Paris December 2017

Jeudi, 21 décembre, 2017 - 08:00
Novotel Paris les Halles hotel



The 15th Paris December Finance Meeting is organized in downtown Paris on December 21, 2017 by EUROFIDAI (European Financial Data Institute) and ESSEC Business School with the participation of AFFI (French Finance Association).

In 2017, the meeting is jointly sponsored by CERESSEC / CDC Institute for Economic Research / CNRS / Institut Louis Bachelier / Fondation Banque de France in Money, Finance and Banking / Equipex BEDOFIH project (European high frequency financial database) / Amundi / Ardian / "Regulation and Systemic Risk" ACPR Chair.

All researchers in finance are invited to present in English their latest research in all areas of finance and insurance, with a special attention given to papers including empirical analysis.

A special prize for the Best Paper of the Meeting will be awarded.

In 2017, 302 papers were submitted for presentation at the meeting and only one out of 5 papers was accepted, indicating rigorous selection criteria

The Paris December Finance Meeting is one of the top 2 European conferences in terms of the quality of the papers presented.

An international reach

In 2017, the submissions were received from :

the U.S. (83), France (43), Germany (35), the U.K. (24), Switzerland (18), Austria (17), Canada (10), Italy (8), Portugal (7), Spain (6), China (5), Sweden (5), Taiwan (5), Belgium (4), Finland (4), South Korea (4), the Netherlands (4), Norway (4), Singapore (4), Denmark (2), Chile (1), Cyprus (1), Greece (1), India (1), Ireland (1), Israel (1), Jamaica (1), Japan (1), Kuwait (1), Lebanon (1). 








2017 scientific committee

  • President : Patrice Fontaine (EUROFIDAI, CNRS)
  • Vice-president : Jocelyn Martel (ESSEC Business School)
  • Members :

Yacine Ait-Sahalia

Hervé Alexandre

Nihat Atkas

Patrick Augustin

Anne Balter

Jean-Noël Barrot

Philippe Bertrand

Véronique Bessière

Bruno Biais

Romain Boulland

Marie Brière

Marie-Hélène Broihanne

Luciano Campi

Catherine Casamatta

Georgy Chabakauri

Pierre Collin-Dufresne

Ian Cooper

Ettore Croci

Matt Darst

Eric de Bodt

François Degeorge

Olivier Dessaint

Alberta Di Giuli

Christian Dorion

Bernard Dumas

Mathias Efing

Ruediger Fahlenbrach

Patrice Fontaine

Thierry Foucault

Pascal François

Andras Fulop

Roland Füess

Marc Gabarro

Jean-François Gajewski

Edith Ginglinger

Peter Gruber

Alex Guembel

Terrence Hendershott

Georges Hübner

Julien Hugonnier

Heiko Jacobs

Monique Jeanblanc Piqué

Sonia Jimenez

Maria Kasch

Alexandros Kostakis

Olivier Lecourtois

Jongsub Lee

Laurence Lescourret

Abraham Lioui

Elisa Luciano

Yannick Malevergne

Roberto Marfé

Jocelyn Martel

Maxime Merli

Sophie Moinas

Franck Moraux

Duc N'Guyen

Lars Norden

Clemens Otto

Loriana Pelizzon

Fabricio Perez

Christophe Pérignon

Ludovic Phalippou

Alberto Plazzi

Joël Petey

Patrice Poncet

Sébastien Pouget

Jean-Luc Prigent

François Quittard-Pinon

Catherine Refait-Alexandre

Jean-Paul Renne

Patrick Roger

Jeroen Rombouts

Mathieu Rosenbaum

Julien Sauvagnat

Patrick Sentis

Olivier Scaillet

Paolo Sodini

Morten Sorensen

Ariane Szafarz

Christophe Spaenjers

Peter Tankov

Roméo Tédongap

Boris Vallée

Philip Valta

Guillaume Vuillemey

Ryan Williams

Rafal Wojakowski

Alminas Zaldokas

Princeton University

Université Paris Dauphine

WHU Otto Beisheim School of Management 

McGill University

Tilburg University

MIT Sloan School of Management

Université Aix-Marseille

Université de Montpellier


ESSEC Business School

Amundi, Université Paris Dauphine, Université Libre de Bruxelles

Université de Strasbourg

London Schoool of Economics

TSE & IEA, Université de Toulouse 1 Capitole

London School of Economics


London Business School

Universita Cattolica del Sacro Cuore

Board of Governors of the Federal Reserve 

Université de Lille 2

University of Lugano

University of Toronto

ESCP Europe

HEC Montréal


University of Geneva & SFI



HEC Paris

HEC Montréal

ESSEC Business School

University of Saint Gallen

University of Mannheim

IAE Lyon

Université Paris-Dauphine

Universita della Svizzeria Italiana

Toulouse School of Economics

Berkeley University

HEC Liège


University of Mannheim

Université d'Evry

Grenoble INP

Humboldt University of Berlin

University of Manchester

EM Lyon

University of Florida

ESSEC Business School


Collegio Carlo Alberto

Université de Paris 1 Panthéon-Assas

Collegio Carlo Alberto

ESSEC Business School

Université de Strasbourg

Toulouse School of Economics

Université de Rennes 1



HEC Paris

Goethe University

Wilfrid Laurier University

HEC Paris

Oxford University

University of Lugano & SFI

Université de Strasbourg

ESSEC Business School

Toulouse School of Economics

Université de Cergy-Pontoise

EM Lyon

Université Franche-Comté

HEC Lausanne

Université de Strasbourg

ESSEC Business School

Université Paris 6

Bocconi University

Université de Montpellier

University of Geneva & SFI

Stockholm School of Economics

Copenhagen Business School

Université Libre de Bruxelles

HEC Paris

ENSAE ParisTech

ESSEC Business School

Harvard Business School

University of Geneva 

HEC Paris

University of Arizona

Surrey Business School




Call for papers

The 15th Paris December Finance Meeting is organized in downtown Paris on December 21, 2017 by EUROFIDAI (European Financial Data Institute) and ESSEC Business School with the participation of AFFI (French Finance Association).

It is jointly sponsored by CERESSEC / CDC Institute for Economic Research / CNRS / Institut Louis Bachelier / Fondation Banque de France in Money, Finance and Banking / Equipex BEDOFIH project (European high frequency financial database) / Amundi / Ardian / Natixis / Société Générale / "Regulation and Systemic Risk" ACPR Chair.

All researchers in finance are invited to present in English their latest research in all areas of finance and insurance :
Asset Pricing, Banking/Financial Intermediation, Bankruptcy, Behavioral Finance, Capital Structure, Corporate Governance, Derivatives, Ethical Finance, Entrepreneurial Finance, Financial Analyst, Financial Crisis, Financial Econometrics, Financial Mathematics, Financial Risks, Hedge Funds/Mutual Funds, Historical Finance, Insurance, Interest Rates, International Finance, Investment Policy/Capital Budgeting, Market Microstructure / Liquidity, Merger and Acquisition, Ownership, Payout Policy, Portfolio Management, Private Equity/Venture Capital, Banking Regulation and Systemic Risk, Risk Management, Security Issuance/IPO.

In previous years, approximately one in six submitted papers was accepted. The Paris December Finance Meeting is one of the top 2 European conferences in terms of the quality of the papers presented.

Prizes will be awarded for the best papers.

PhD and job market paper sessions will also be organized, so all job market and PhD papers are welcome.


