe un lien entre ce prix et le prix d'équilibre des actifs assurables évalué sur le marché financier.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

Traders and Shippers. The Saga of International Commodity Trading

Authors: Simon, Y.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

The hedging dimension of intermediation: credit lines as forward contracts

Authors: Chateau, JPD

This paper examines the paradigm of credit lines as forward contracts, with the following substantive results. When the intermediary only faces spot markup uncertainty, its commitment of credit supply to a credit lines hedge is governed by its appraisal of the forward markup as a (un)biased predictor of the expected spot markup. In the absence of organized secondary credit market, liability-financed solutions to excess hedge exposure are suggested. When on the other hand, markup uncertainty is coupled with that of the intermediary's credit supply, the optimal hedge is partitioned into speculative and hedging components. The latter then varies with the magnitude of the markup elasticity of credit output; in the special case of a zero elasticity coefficient, the optimal short hedge is always less than the expected credit supply for intermediaries displaying decreasing absolute risk aversion.

This article draws an analogy between credit lines and futures contracts. The following results emerge. Since the cost of an overdraft is calculated as the Bank Base Rate increased by a margin, the granting of a credit line by a financial intermediary (who would only be faced with uncertainty about the future margin) results only from the difference between the contractual margin fixed in advance and the anticipated margin that would be applied subsequently to a spot credit. In the absence of a secondary credit market, the adjustment of its liabilities allows the financial intermediary to modulate the margin risk it takes by granting credit lines. If the uncertainty regarding the volume of credit granted is added to the margin risk, the optimal adjustment of the intermediary's balance sheet reveals a motive for speculation and a motive for hedging. The latter is linked to the dependence that may exist between the volume of credit and the margin required by the intermediary. If there is no dependence between these two quantities, the optimal liability coverage is always less than the expected credit outstanding, if the intermediary has a decreasing absolute risk aversion.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 2

On “Nationalizations, Compensation and Transfers of Assets”: Some Comments and Additional Results on the Period of Political Turbulence 1977-1981

Authors: Jacquillat, Bertrand

This is a comment on an article by Langhor and Viallet which has been published last year in Finance and in which an attempt was made at measuring the transfers of wealth brought about by the 1982 nationalization of a number of industrial and financial firms. The comment deals with political events which occurred before the nationalizations, viz. the legislative election of 1978 and the presidential election of 1981. Since the election of president Mitterrand, automatically meant that the nationalization would take place, it is important when measuring the size of the transfers of wealth, to determine when and to what extent his election has been anticipated by the financial markets.

Voici un commentaire d'un article de Langhor et Viallet qui fut publié l'an dernier dans Finance et dans lequel les auteurs tentèrent de mesurer les transferts de patrimoine occasionnés par les nationalisations de 1982. Le commentaire a trait aux événements politiques qui précédèrent les nationalisations, à savoir les élections législatives de 1978 et l'élection présidentielle de 1981. Puisque l'élection du candidat Mitterrand était synonyme de nationalisation, il est important, lors de la mesure des transferts de patrimoine, de déterminer quand, et dans quelle mesure, son élection avait été anticipée par les marchés financiers.

DATE PUBLISHED: 15/10/1983

VOLUME: 4

NUMBER: 1

Speech by President Richard Zisswiller at the 4th Congress of the French Finance Association

Authors: Richard Zisswiller

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

The takeover bid, the control premium and minority shareholders

Authors: Saint-Pieree, Jacques

This study expounds the theoretical foundations which explain why premia are offered to stockholders by those who wish to obtain or strengthen a dominant position in a firm. The theory is developed in the context of financial and agency theories. It allows a synthesis of earlier empirical results on take-over bids and it predicts a number of observed phenomena such as market entry costs on the occasion of a first issue of common shares. The author's view of the theory and of the empirical record contradicts recent legislative interventions in Canada and in the United States aiming to regulate take-overs. It seems that once again more room has been given to passion than to a cold analysis of facts.