Only on line submissions will be considered for the 2017 Paris December Finance Meeting. Before filling the application form, please read the following instructions:

  • Prepare 2 files in pdf format:
    • An anonymous version of the paper (the complete paper without the name(s) of the author(s), without the acknowledgements and without any indication of author’s affiliation)
    • A complete version of the paper including the following information: title, name(s) of the author(s), abstract, keywords, email address for each author, complete address(es)
  • The abstract you will fill in the submission form is limited to 150 words.
  • To complete your submission you will have to classify your paper according to a list of keywords. This choice will define the session referees judging your paper.
  • Each submission will be charged 45€.

Click on the "Submission" tab to access on line submissions.


Papers must be submitted on line by June 5, 2017.


Accepted papers will be posted on the Financial Economic Network (SSRN) and the website of EUROFIDAI.




Only on line submissions on SSRN will be considered for the 2017 Paris December Finance Meeting. Before filling the application form, please read the following instructions:

  • Prepare 2 files in pdf format:
    • An anonymous version of the paper (the complete paper without the name(s) of the author(s), without the acknowledgements and without any indication of author’s affiliation)
    • A complete version of the paper including the following information: title, name(s) of the author(s), abstract, keywords, email address for each author, complete address(es)
  • The abstract you will fill in the submission form is limited to 150 words.
  • To complete your submission you will have to classify your paper according to a list of keywords. This choice will define the session referees judging your paper.
  • Each submission will be charged 45€.




Papers must be submitted on line by June 5, 2017.


Accepted papers will be posted on the Financial Economic Network (SSRN) and the website of EUROFIDAI.



Show all sessions
Planning from December 21, Thursday

Asset Pricing 1 (12/21/2017 at 09:00)

Presiding : Philippe Bertrand (Université Aix-Marseille)

The Volatility-of-Volatility Term Structure

Authors : Branger Nicole (University of Muenster - Finance Center Muenster); Huelsbusch Hendrik (University of Muenster - Finance Center Muenster); Kraftschik Alexander (University of Muenster - Finance Center Muenster);

This paper investigates the volatility-of-volatility (VVIX) term structure. Using daily data, we show that the term structure is in nearly all cases downward sloping. We find that the second principal component (SlopeVVIX) of the VVIX predicts returns of S&P500 and VIX straddles. Its informational content is incremental to the VIX term structure and the variance risk premium. SlopeVVIX is a significant risk-factor, not its level, because the latter is too sticky. To disentangle the main drivers, we develop an affine approximation for the VVIX in context of a VIX option pricing model. We identify three factors that describe 95% of the term structure: Continuous vol-of-vol, jump expectations and a deterministic component. Their contribution to the term structure vary systematically with states of the economy. When the latest major crises hit, continuous vol-of-vol took the lion's share, showing that investors could not judge how long the crisis would take.

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Economic Uncertainty and Commodity Futures Volatility

Authors : Watugala Sumudu W. ();

This paper investigates the dynamics of commodity futures volatility. I derive the variance decomposition for the futures basis to show how unexpected excess returns result from new information about the expected future interest rates, convenience yields, and risk premia. This motivates my empirical analysis of the volatility impact of economic and inflation regimes and commodity supply-demand shocks. Using data on major commodity futures markets and global bilateral commodity trade, I analyze the extent to which commodity volatility is related to fundamental uncertainty arising from increased emerging market demand and macroeconomic uncertainty, and control for the potential impact of financial frictions introduced by changing market structure and index trading. I find that a higher concentration in the emerging market importers of a commodity is associated with higher futures volatility. Commodity futures volatility is significantly predictable using variables capturing macroeconomic uncertainty. I examine the conditional variation in the asymmetric relationship between returns and volatility, and how this relates to the futures basis and sensitivity to consumer and producer shocks.

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The Time-Varying Risk of Macroeconomic Disasters

Authors : Marfe Roberto (University of Torino - Collegio Carlo Alberto); Penasse Julien ();

The rare disasters model of asset prices suggests stock market variations reflect persistent fluctuations in the probability of a large decline in consumption. This paper estimates this probability from macroeconomic data alone, using a dataset of 42 countries over more than a century. We find that disaster risk is volatile and persistent, strongly correlates with the dividend-price ratio, and forecasts stock returns. Our evidence suggests that disaster risk can rationalize the equity premium and risk-free rate puzzles, the excess volatility puzzle, and the predictability of aggregate stock market returns by the dividend-price ratio. A variable disaster model calibrated with our risk estimates confirms these results under standard assumptions. While former works support the plausibility of disaster risk hypothesis, we provide direct evidence that disaster risk can rationalize price fluctuations.

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Banking 1 (sponsored by ACPR Chair) (12/21/2017 at 09:00)

Presiding : Christophe PERIGNON (HEC Paris)

Credit Supply Shocks and Human Capital: Evidence from a Change in Accounting Norms

Authors : Barbosa Luciana (Bank of Portugal - Economic Research Department); Bilan Andrada (Swiss Finance Institute); Celerier Claire (University of Toronto - Rotman School of Management);

This paper investigates the effect of an exogenous credit supply shock triggered by a change in accounting norms on firm accumulation of human capital. In 2005, the introduction of new reporting norms for defined-benefit pension plans in Portugal led to large increases in the value of bank pension liabilities. Affected banks increased both direct contributions to pension plans and prudential deductions from Tier 1 capital, subsequently reducing their supply of credit. We first document that firms in a relationship with affected banks do not perfectly substitute credit. Second, we find that affected firms reduce employment. We show that these employment effects are stronger among unskilled workers, but also among the highly educated ones. Workers holding a college degree, or holding complex occupations, are more likely to leave affected firms. These results suggest that credit supply shocks can affect firm accumulation of human capital, with implications for firm long-term productivity.

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Costless Capital Requirements

Authors : Flore Raphael (University of Cologne - Center for Macroeconomic Research (CMR));

Arguments for costs of capital requirements in the long run are usually based on the trade-off theories of capital structure. This paper provides a critical assessment of these theories by studying how the optimal capital structure of a firm can be modified by an 'integrated fund', which means by an extension of the balance sheet in the form of investments in financial assets. For arbitrary initial sets of assets and the corresponding optimal capital structures, I determine conditions under which the firm can decrease its leverage and its bankruptcy probability without a loss of value by means of such 'integrated funds'. This paper thus indicates a way how the bankruptcy probability of banks can be reduced without any costs.

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Banking Regulation and Market Making

Authors : Cimon David A. (Bank of Canada); Garriott Corey (Bank of Canada);

Recent banking regulation can harm bond market liquidity by motivating a shift to agency intermediation. In a model, theoretical market makers are made to satisfy balance-sheet constraints that are stylizations of the banking rules from Basel III and the U.S. Volcker Rule. The regulations cause market makers to reduce their intermediation by refusing principal positions and instead match clients on an agency basis. As a result, asset prices exhibit greater price impact and greater price pressure. However, the regulations can improve the bid-ask spread because they induce entry by new market makers. We conclude the costs of regulation can be assessed by examining principal positions and asset prices but not by examining bid-ask spreads.

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Corporate Governance 1 (12/21/2017 at 09:00)

Is There a Local Culture of Corruption in the U.S.?

Authors : Dass Nishant (Georgia Institute of Technology - Scheller College of Business); Nanda Vikram K. (University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics); Xiao Steven Chong (University of Texas at Dallas - Naveen Jindal School of Management);

U.S. corporations headquartered in states with greater public corruption are prone to more unethical behavior, reflective of a state-level "culture-of-corruption". We test for state-level differences by exploiting passage of Foreign Corrupt Practices Act (FCPA) that curtailed bribery of foreign officials. Firms in corrupt states, especially firms trading with more corrupt countries, suffer greater value (Tobin's Q) and performance (ROA) decline following FCPA, indicating larger losses from restrictions on bribery. Culture-of-corruption is also manifest in greater agency problems: Firms in corrupt states are more likely to manage earnings, face securities fraud litigation and be adversely affected by state-level anti-takeover laws.

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Elephants (or Donkeys) at the Gate: Political Ideology in M&A

Authors : Alhashel Bader (Kuwait University); Alnahedh Saad (University of Colorado at Boulder - Department of Finance);

We study the effect of shared political identity between acquirers and targets on merger outcomes. In a sample of publicly traded U.S. mergers, we find that targets are more likely to be acquired by an acquirer of a similar political orientation. We document that acquirers in politically matched mergers experience significantly worse cumulative abnormal returns around the merger announcement compared to their non-politically matched counterparts. Acquirers in those mergers pay less takeover premiums, less advisory fees, and experience worse post-merger operating performance. We also find that target executive retention rates are higher, and that the top management team receives a larger bonus post-merger in politically matched mergers. Our results indicate that politically matched mergers create less value to shareholders.

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Debt and Incentives in Political Campaigns

Authors : Ovtchinnikov Alexei V. (HEC Paris (Groupe HEC) - Finance Department); Valta Philip (University of Bern);

Debt is a significant source of funding of political campaigns, with almost half of all campaigns relying on some form of debt. In this paper, we analyze the legislative incentives created by this type of debt financing. We find that indebted politicians raise more funds in subsequent elections, especially from special interest groups. We also show evidence of votes-for-money arrangements, especially among indebted politicians, whereby politicians vote for the benefit of those interest groups that help funding their reelection campaigns. The results are consistent with the view that debt creates legislative distortions and exacerbates the principal-agent problem because it forces indebted politicians to take policy positions that are not aligned with the local constituents' interests.

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Market Microstructure 1 (sponsored by BEDOFIH) (12/21/2017 at 09:00)

Presiding : Patrice Fontaine (EUROFIDAI-CNRS)

How Auctions Amplify House-Price Fluctuations

Authors : Arefeva Alina (Johns Hopkins University - Carey Business School);

I develop a dynamic search model of the housing market where house prices are determined in auctions rather than by Nash bargaining as in the housing search model from the literature. The model with auctions generates fluctuations between booms and busts. During the boom multiple buyers compete for one house, while in the bust buyers are choosing among several houses. The model improves on the performance of the model with Nash bargaining by producing highly volatile house prices which helps to solve the puzzle of excess volatility of house prices. Higher volatility arises because of the competition between buyers with heterogeneous values. With heterogeneous valuations, the price determinations becomes important for the quantitative properties of the model. With Nash bargaining, the buyer is chosen randomly among all interested buyers. Then the average of buyers' house values determines the house price. In the auction model, the buyer is chosen by the maximum bid among all interested buyers, so the highest value determines the house prices. During the boom, the highest values increase more than the average values, making the sales price more volatile. This high volatility is constrained efficient since the equilibrium in the model decentralizes the solution of the social planner problem, constrained by the search frictions.

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Quantitative Easing, Scarcity, and Spotlight Effects on Liquidity in the Government Bond Market

Authors : Pelizzon Loriana (Goethe University Frankfurt - Faculty of Economics and Business Administration); Subrahmanyam Marti G. (New York University - Stern School of Business); Tobe Reiko (Waseda University - Graduate School of Finance, Accounting & Law); Uno Jun (Waseda University);

We examine the impact of the Quantitative Easing (QE) programs implemented by one of the largest central banks in the world on market liquidity in the sovereign bond market. We do so in the context of the Large Scale Asset Purchase (LSAP) program of the Bank of Japan (BoJ) and distinguish between two opposing effects of QE on the yield and liquidity of Japanese Government Bonds (JGBs): the \scarcity effect," which results from the reduction in liquidity as a consequence of shrinkage in the available bonds in the market, and the \spotlight effect," which improves liquidity, arising from focusing attention on individual bonds selected for purchase by the central bank. The spotlight effect thus has an immediate positive impact on bond liquidity; on the other hand, the scarcity effect is only gradually manifested as a negative impact on liquidity. Since the LSAP repeatedly involved the purchase of signi_x000C_cant amounts of individual securities, it is important to disentangle these two effects from each other to assess the overall impact. In the case of the BoJ's LSAP between 2011 and 2016, we _x000C_nd that, indeed, government bonds show an improvement in liquidity through the spotlight effect and then a deterioration in liquidity through the scarcity effect. The spotlight effect is associated with the BoJ's clear announcements of the programs and purchases in subsequent operations. The scarcity effect is ampli_x000C_ed in the latter's Quantitative and Qualitative Easing and when the BoJ's bond holding ratio for particular matu- rities rises above 59% and 37% for three- to 10-year bonds and bonds over 10 years, respectively, indicating the presence of a ratio threshold above which the relation between yield change and time to maturity is altered. Our results suggest, therefore, that an aggressive QE program can eventually adversely affect the government bond market's liquidity and that the execution of such an LSAP program requires caution.

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Shock Propagation Through Cross-Learning in Opaque Networks

Authors : Schneemeier Jan (Indiana University - Kelley School of Business);

This paper studies how firms' learning from their neighbor's stock price ("cross-learning") affects the exposure of firm investment and stock prices to firm-specific shocks. Firms are located in a circular network and share a common productivity shock with their direct neighbors. Stock prices reflect informed traders' private information about future shocks and managers learn from their neighbor's stock price to improve investment efficiency. Local shocks are transmitted from one firm to all other firms and can have a sizeable impact on aggregate variables. This impact is particularly strong in more uncertain episodes, when managers face a higher incentive to cross-learn.

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Coffee break (12/21/2017 at 10:30)

Asset Pricing 2 (12/21/2017 at 11:00)

Presiding : Abraham Lioui (EDHEC)

ESG Risks and the Cross-Section of Stock Returns

Authors : Glossner Simon (Catholic University of Eichstaett-Ingolstadt);

This paper finds that environmental, social, and governance (ESG) risks generate negative long-run stock returns. A value-weighted portfolio of firms with high ESG risks exhibits a four-factor alpha of 3.5% per year, even when controlling for other risk factors, industries, or firm characteristics. The negative alpha stems from unexpected costly ESG incidents and from negative earnings surprises. These findings make three contributions. First, weak corporate social responsibility (CSR) destroys shareholder value. Second, stock markets fail to incorporate the consequences of intangible risks. Third, shorting firms with high ESG risks is a profitable socially responsible investing (SRI) strategy.

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The Lost Capital Asset Pricing Model

Authors : Andrei Daniel (University of California, Los Angeles (UCLA) - Anderson School of Management); Cujean Julien (University of Maryland - Robert H. Smith School of Business); Wilson Mungo Ivor (University of Oxford - Said Business School);

Just as the lost city of Atlantis, the CAPM is empirically invisible most of the time. Yet, recent evidence shows that a strong CAPM relation holds on macroeconomic announcement days. We show that these findings coexist in an economy with asymmetric information. In this context the CAPM relation holds relative to the market consensus the average beliefs across investors but fails for the econometrician who does not observe investors' information nor the market portfolio. On announcement days, when investors learn about macroeconomic factors to which stocks are exposed, fundamental risk better explains variations in asset returns, clearing the shoal of mud that stands in the way of the CAPM.