Cette étude présente les fondements théoriques qui expliquent l'existence des primes qui sont offertes aux porteurs de valeurs par ceux qui veulent obtenir ou renforcer une position dominante dans une entreprise. La thèse est développée dans le cadre de la théorie financière classique et de celle des coûts d'agence. La théorie permet de synthétiser les résultats empitiques obtenus dans de nombreuses études sur les offres d'achat et de prévoir certains phénomènes comme celui des coûts d'entrée sur le marché lors d'une première émission d'actions ordinaires. L'interprétation de la théorie et des résultats empiriques faite par l'auteur infirme le bien-fondé des récentes interventions législatives au Canada et aux Etats-Unis en vue de réglementer sévèrement les prises de contrôle. Il semble qu'encore une fois l'on ait laissé la priorité à l'image passionnelle plutôt qu'à l'image observable et observée.

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

The German balance sheet: reading and analysis

Authors: Urban, Sabine

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

Financial decisions in the company Methods and applications

Authors: Pene, Didier

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

Note on stochastic differential calculus

Authors: Heungsik, Choe

This is a survey article on the use of stochastic calculus in finance. The various categories of diffusion processes are presented first. Then, it is shown that the standard rule of differential calculus is not applicable to functions of random processes and must be replaced by Itô's lemma. The probability distribution of a diffusion process evolves according to laws known as Kolmogorov equations; there are derived next. The most fruitful application of these tools to our field has dealt with the evaluation of long term bonds in the presence of random interest rates. This application is reviewed in detail.

Il s'agit ici d'une étude de synthèse sur l'utilisation du calcul différentiel stochastique en finance. Les différentes catégories de processus de diffusion sont tout d'abord présentées. Puis on montre que les règles habituelles de calcul différentiel ne s'appliquent pas aux fonctions de processus aléatoires et qu'elles doivent être remplacées par le lemme d'Itô. La distribution de probabilité d'un processus de diffusion évolue selon des lois connues sous le nom d' « équations de Kolmogorov »; elles sont dérivées ensuite. L'application la plus fructueuse de ces outils à notre domaine a concerné l'évaluation des obligations dans un univers où les taux d'intérêt sont aléatoires. Cette application fait l'objet d'une revue détaillée.

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

Control rent and partnership theory

Authors: Husson, Bruno

The modern theory of financial markets is not sufficient to explain in a satisfactory mariner, the importance of the premiums paid by bidders on the occasion of take-over operations. The present article aims to remedy this shortcoming of portfolio theory by introducing the notion of « rent from control », which leads to a new formula applicable to the investors' equilibrium stockholdings. Indeed, the investors arbitrate between the additional revenue due to an increase in their control position and the incremental risk related to a reduced diversification of the portfolio. A simple numerical application is presented and this leads to the realization that the notion of rent from control is incompatible with the existence of equilibrium. The article concludes that taking account of the control phenomena will require further amendments to portfolio theory.

La théorie moderne des marchés financiers ne parvient pas à expliquer de façon satisfaisante l'importance des primes payées par les acquéreurs lors des opérations de prise de contrôle. Le présent article se propose de remédier à cette carence de la théorie du portefeuille par l'introduction d'un nouveau paramètre, baptisé « rente du contrôle », qui conduit à une nouvelle formulation des participations détenues à l'équilibre par les investisseurs, ces derniers arbitrant entre le supplément de rentabilité retiré d'un renforcement de leur pouvoir de contrôle et le surcroît de risque lié à une moindre diversification de leur portefeuille. Une application numérique simple débouche sur le constat que la présence d'une rente de contrôle est incompatible avec l'existence d'un prix d'équilibre unique sur le marché. La conclusion ultime de cet article est que la prise en compte des phénomènes de contrôle appelle a priori des aménagements encore plus conséquents de la théorie du portefeuille.

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

A simple analytical model of the French banking system including the Caisse des Dépôts et Consignations

Authors: Portair, R.; Poncet, P.