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Time-Varying Predictability of Consumption Growth, Macro-Uncertainty, and Risk Premiums

Authors : Barroso Pedro (UNSW Australia Business School, School of Banking and Finance); Boons Martijn (New University of Lisbon - Nova School of Business and Economics); Karehnke Paul (UNSW Australia Business School, School of Banking and Finance);

Risk premiums for exposure to state variables that predict consumption growth are time-varying consistent with macro-finance theory. We first show that the relation between state variables, such as the term spread, and future consumption growth varies significantly over time. Consistent with an Intertemporal CAPM, we find that state variable risk premiums (in the cross-section of individual stocks) vary over time accordingly: Risk premiums increase by 5% (annualized) when a state variable predicts consumption growth strongly relative to its own history. We further show that this effect is magnified by time-variation in the variance of the state variables, which we argue to be driven by general macroeconomic uncertainty. Our conditional evidence contributes to recent literature that focuses on the unconditional pricing of state variable risk and finds mixed results.

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Banking 2 (12/21/2017 at 11:00)

Should the Government Be Paying Investment Fees on $3 Trillion of Tax-Deferred Retirement Assets?

Authors : Landoni Mattia (Southern Methodist University (SMU) - Finance Department); Zeldes Stephen P. (Columbia Business School - Finance and Economics);

Governments incentivize retirement saving by allowing individuals to contribute to tax-advantaged accounts where the returns to financial assets receive special tax treatment. In accounts with back-loaded taxation, the individual contributes pretax money and pays taxes when the money is withdrawn. In accounts with front-loaded taxation, the individual contributes aftertax money and pays no future taxes. Under some simplifying assumptions, a standard benchmark result is that both the individual and the government are indifferent between the two types of accounts. We add investment management fees to the benchmark model and show that the neutrality result breaks down. Assuming fees are fixed as a percent of assets under management (AUM), we show that individuals are still indifferent to the timing of taxation but the government is not. Under back-loaded taxation, the government implicitly owns a share of all retirement accounts and is effectively paying investment fees on this share, something it avoids under front-loaded taxation. We estimate this to cost the government $14 billion per year. We then ask whether this result holds in general equilibrium, where fees as a percent of AUM are allowed to vary. The answer depends both on the nature of the cost function for asset management services, and on the nature of market competition, but we find that the result will in general continue to hold: back-loaded taxation is more expensive for the government and produces a larger asset-management industry. Finally, we use the general equilibrium model to examine welfare implications. In a rough calibration of the model, we find that this increase in the size of the asset management industry reduces consumer welfare.

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Dynamic Fire-Sale Externalities and Rollover Risk Spillovers

Authors : Doh Hyunsoo (University of Chicago, Booth School of Business, Students);

This paper studies financial contagion in a short-term debt market by developing a dynamic model with heterogeneous banks in which outside investors of assets are financially constrained and have different asset-management skills. Each bank's creditors make withdrawal decisions at their maturity dates. Each outside investor chooses an optimal time to purchase failed assets. The rollover risks of distressed banks propagate to other banks through the expected changes in a market-clearing liquidation price of assets. In contrast to He and Xiong (2012), the model implies providing more credit support or extending debt maturities alleviates a crisis by increasing the liquidation price.

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Illuminating the Dark Side of Financial Innovation: The Role of Investor Information

Authors : Ammann Manuel (University of Saint Gallen - School of Finance); Arnold Marc (University of Saint Gallen - School of Finance); Straumann Simon (University of Saint Gallen - School of Finance);

This paper investigates the impact of investor information on financial innovation. We identify specific channels through which issuers of financially engineered products exploit retail investors by using their privileged access to information. Our results imply that imperfect investor information regarding volatility and dividends is crucial to explain the pricing and design of financially engineered products. We confirm our conjecture by exploiting a discontinuity in issuers' informational advantage. The insights are of systemic importance because they suggest that product issuers' behavior in the financial innovation market aggravates investor information problems of the financial system.

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Behavioral Finance 1 (12/21/2017 at 11:00)

Presiding : Jean-François Gajewski (IAE Lyon)

A Signaling Theory of Derivatives-Based Hedging

Authors : Anjos Fernando (NOVA School of Business and Economics); Winegar Adam ();

We model a commodity producing firm that has private information about future volume and requires outside financing to fund a growth opportunity. Due to costly financial distress, a firm's first-best strategy is to sell forward its future production, avoiding any price risk. Low-volume firms, however, have an incentive to mimic, which in equilibrium distorts the hedging strategy of high-volume firms. Under certain conditions, high-volume firms signal their type by hedging more than they would under their first-best strategy. When allowing firms to use multiple types of derivatives, we show that high-volume firms use both options and forwards, while low-volume firms only use forwards. The model suggests that heterogeneous and prima facie inefficient hedging policies may be due to signaling and not speculation or risk shifting.

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Pricing Sin Stocks: Ethical Preference vs. Risk Aversion

Authors : Colonnello Stefano (Otto-von-Guericke Universitat Magdeburg); Curatola Giuliano (Goethe University Frankfurt - Research Center SAFE); Gioffre Alessandro (Goethe University Frankfurt - Research Center SAFE);

We develop a model that explains the average return and volatility spread between sin stocks and non-sin comparable stocks. We endow agents' preferences with a sensitivity factor to firms' ethicalness. A positive marginal rate of substitution between dividends and ethicalness explains the higher average returns that sin stocks exhibit over non-sin comparable stocks. This result can be obtained either when (i) dividends and ethicalness are substitute goods and investors are less riskaverse than log utility, or (ii) when dividends and ethicalness are complementary goods and investors are more risk-averse than log utility. We empirically show that only the latter case can explain the patterns of the conditional return and volatility spreads between sin and non-sin comparable stocks.

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Another Law of Small Numbers: Patterns of Trading Prices in Experimental Markets

Authors : Bousselmi Wael (Université Montpellier I); Roger Patrick (Strasbourg University - LARGE Research Center - EM Strasbourg Business School); Roger Tristan (Université Paris-Dauphine, PSL Research University); Willinger Marc (LAMETA, University of Montpellier 1);

Studies in neuropsychology show that the human brain processes small and large numbers differently. Small numbers are processed on a linear scale, while large numbers are processed on a logarithmic scale. In this paper, we report the results of an experiment showing that trading prices on experimental markets are processed differently by subjects, depending on their magnitude. Deviations from fundamental values are much larger on small price markets than on large price markets. Our experimental design allows us to confirm the result at the individual level. For a given subject, the deviation from the fundamental value is 24,66\% on average when she trades on a small price market compared to about 0,42\% on a large price market. Our results show that price magnitude influences the way people perceive the distribution of future returns. This result is at odds with standard finance theory but is consistent with: (1) a number of observations in the empirical finance and accounting literature; and, (2) the use of different mental scales for small and large prices.

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Dealer Trading at the Fix

Authors : Osler Carol L. (Brandeis University - International Business School); Turnbull D. Alasdair S. (Clarkson University - School of Business);

This paper develops a model of dealer conduct and misconduct at the London 4 pm fix, a major currency-market benchmark. The analysis clarifies the dealers' incentives and strategies, explains why price dynamics appear unchanged despite reforms, and provides insights relevant to benchmark design. Prices will be unusually volatile before the fix without collusion. Collusion is profitable because it shuts down a form of free-riding in which dealers front-run each other. With collusion the price trend accelerates more as the fix moment approaches than when dealers trade independently. Statistical tests detect this shift around 2008, when major banks admit their dealers began colluding.

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Investment (12/21/2017 at 11:00)

The Effect of Hold-Up Problems on Corporate Investment: Evidence from Import Tariff Reductions

Authors : Martin Thorsten (HEC Paris - Finance Department); Otto Clemens A. (Singapore Management University);

We provide empirical evidence of the importance of hold-up problems for investment decisions in a large number of U.S. manufacturing industries. We exploit variation in the severity of hold-up problems between upstream suppliers and downstream customers resulting from import tariff reductions in upstream industries. We find that downstream customers respond by increasing investment. As theory predicts, the effect is stronger if the customers are not vertically integrated with their suppliers, if they have little bargaining power, if their suppliers produce differentiated inputs, and if high uncertainty inhibits the use of long-term contracts.

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The Flight Home Effect in Multinational Internal Capital Markets During the Great Recession

Authors : Deloof Marc (University of Antwerp); Montalto Fabiola (University of Antwerp);

We investigate whether the Great Recession induced a flight home effect in internal capital markets of European multinational firms. Using a difference-in-difference approach, we find a significant reduction in group borrowings by subsidiaries of European multinationals in Italy since 2008, compared to a propensity score matched sample of subsidiaries of local business groups. While the reduction in group borrowings by multinational subsidiaries is partially counterbalanced by an increase in bank borrowings, multinational subsidiaries reduced their investments more than local group subsidiaries. These effects are significantly stronger for subsidiaries of multinationals headquartered in a European country that has been hit harder by the Great Recession. The reduction in group borrowings is larger when the foreign parent is located at a greater distance from subsidiary.

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The Real Effects of Short Selling Restrictions

Authors : Schiller Christoph M. (University of Toronto - Rotman School of Management);

Short selling enhances the price feedback mechanism for corporate investment decisions. Using the staggered introduction and repeal of short selling restrictions around the world, we show that the sensitivity of investment to Tobin's Q is 25% higher when short selling is permitted. Further, short selling strengthens the link between the completion of announced M&A deals and the price reaction on announcement day. The positive impact of short selling on investment-Q sensitivity is higher for firms with low analyst coverage and institutional ownership, mitigated for cross-listed firms, and subsequently results in improved firm performance. The effects do not appear to be driven by a higher total amount of information in prices, faster price discovery, improved firm disclosure, or differences in governance. Our results suggest that short selling incentivizes traders to acquire private information new to firm managers, thus enhancing managers' reliance on stock prices as an information signal for investment decisions.

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Lunch (12/21/2017 at 12:30)

Behavioral Finance 2 (12/21/2017 at 14:00)

Overpriced Winners

Authors : Daniel Kent D. (Columbia Business School - Finance and Economics); Klos Alexander (University of Kiel - Institute for Quantitative Business and Economics Research (QBER)); Rottke Simon (University of Muenster - Finance Center Muenster);

A strong increase in a firm's market price over the past year is generally associated with higher future abnormal returns, consistent with the momentum anomaly. However, for a small set of firms for which arbitrage is limited, high past returns forecast strongly negative future abnormal returns. We propose a dynamic model in which increased unwarranted optimism by a set of speculators leads to dynamic mispricing effects. Consistent with this model, we show a set of firms with high past returns, low institutional ownership, and high recent changes in short interest earns persistently low returns going forward. A strategy that goes short the overpriced winners and long other winners generates a Sharpe-ratio of 1.12; its returns cannot be explained by commonly used risk-factors.

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Wall Street Crosses Memory Lane: How Witnessed Returns Affect Professionals' Expected Returns

Authors : Hoffmann Arvid O. I. (University of Adelaide - Business School); Iliewa Zwetelina (Centre for European Economic Research (ZEW)); Jaroszek Lena (Copenhagen Business School - Department of Finance);

Witnessing stock market history in the making leaves behind a vivid story, but does not provide valuable information. Nevertheless, well-versed finance professionals extrapolate from witnessed returns when forming beliefs about expected returns which we show by using a unique dataset regarding professionals' career start in the finance industry. This result is robust to controlling for all publicly available information and interpersonal differences. Additionally, we find that returns witnessed early on in a career are more formative than those witnessed recently. Among the potential channels through which witnessed returns might affect professionals' expectations, a judgmental bias appears the most plausible.

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All Is Not Lost that Is Delayed: Overconfidence and Investment Failure

Authors : Betzer André (BUW- Schumpeter School of Business and Economics); van den Bongard Inga (University of Mannheim - Finance Area); Theissen Erik (University of Mannheim - Finance Area); Volkmann Christine (University of Wuppertal);

Using a unique panel data set of private German firms over the period 2002 to 2013 we analyze the relation between managerial overconfidence and investment policy in small and medium-sized firms. We construct direct estimates of managerial overconfidence that are based on sales forecasts. We find that overconfident managers are more likely to invest, and that this relation is driven by expansion investments (as opposed to replacement investments). Most importantly, we provide empirical evidence on the determinants of failed (downsized, delayed or abandoned) corporate investment projects. Controlling for socio-demographic variables and firm characteristics, we find that investment projects planned by overconfident managers are more likely to fail. When we differentiate between the three categories of failure (abandoning, delaying, and downsizing) we find that overconfident managers are more likely to delay, rather than to abandon or downsize, an investment project. We offer an explanation that is based on the theory of cognitive dissonance.

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Corporate Governance 2 (12/21/2017 at 14:00)

Presiding : Edith Ginglinger (Université Paris Dauphine)

Peer Pressure in Corporate Earnings Management

Authors : Charles Constantin (University of Southern California - Marshall School of Business); Schmid Markus M. (University of Saint Gallen - Swiss Institute of Banking and Finance); von Meyerinck Felix (University of Saint Gallen - School of Finance);

We show that peer firms play an important role in shaping corporate earnings management decisions. To overcome identification issues in isolating peer effects, we use fund flow-induced selling pressure by passive open-end equity mutual funds as exogenous shocks to firms' stock prices. Managers respond to such exogenous price shocks by adjusting earnings management policies. We then measure individual firms' reactions to changes in earnings management at peer firms as a result of such exogenous price shocks. The documented peer effect in earnings management is not only statistically, but also economically significant. Our results are robust to alternative measures of fund flow-induced selling pressure and earnings management, and to estimating instrumental variables regressions in which we instrument peer firms' earnings management with mutual fund flow-induced selling pressure.

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A Learning-Based Approach to Evaluating Boards of Directors

Authors : Stern Lea Henny ();

Using predictions from a learning model, this paper exploits the cross-sectional variation in the learning-induced decline in stock return volatility over director tenure to infer the marginal value of different kinds of directors. This new framework confirms prior empirical findings and documents new results. For example, directors joining better compensated boards have higher marginal value while the marginal value of a director joining an entrenched board is muted. Furthermore, the estimates imply that governance related uncertainty associated with the arrival of a new director accounts for 7% of return volatility, shedding light on the extent to which governance matters.

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Active Versus Speculative Monitoring: Evidence from Pre-WWI Paris-Listed Firms

Authors : Bonhoure Emilie (Toulouse Business School); Germain Laurent (Toulouse University, Toulouse Business School); Le Bris David ();

The corporate statutes of the five hundred firms listed on the unofficial Paris market before WWI stated the amount of dividends as a fixed percentage of profits: as a result, managers could not use dividends as a market signal. This setting offers the opportunity to study the agency explanation of dividends, while clearly excluding the signaling theory. Moreover, we investigate speculative (active) monitoring costs as proxied by distance between investors and the company's main activities (or head office). We confirm the effect of agency costs and find that speculative monitoring costs are more important in explaining dividend yield.

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Are Independent Directors with Industry Expertise More Informed?