The « Caisse des Dépôts et Consignations » is the French financial institution which centralizes the funds collected by the « Caisses d'Epargne » (Saving institutions). The « Caisse des Dépôts » uses these funds to finance the Treasury, to make loans to banks on the open market and to grant credit to selected institutions at preferential rates. This article shows how the allocation of funds as between these three categories can affect the equilibrium money supply or the equilibrium interest rate (depending on the monetary regime) and cart therefore serve as an instrument of monetary policy.

La Caisse des Dépôts consacre les fonds collectés par les Caisses d'Epargne au financement du Trésor public et au refinancement des banques. Le solde sert à distribuer des crédits à des taux privilégiés. Cet article montre comment l'affectation des fonds à ces trois emplois peut influer sur la masse monétaire d'équilibre ou bien sur le taux d'intérêt d'équilibre (selon le type d'intervention monétaire pratiqué par les autorités) et peut donc être utilisée comme instrument de la politique monétaire.

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

US American and German Law

Authors: Blaettchen, Wolfgang; Kienast, Philippe

DATE PUBLISHED: 15/05/1983

VOLUME: 4

NUMBER: 1

A quadratic-rational-expectations theory of capital markets

Authors: Dumas, Bernard

The Capital Asset Pricing Model is of little practical use in investment analysis since no method is provided to anticipate the position of the Securities Market Line or the location of a particular security on the line. What is needed is a theory of valuation and portfolio choice which is practical and, above all, based on information effectively available at the time the analysis is performed. Such is the goal of this paper. It is postulated that the cash-flow stream associated with each asset follows an autoregressive stochastic process and that all investors have time-additive von Neumann Morgenstern quadratic utilities. Asset prices are derived at each point in time as functions of past and current cash flows and so are the sequence of each investor's portfolio and consumption choices as well as the evolution of the term structure of interest rates.

L'application pratique du Modèle d'Equilibre des Actifs financiers se heurte à la difficulté d'anticiper la pente future de la droite de marché ainsi que la position respective des sociétés par rapport à celle-ci. Il est nécessaire d'avoir une théorie de l'évaluation des actifs et des choix de portefeuille qui soit pratique, c'est-à-dire dont les ingrédients soient effectivement disponibles au moment de l'analyse. Cet article postule que les cash-flows futurs que doit rapporter tout actif suivent un processus stochastique autorégressif et que les investisseurs ont des fonctions d'utilité additives de von Neumann Morgenstern. Les prix des actifs financiers sont alors calculés chaque fois en fonction des cash-flows passés et présents ainsi qu'est déterminée la séquence des décisions d'investissement et consommation optimales de même que l'évolution de la structure des taux d'intérêt.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Accounting and shareholder information

Authors: Levasseur, Michel

To run a firm, its management must engage in contracts with different parties including shareholders. In this article, the author uses the most recent literature in Finance-Information and Accounting to show that financial statements provide a very useful information which helps shareholders to control the management and the fairness of the level of profits and dividends. Moreover, accounting provides forecasts which help shareholders to make their investment decisions.

Managing a business requires management to enter into various contracts with all partners, including shareholders. Based on the most recent financial accounting literature, the author shows in this article that general accounting, without being exclusive, nevertheless provides essential information to shareholders to help them ensure that their interests have not been robbed for the benefit of other parties and that the sharing of the proposed results is fair, i.e. ultimately that the contract is being executed satisfactorily. Furthermore, accounting can also provide forecast information for investment decision-making.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Incentive contracts in dominant strategy and financial investments with information asymmetry

Authors: Belloc, Bernard

Asymmetric information exists with financial investments. It stems from the fact that the professional portfolio managers have better information on the markets or the risks associated with individual securities than individuals who wish to invest. Most of the cases where asymetric information exist give rise to incentive problems directed towards those who have the information. This article studies the existence and properties of contracts which provide incentives to the financial intermediary in charge of the management of other people's money to use all the information he has in an efficient sense and not for his own profit; for this matter, the author uses the methodology which has been developped by Laffont and Maskin for the revealing preferences process in the area of public goods.