Authors : Wang Sumingyue (ESSEC Business School - Finance Department, Students);

This paper examines the informational advantage of independent directors with industry expertise compared to independent directors lack of such expertise. I find that independent directors with industry expertise earn significantly higher abnormal returns when purchasing their firms' stocks than do independent directors without industry expertise. The impact of industry expertise on independent directors' trading profits is more pronounced for firms with higher information asymmetry, more complex firms, and firms with higher business risk. Trades made by industry experienced independent directors have greater predictive power regarding imminent large stock price changes. Moreover, the presence of independent directors with relevant industry experience is associated with better alliance performance, higher likelihood of M&A bid success, and lower investment-to-stock price sensitivity. Overall, the results suggest that independent directors with industry expertise have superior knowledge about the firm and enhance board effectiveness in performing both monitoring and advisory roles.

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Financial Econometrics & Mathematics (12/21/2017 at 14:00)

Variance Swap Payoffs, Risk Premia and Extreme Market Conditions

Authors : Rombouts Jeroen (ESSEC Business School); Stentoft Lars (Department of Economics, University of Western Ontario); Violante Francesco (Maastricht University - Department of Economics);

This paper estimates the Variance Risk Premium (VRP) directly from synthetic variance swap payoffs. Since variance swap payoffs are highly volatile, we extract the VRP by using signal extraction techniques based on a state-space representation of our model in combination with a simple economic constraint. Our approach, only requiring option implied volatilities and daily returns for the underlying, provides measurement error free estimates of the part of the VRP related to normal market conditions, and allows constructing variables indicating agents' expectations under extreme market conditions. The latter variables and the VRP generate different return predictability on the major US indices. A factor model is proposed to extract a market VRP which turns out to be priced when considering Fama and French portfolios.

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Efficient Parameter Estimation for Multivariate Jump-Diffusions

Authors : Guay Francois (Boston University); Schwenkler Gustavo (Boston University - Department of Finance & Economics);

This paper develops unbiased Monte Carlo estimators of the transition and marginal densities of a multivariate jump-diffusion process. The drift, volatility, jump intensity, and jump magnitude are allowed to be state-dependent and non-affine. It is not necessary to diagonalize the volatility matrix. Our density estimators facilitate the parametric estimation of multivariate jump-diffusion models based on discretely observed data. The parameter estimators we propose have the same asymptotic behavior as maximum likelihood estimators under mild conditions. Our approach is found to be highly accurate and computationally efficient in a numerical case study of practical relevance.

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What Drives the Trend and Behavior in Aggregate (Idiosyncratic) Variance? Follow the Bid-Ask Bounce

Authors : Lesmond David A. (Tulane University - A.B. Freeman School of Business); Pan Xuhui (Nick) (Tulane University); Zhao Yihua (Tulane University - A.B. Freeman School of Business);

A number of competing explanations have been offered as a rationale for the trend in idiosyncratic variance that has been experienced over the past four decades. We establish a theoretical model linking a market microstructure bias with the industry-adjusted idiosyncratic variance (Campbell, Lettau, Malkiel, and Xu, 2001) or the risk-adjusted idiosyncratic variance. Using this model's predictions, we empirically show that the bid-ask spread eliminates the time trend in aggregate idiosyncratic variance. These results are robust across various exchanges, across various risk-based measures of idiosyncratic variance, and through time. Two natural experiments demonstrate that an exogenous shock to the bid-ask spread is associated with a subsequent decline in the aggregate idiosyncratic variance. The microstructure hypothesis dominates any of the alternative explanations, including uncertainty about profitability, earnings shocks, or growth options, for the trend in idiosyncratic variance.

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The Dynamics of Price Jumps in the Stock Market: An Empirical Study on Europe and U.S.

Authors : Ferriani Fabrizio (Bank of Italy); Zoi Patrick (Bank of Italy);

We study the bivariate jump process involving the S&P 500 and the Euro Stoxx 50 with jumps extracted from high frequency data using non-parametric methods. Our analysis, based on a generalized Hawkes process, reveals the presence of self-excitation in the jump activity which is responsible for jump clustering but has a very small persistence in time. Concerning cross-market effects, we find statistically significant co-jumps occurring when both markets are simultaneously operating but no evidence of contagion in the jump activity, suggesting that the role of jumps in volatility transmission is negligible. Moreover, we find a negative relationship between the jump activity and the continuous volatility indicating that jumps are mostly detected during tranquil market conditions rather than in periods of stress. Importantly, our empirical results are robust under different jump detection methods.

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Hedge Funds / Portfolio Management (sponsored by AMUNDI) (12/21/2017 at 14:00)

Presiding : Jocelyn MARTEL (ESSEC)

Knowing Me, Knowing You? Similarity to the CEO and Fund Managers' Investment Decisions

Authors : Jaspersen Stefan (University of Cologne - Centre for Financial Research (CFR)); Limbach Peter (University of Cologne and Centre for Financial Research (CFR));

We study whether investors' demographic similarity to CEOs affects their investment decisions. Mutual fund managers overweight firms led by CEOs who resemble them in terms of age, ethnicity and gender. This finding is robust to educational and local ties and is supported by variation in similarity caused by CEO departures. Overweighting of similar CEOs is more pronounced when uncertainty is higher. It is associated with superior fund performance, except for the case of similar ethnicity. Results suggest that, on average, demographic similarity to CEOs facilitates informed trading. They further suggest that CEOs matter to investors.

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The Predominance of Real Estate in the Household Portfolio

Authors : Barras Laurent (McGill University - Desautels Faculty of Management); Betermier Sebastien (McGill University - Desautels Faculty of Management);

This paper investigates why household portfolios are heavily skewed toward real estate. Previous studies suggest that the large portfolio share of real estate primarily stems from non-investment-related motives as homeowners are often forced to invest heavily to buy the home they want to consume. In contrast, we show that homeowners would still invest the bulk of their wealth in real estate in a frictionless setting where they could own and consume separate amounts of housing. We provide empirical support to this argument and derive a dynamic portfolio model to study why real estate has such a strong investment appeal.

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Limits of Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data

Authors : von Beschwitz Bastian (Board of Governors of the Federal Reserve System); Lunghi Sandro (Inalytics Limited); Schmidt Daniel (HEC Paris (Groupe HEC) - Finance Department);

We exploit detailed transaction and position data for a sample of long-short equity hedge funds to document new facts about the trading activity of sophisticated investors. We find that the initiation of both long and short positions is associated with significant abnormal returns, suggesting that the hedge funds in our sample possess investment skill. In contrast, the closing of long and short positions is followed by return continuation, implying that hedge funds close their positions too early and leave money on the table. As we demonstrate with a simple model, this behaviour can be explained by hedge funds being (risk) capital constrained and facing position monitoring costs. Consistent with our model, we document that the return continuation following closing orders is more pronounced when these constraints become more binding (e.g., after negative fund returns or increases in volatility).

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Is Variation on Valuation Too Excessive? A Study of Mutual Fund Holdings

Authors : Chen Hsiu-Lang (University of Illinois at Chicago - Department of Finance);

I first examine whether or not the fair value of financial instruments is priced consistently across mutual funds. Mutual funds price fair value differently for illiquid stocks, value stocks, and not-IPO-yet startups. I find that U.S. equity funds with an inclination for upbeat fair value tend to underperform others particularly in months following up-markets. When an equity fund performs poorly, has positive price dispersion in its holdings, or holds more illiquid stocks, the fund tends to have positive price dispersion again in the next quarter. This behavior is more significant when the stock market is more volatile. If the fair value of securities varies due to inconsistent valuation policies across mutual funds, a comparison of the portfolio weights on their securities could be problematic.