Les asymétries informationnelles existent dans le domaine de l'investissement financier; elles proviennent du fait que les professionnels ont une meilleure information sur l'état des marchés ou sur les risques associés à tel ou tel placement que les individus qui désirent utiliser leurs services. Dans la plupart des cas où il y a asymétrie d'information, apparaît par conséquent un problème d'incitation vis-à-vis des agents qui détiennent l'information. Cet article étudie l'existence et les propriétés des contrats incitant l'intermédiaire financier chargé par un agent de la gestion de son capital à utiliser toute l'information dont il dispose, et à ne pas l'utiliser à son propre profit uniquement. Pour ce faire, l'auteur utilise la méthodologie proposée par Laffont et Maskin pour la révélation des préférences en matière de bien public.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Financial management of the company

Authors: Chevalier, Alain

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Financial Repression

Authors: Poncet, Patrice

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

The valuation of the negotiable option in an imperfect market

Authors: Delattre, Éric

The opening of the EOE in Amsterdam corresponded to the clear objective to create an active and international traded options market in continental Europe. Results don't match the objectives of the founders and the Amsterdam Exchange is a relatively narrow market with a moderate volume and high transactions costs. In this article, the author presents a Black Scholes revisited option formula which is valid in these markets as well as the domain of possible transactions between various categories of buyers and sellers.

L'ouverture de l'EOE à Amsterdam répondait à l'ambition de créer un marché actif et véritablement international au centre de l'Europe occidentale. Pour diverses raisons, les résultats ne sont pas tout à fait conformes aux ambitions et l'EOE est un marché relativement étroit, caractérisé par un volume de transactions modéré et des frais de transactions é1evés. L'auteur tient compte des caractéristiques d'un marché étroit pour amender la formule d'évaluation de Black et Scholes et présente le domaine des transactions possibles entre les diverses catégories d'acheteurs et de vendeurs dans un tel marché.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

The company's financial decisions. Investment

Authors: Dupont, C.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Financial macroeconomics

Authors: Henner, H. F.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Currency and Circuit Theory

Authors: Ferrandier, Robert

In this note the author presents the « circuit theory » whose aim is to endogenize in economic models the creation of money by examining the borrowing behavior of both firms and individuals and the lending behavior of the banking system.

Dans cette note, l'auteur présente la « théorie du circuit » qui vise à rendre endogène le processus de création monétaire dans les modèles économiques. La création de monnaie y est considérée comme résultant des opérations d'endettement des agents du secteur privé dont il s'agit d'étudier le comportement.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Note on investment decisions of insurance companies in France

Authors: Outreville, Jean-François

The investment policy of Insurance companies depend on the principles of portfolio theory, the expectations regarding the interest rates in the future and the regulation facing the industry. The author shows through econometric tests that the portfolio adjustments stem only from new cash flows while the structure of existing assets almost never change. He also shows that the nature of new investments is higlhy correlated with changes in interest rates.

La politique d'investissement des compagnies d'assurance dépend, a priori, à la fois des principes de la théorie du portefeuille et de la réglementation qui régit leur politique de placement et des anticipations sur l'évolution de la structure des taux d'intérêt. L'auteur montre, à partir de tests économétriques, que les ajustements de portefeuille se font en fonction des flux de liquidités nouveaux alors que la structure des stocks d'actifs reste à peu près inchangée et que les modifications observées sont sensibles aux variations de taux d'intérêt.

DATE PUBLISHED: 15/12/1982

VOLUME: 3

NUMBER: 4

Expectations and inflation in Canada: 1953-1980

Authors: Apel, Emmanuel

This article is an empirical investigation in Canada of the third generation of the Phillips curve. The principal findings are the following : the anticipated as well as the unanticipated price changes are independent of the unemployment rate in a rational expectations model. The Phillips coefficients are very unstable from subperiod to subperiod. With the determinist models of price change expectations -- with trends, adaptative, with distributed lag -- the relationship between price and unemployment changes is not statistically different from zero.