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Interest Rates (12/21/2017 at 14:00)

Presiding : Patrice Poncet (ESSEC Business School)

Central Bank Communication and the Yield Curve

Authors : Leombroni Matteo (Stanford University); Vedolin Andrea (Boston University - Department of Finance & Economics); Venter Gyuri (Copenhagen Business School); Whelan Paul (Copenhagen Business School);

We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on swap rates and sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB's private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication can induce demand shocks for bonds due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.

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Expectations or Surprises: What Really Moves the U.S. Treasury Market?

Authors : van der Wel Michel (Erasmus University Rotterdam); Erdemlioglu Deniz (IESEG School of Management and CNRS - France);

The standard approach in asset pricing is to use information shocks to determine how markets react to news. We examine this paradigm empirically by decomposing high-frequency bond responses into ex-ante (expected) and ex-post (surprise) news components. Our analysis shows that the magnitude, direction and duration of reactions depend on the choice of measurement component. While bond returns barely react to news, volatility is closely linked to fundamentals. Ex-ante forecasts of investors generate significant jump (tail) clustering in the data, but we find no evidence for such effects with (ex-post) surprise measures. This suggests that considering ex-post surprises solely as proxy for shocks undermines the realized announcement impact, particularly for characterizing jump-type tail behavior in crisis periods. The news-implied reaction dispersion between expectations and shocks is sizable, related to trading volume and time-varying over the business cycle. Our findings provide relevant implications for macro-finance modeling and bond market microstructure.

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International Real Yields

Authors : Ermolov Andrey ();

I study market-implied real yields extracted from prices of inflation-linked government bonds for nine developed countries. The liquidity premium is an important component of breakeven inflation rates. Unconditional real yield curves are upward-sloping, providing empirical support for habit models. The cross-country real rate equality is rejected. Across countries, real yields are strongly positively correlated while liquidity premia are moderately positively correlated. Low nominal yields following the Great Recession are mainly due to low real yields, although the inflation risk premia have also decreased.

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Does Monetary Policy Impact Market Integration? Evidence from Developed and Emerging Markets

Authors : Caporin Massimiliano (University of Padua - Department of Statistical Sciences); Pelizzon Loriana (Goethe University Frankfurt - Faculty of Economics and Business Administration); Plazzi Alberto (USI-Lugano);

We investigate the impact of monetary announcements of the ECB and the FED on integration in the equity and sovereign CDS markets for a large cross-section of 18 Developed and 21 Emerging countries over 2006 to 2015. The effect of both announcements is negative or muted in the pre-crisis period, while it turns strongly positive during the financial crisis of 2007-2009. ECB interventions lead to more integration in the equity market during 2010 to 2012, but dis-integration in the CDS market in the ECB Quantitative Easing period (2013 to 2015), especially for emerging countries. In contrast, FED announcements are perceived as global factors in the CDS emerging market and are accompanied with an increase in integration both when the FED implements and unwinds its unconventional measures. The relation between the global factor and the U.S. market increases during FED interventions, the same does hold for the European market during ECB announcements. The exposure of emerging markets to outside monetary policy shocks can be explained in terms of their degree of trade and financial openness.

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Market Microstructure 2 (12/21/2017 at 14:00)

Informed Trading in the Index Option Market

Authors : Kaeck Andreas (University of Sussex); van Kervel Vincent (Pontifical Catholic University of Chile); Seeger Norman (VU University Amsterdam);

We estimate a structural model of informed trading in option markets. We decompose option order flow into exposures to the underlying asset (through the option delta) and its volatility (through the option vega). We then use these order flow exposures to predict changes in the underlying asset and volatility in a vector autoregressive (VAR) model. The model measures informed trading in the aggregate option market, as option order flows can be meaningfully combined across options with different strike prices and maturities. Further, the order flow aggregation increases statistical power, which is necessary to identify informed trading on the two components. The model also yields a novel price impact parameter of volatility speculation. Estimates using options on the S&P500 confirm that option trades are indeed informed about changes in both the underlying and volatility, although the magnitude of the former is substantially larger.

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When to Introduce Electronic Trading Platforms in Over-The-Counter Markets?

Authors : Vogel Sebastian (Ecole Polytechnique Fédérale de Lausanne);

I study a hybrid over-the-counter (OTC) market structure in which traders have the choice of obtaining an asset either in a bilateral market or on an electronic trading platform. In a hybrid market (HM), turnover is higher and expected prices are lower than in a pure bilateral market (PBM). I present sufficient conditions under which dealers' profits are higher in the HM than in the PBM and vice versa. Dealers can increase their profits in the HM by colluding to keep their activity on the platform at a certain level. The model also delivers several other empirical implications regarding prices, trading volume and the traders' choices of trading venue under the two different market structures.

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The Role of Pre-Opening Mechanisms in Fragmented Markets

Authors : Boussetta Selma (University of Toulouse 1 - Université Toulouse 1 Capitole); Lescourret Laurence (ESSEC Business School); Moinas Sophie (Toulouse School of Economics);

To facilitate price discovery, Euronext Paris has always relied on a transparent pre-opening phase and on a call auction to open continuous markets. Fast trading, competition from alternative trading venues and the poor volume at the open (2%) however question the role of these non-trading sessions. Using a unique dataset of stocks cross-traded on Euronext Paris, BATS and Chi-X, we explore the behavior of traders during the preopen based on their speed and nature of orders (proprietary, agency or market-making). We show that slow brokers submit orders very early, and most of them are executed within the day. In contrast, fast prop traders or dedicated liquidity providers only participate in the last half-hour. Interestingly the pre-opening activity of slow brokers is strongly related to the price discovery process across trading venues. Finally, we show that although tentative clearing prices of the preopen contain information, they are followed by a reversal in the following 15 minutes across the different platforms, reflecting price pressure and liquidity issues around the open.

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Quotes, Trades and the Cost of Capital

Authors : Rosu Ioanid (HEC Paris (Groupe HEC) - Finance Department); Sojli Elvira (UNSW Business School, School of Banking and Finance); Tham Wing Wah (University of New South Wales (UNSW));

This paper studies the quote-to-trade (QT) ratio and its relation with liquidity, price discovery, and expected returns. Empirically, we find larger QT ratios in small, illiquid or neglected firms, yet large QT ratios are associated with low expected returns. The results are driven by quotes, not by trades. We propose a model of the QT ratio consistent with these facts. In equilibrium, market makers monitor the market faster (and thus increase the QT ratio) in neglected, difficult-to-understand stocks. They also monitor faster when their clients are less risk averse, which reduces mispricing and lowers expected returns.

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Coffee break (12/21/2017 at 16:00)

Banking 3 (12/21/2017 at 16:30)

Presiding : Joël Petey (Université de Strasbourg)

What Drives Interbank Loans? Evidence from Canada

Authors : Bulusu Narayan (); Guerin Pierre (Government of Canada - Bank of Canada);

We analyse the drivers of the Canadian interbank market using a novel dataset of uncollateralised and collateralised overnight loans, and applying a Bayesian model averaging approach to deal with model uncertainty. We find three important classes of drivers of the terms of interbank loans: (i) the price of substitutes, (ii) financial stress, and (iii) systemic liquidity needs. These drivers have a heterogeneous impact on interbank loans, depending on the collateral quality. We then present the results of a structural VAR analysis, which shows a persistent impact of financial stress and systemic liquidity shocks on the overnight interbank funding market.