Cet article est une vérification empirique de la troisième génération de la courbe de Phillips pour le Canada. Les principales conclusions sont les suivantes. Les variations anticipées et non anticipées des prix sont indépendantes du taux de chômage dans un modèle d'anticipations rationnelles. Les coeflïcients de Phillips sont très instables d'une sous-période à l'autre. S'agissant des modèles déterministes d'anticipation des prix -- tendanciels, adaptatifs, à retards échelonnés -- la relation entre l'évolution du taux de chômage et celle des prix n'est pas statistiquement différente de zéro.

DATE PUBLISHED: 15/10/1982

VOLUME: 2

NUMBER: 2/3

Economic and financial consequences of the implementation of a “No-Fault” type system for automobile insurance in Quebec

Authors: Outreville, J.-François

Governmental regulation in Quebec on the auto insurance market through the adoption of the no fault system had several effects. The revenues of the insurance companies have gone down with significant differences among companies. The growth of premia have been negative in the other segments of the insurance business. The concentration of the industry has increased to the advantage of the largest firms.

La politique gouvernementale d'intervention du Québec sur le marché de l'assurance auto et l'adoption du système de la responsabilité sans preuve de la faute (no fault) a non seulement eu des effets sur les revenus des Companies d'Assurances, mais aussi sur la concurrence dans le marché de l'Assurance en général : la croissance des primes sur les autres produits d'assurance a été négative; le degré de concentration s'est élevé et a profité aux plus grandes compagnies d'assurances. Les résultats financiers ont baissé, mais de manière inégale selon les compagnies.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Creditor security requirements and optimal capital structure of the firm

Authors: Swoboda, Peter

Transaction costs to build and control covenants are fairly large both in Austria and Germany. This article shows the importance of covenants in financial theory and practice, and the structure and peculiarities of covenants among countries. It also shows that the advantages of covenants depend on how soon bankruptcy and reorganization are declared.

Le coût des transactions tendant à la constitution et au contrôle des sûretés est très élevé en Autriche et en Allemagne. Cet article explique l'importance des nantissements dans l'ensemble des contrats pour la gestion de la firme, la structure des sûretés selon les différents pays. Il montre par ailleurs que les avantages des sûretés dépendent du caractère précoce des actions en liquidation et de restructurations engagées.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Life insurance as a “second best” diversification strategy

Authors: Buser, Stephen A.; Smith, Michael L.

Because of market imperfections, risks linked to human capital are not diversified away on a financial market but hedged on the insurance market. This article evaluates this second best strategy and measures its impact on the portfolio structure of individuals. This is done through a Treynor-Black type model which gives the optimal amount of life insurance that individuals should buy. This amount depends on the potential loss in human capital and the characteristics of the insurance contract as an investment.

A cause de l'imperfection des marchés, la diversification des risques inhérents au capital humain se réalise généralement au travers du marché de l'assurance qui peut être considéré comme une alternative de second best à la diversification dans un marché financier parfait. L'article étudie la prise en compte de cette alternative dans la composition des portefeuilles de placement des individus à l'aide d'un modèle à la Treynor-Black qui fournit le montant optimal d'une assurance-vie en fonction de la perte potentielle en capital humain et des caractéristiques du contrat d'assurance en tant que placement.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Savings and retirement

Authors: Valin, Gérard

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Financial management of the company

Authors: Sulzer, JR

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Profitability of German banks

Authors: Rosenfeld, Félix

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

The Rescue of American Savings Banks

Authors: Lazar, John

Although the Savings and Loans Association was a prosperous segment of the Banking Industry in the past, it is no more true to day. The S. & L. has suffured every time the growth of the monetary base has been strictly controlled. This article examines the difficulties of this industry and the aid it has received. It shows the main aspects of what this industry will look like when it is restructured. S. & L. will be a nation wide, computerized profit oriented organization.

Autrefois pilier prospère du système financier américain, les 3 900 associations de crédit et d'épargne (S. & L.) connaissent aujourd'hui de graves difficultés à la suite d'une politique stricte de contrô1e de la liquidité monétaire aux Etats-Unis depuis douze ans. Cet article examine ces difficultés, les procédures d'aide et de soutien mises en œuvre pour soutenir le secteur, et esquisse les grandes lignes de la nécessaire restructuration que va connaître cette industrie dans les années à venir. La Caisse d'Epargne deviendra une organisation nàtionale, largement informalisée, soucieuse du profit.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

The rescue of bankrupt thrift institutions in the United States

Authors: Kessler, Denis

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Financial markets and portfolio management

Authors: Nussenbaum, Maurice

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Optimal currency baskets and the reduction of exchange rate risk

Authors: Marc, Michèle Saint

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Optimal currency baskets and the reduction of exchange rate risk

Authors: Leroux, François; Albouy, Michel

Various currency baskets or currency cocktails have been proposed for use as official unit of account, or for international transactions mainly on the eurobond market. This paper proposes a practical method based on portfolio theory in order to define an optimal currency basket, i.e. one which minimizes exchange risk. Several forms of currency baskets are tested: EURCO, B. Unit, DTS, and the European Currency Unit (ECU).

Plusieurs paniers monétaires, ou cocktails monétaires, ont été proposés soit pour être utilisés comme unité de compte officielle, soit pour être employés dans des transactions internationales principalement sur le marché euro-obligataire. Ce papier propose une méthode pratique, fondée sur la théorie du portefeuille, pour définir un panier monétaire optimal qui minimiserait le risque de change. Plusieurs paniers monétaires sont testés : EURCO, B. Unit, DTS, et l'Unité de Compte européenne (ECU).

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

The Third International Finance Days

Authors: Gallais-Hamonno, Georges

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Nationalization, compensation and transfer of assets: an econometric study of the French experience, 1981-1982

Authors: Lefoll, Jean

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Nationalization, compensation and transfer of assets: an econometric study of the French experience, 1981-1982

Authors: Langohr, Herwig; Viallet, Claude

An empirical analysis of the wealth transfers associated with the recent French nationalisation program is performed. Wealth transfers are estimated using stock market data and methodologies derived from the event study literature. The sample includes the eleven nationalised companies whose shares were traded in the most active market of the French Stock Exchange. It was found that the total sample transfer of wealth towards nationalised firms' shareholders represents nearly 46 % of the total sample capitalization which would have been observed in the absence of nationalisation. Furthermore, it was also found that this transfer varies considerably from one firm to another.

Les nationalisations qui ont eu lieu en France au début de l'année 1982 font l'objet d'une étude économétrique dont l'objectif est d'évaluer les transferts de patrimoine attachés aux transferts à l'Etat de la propriété des entreprises nationalisées. La méthodologie employée est une adaptation des techniques sur l'analyse d'événements. L'échantillon comprend les onze sociétés nationalisées dont les titres étaient négociés dans le marché à terme. Il est montré que le montant global du transfert pour l'échantillon considéré représente près de 46 % de la capitalisation boursière qui aurait été observée pour cet échantillon en l'absence de nationalisation. Par ailleurs, ce transfert varie considérablement d'une société à une autre.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

A model of the growing bank and the vulnerability of the credit portfolio to interest rate fluctuations

Authors: Portait, Roland; Poncet, Patrice

This article presents a continuous time growth model of the banking firm leading to tractable relationships between the flow of loans granted, the amount of loans outstanding and the cashflows. A measure of the overall exposition of the loan portfolio to interest rate risk as well as a measure of the overall liquidity of the bank are also derived. Finally, the impact of a change in money market interest rates on the bank's profits and its market value is analyzed under different assumptions relative to the speed with which the bank revises its credit terms.

L'article présente un modèle en temps continu de la banque en croissance conduisant à des relations simples entre production, encours et flux de trésorerie. En ce qui concerne le risque de fluctuation des taux d'intérêt affectant l'activité de crédit, le modèle permet d'obtenir, d'une part, une mesure globale d'exposition (« duration ») du portefeuille de crédits et, d'autre part, un indicateur unique de la liquidité du bilan de la banque. Il permet ainsi d'apprécier l'influence d'une modification des taux sur les bénéfices et la valeur boursière de la banque sous des hypothèses différentes concernant la vitesse d'ajustement des barèmes bancaires.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 2/3

Bank management and policies

Authors: Cabon, Pierre.

DATE PUBLISHED: 15/04/1982

VOLUME: 3

NUMBER: 1

Bank management and policies

Authors: Cabon, Pierre.

DATE PUBLISHED: 15/04/1982

VOLUME: 3

NUMBER: 1

An analysis of investment decisions based on multi-attribute choice models

Authors: Evrard, Y.; Zisswiller, R.

Investment decisions by firms are based on many criteria. This article shows that seven criteria mostly explain these decisions: convergence with the strategic plan, urgency, internal rate of return, payback, risk, size of projects, correlation among projects. By using multi-attributes models and conjoint analysis, the authors test among a sample of Financial Executives which criteria are most widely used, which conclude it is the convergence with strategic planning and the internal rate of return.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 1

Accounting and inflation

Authors: Valin, G.

This article examines the conjoint effects of accounting information systems and inflation on the Financial health of French Insurance Companies. Present Financial Reporting rules based on historical accounting lead to an overestimation of assets and an undervaluation of liabilities. The investment policy applied to the reserves can not make up to counterbalance the perverse effects of historical accounting on balance sheet items. The author estimates that the use of a single index for adjusting assets and liabilities historical value is not appropriate to the Insurance sector. He recommands the use of several indices. Assets would be valued according to their market or liquidation value and liabilities by estimating their future value at the date they are due.

DATE PUBLISHED: 15/10/1982

VOLUME: 3

NUMBER: 1

Economics and Finance of Insurance and Reinsurance

Authors: Valin, Gérard.

DATE PUBLISHED: 15/04/1982

VOLUME: 3

NUMBER: 1

Intermediary's hedging and Credit Setting Strategies under loan rate uncertainty

Authors: Chateau, J.-P. D.

A choice theoretic model of the unperfectly and perfectly competitive intermediary under loan demand uncertainty is analyzed to show the effects that spot and future loan rates as well as risk aversion have on the intermediary's credit -- setting and hedging decisions. This model compares with a similar strategy of planning current credit supply under certainty. The introduction of overall uncertainty does not affect the equilibrium supply of the risk-neutral intermediary. However, if the intermediary displays risk aversion (preference), its optimal supply is smaller (larger) than the loan capacity under certainty. Extensions to include credit line forward contracts indicate that an important benefit derived from the existence of forward contracts is to eliminate supply fluctuations due to variations in intermediaries' subjective distributions of future spot rate.

DATE PUBLISHED: 04/04/1982

VOLUME: 3

NUMBER: 1

Asset selection models: comments and proposals

Authors: Outreville, J.-Françis

The estimation errors in the macromodels of assets choice with stockadjustment stem from measurement errors and multicollinearity of the variables. In this article, the authors present an alternative specification of the model. By introducing the expectations of agents, information and transaction costs, this article aims at solving some of the problems pertaining to multicollinearity.

DATE PUBLISHED: 15/04/1982

VOLUME: 3

NUMBER: 1

Portfolio selection and firms' control

Authors: Gambarelli, Gianfranco

Many large investors are interested in the expected returns and risks of their investments, and in the utilities derived from the control of various firms as well. Classical theories of portfolio-selection are in conflict with the concentration of shares which is necessary for control. This article aims at revisiting Portfolio theory with this empirical observation by allowing a rational investor to optimize a function of the following components: return from investment, return from control, risk of investment, risk of control.

DATE PUBLISHED: 15/04/1982

VOLUME: 3

NUMBER: 1

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