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The Value of Bond Underwriter Relationships

Authors : Daetz Stine Louise (Copenhagen Business School); Dick-Nielsen Jens (Copenhagen Business School - Department of Finance); Nielsen Mads Stenbo (Copenhagen Business School - Department of Finance);

We show that corporate bond issuers benefit from utilizing existing underwriter relationships when rolling over bonds, but at the same time become exposed to underwriter distress. A strong relationship enables the underwriter to credibly certify the issuer resulting in lower direct issuance costs and lower underpricing. However, if the underwriter becomes distressed, this spills over to the issuer's credit risk, because it weakens the relationship and increases the risk of involuntary relationship termination. The credit risk spillover is more pronounced for risky, opaque issuers with high rollover exposure, i.e., those issuers most in need of certification by an underwriter.

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The Relevance of Credit Ratings in Transparent Bond Markets

Authors : Badoer Dominique C. (University of Missouri at Columbia - Department of Finance); Demiroglu Cem (Koc University, College of Administrative Sciences and Economics);

We examine the effect of bond price transparency on the information content of credit ratings. To identify the causal impact of transparency, we use a recent regulation in the U.S. that mandates real-time public dissemination (or disclosure) of over-the-counter transactions in corporate debt securities via the Trade Reporting and Compliance Engine (TRACE). We find that dissemination dramatically reduces the average short-term stock and bond price impact of rating downgrades, suggesting that ratings fill information gaps arising from lack of price transparency. The reduction does not arise from changes in investor confidence in, or the ex post quality of, issuer-paid ratings. Dissemination matters less where the issuer is a CDS reference entity or has outstanding bonds traded on an exchange or where stock analysts issue more reliable forecasts of the issuer's future earnings. We also find that rating downgrades become more sensitive to changes in market-based measures of credit risk after dissemination, consistent with transparent prices making rating inflation more transparent, and therefore increasing the incentives for rating agencies to update ratings in a more timely manner. Finally, we document that credit spreads better predict future defaults after dissemination, consistent with more efficient information aggregation in transparent markets.

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Capital Structure (12/21/2017 at 16:30)

Renegotiation Costs, Financial Contracting, and Lender Choice

Authors : Ferracuti Elia (University of Utah - School of Accounting and Information Systems); Morris Arthur (University of Utah - School of Accounting and Information Systems);

This study exploits a plausibly exogenous change in renegotiation costs to analyze the relationship between renegotiation costs and initial contracting. TD9599 materially reduces the tax burden of renegotiating syndicated loans, while leaving the taxation of renegotiating single-lender loans and bonds unchanged. In this setting we examine the implications of incomplete contracting theory for three contract features: debt maturity, the initial likelihood of covenant violation, and the use of performance pricing provisions. Consistent with incomplete contracting theory, we find that as renegotiation costs fall the maturity of debt contracts lengthens, the likelihood of covenant violation increases, and the use of PPPs becomes less frequent. We further study whether renegotiation costs influence borrowers' lender preference. Consistent with TD9599 eliminating the asymmetric taxation of syndicated loans and public bonds during out-of-court renegotiation, we find that lower cost of renegotiation shift borrowers' preferences away from public bonds and toward private loans.

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News About Zero-Leverage Firms

Authors : Geelen Thomas (Ecole Polytechnique Fédérale de Lausanne);

I develop a dynamic capital structure model in which creditors face adverse selection and learn about the firm's quality from news. Shareholders of a high-quality firm prefer to postpone debt issuance so creditors can learn about the firm's quality, which lowers the underpricing of its debt. At some point the benefits of waiting no longer outweigh the current tax benefits and shareholders decide to issue debt. This setup endogenously creates a zero-leverage firm, which is expected to issue debt in the future. Shortening the firm's debt maturity alleviates the adverse selection and speeds up debt issuance.

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Investor Relations and IPO Performance

Authors : Chahine Salim (American University of Beirut - Olayan School of Business); Colak Gonul (Hanken School of Economics); Hasan Iftekhar (Gabelli School of Business, Fordham University); Mazboudi Mohamad (American University of Beirut);

We analyze the value of investor relations (IR) strategies to the IPO firms. Firms that are less visible and have inexperienced management tend to hire IR consultants prior to the issue date. Such IR-backed IPOs also exhibit higher short-term performance in terms of lower cost of capital, higher price revision, higher underpricing, and better market liquidity. The IR consultants help create positive news coverage before the IPO event as reflected in a more optimistic tone of the media news articles. However, this optimism is negatively related to the long-term IPO performance. Furthermore, IR consultants' efforts attract some distant institutions into the issue, however at the end of the first quarter following the IPO date, large percentage of the ownership belongs to the small institutions and individual investors. Finally, during such IR-backed public offerings, the participation ratio by the insiders of the IPOs is disproportionately higher. Thus, the IR consultants seem to facilitate the exit strategies by the insiders, which can explain the increased popularity of such IR programs in recent years.

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Derivatives (12/21/2017 at 16:30)

Presiding : Franck Moraux (Université de Rennes 1)

Extreme Inflation and Time-Varying Disaster Risk

Authors : Dergunov Ilya (); Meinerding Christoph (Deutsche Bundesbank); Schlag Christian (Goethe University Frankfurt - Research Center SAFE);

Low consumption growth tends to occur together with either very high or very low inflation. The probability of low expected consumption growth estimated from a Markov chain for consumption growth and inflation is highly correlated with a measure for the likelihood of consumption disasters suggested by Wachter (2013). A simple asset pricing model with recursive utility and unobservable states reproduces the time variation in volatilities and correlations of stock and bond returns very well.

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Term Structure of Interest Rates with Short-Run and Long-Run Risks

Authors : Grishchenko Olesya V. (Board of Governors of the Federal Reserve System); Song Zhaogang (Johns Hopkins University - Carey Business School); Zhou Hao (Tsinghua University - PBC School of Finance);

Interest rate variance risk premium (IRVRP), the difference between implied and realized variances of interest rates, emerges as a strong predictor of Treasury bond returns of maturities ranging between one and ten years for return horizons up to six months. IRVRP is not subsumed by other predictors such as forward rate spread or equity variance risk premium. These results are robust in a number of dimensions. We rationalize our findings within a consumption-based model with long-run risk, economic uncertainty, and inflation non-neutrality. In the model interest rate variance risk premium is related to short-run risk only, while standard forward-rate-based factors are associated with both short-run and long-run risks in the economy. Our model qualitatively replicates the predictability pattern of IRVRP for bond returns.

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Option Implied Dividends

Authors : Kragt Jac (Tilburg University - Department of Finance);

I determine the valuation of future dividends for US companies as implied by option prices. This is the first paper in which the early exercise premium included in these prices is explicitly accounted for as part of finding these dividend valuations. From these implied dividend data, I build company-specific term structures of dividend growth relative to actual dividends. These term structures show substantial variation in slope over time as well as in the cross-section. Implied dividends predict actual dividends, particularly upward dividend changes. But if a dividend cut is correctly predicted by implied dividends, the average 2.3% stock price response to the announcement becomes negligible.

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M&A / Private Equity (sponsored by ARDIAN) (12/21/2017 at 16:30)

Presiding : Nihat Aktas (WHU Otto Beisheim School of Management)

Facilitating Takeovers and Takeover Premia: The Case of Coordinated Monitoring

Authors : Croci Ettore (Catholic University of the Sacred Heart of Milan); Mazur Mieszko (Catholic University of Lille - IESEG School of Management); Salganik-Shoshan Galla (Ben-Gurion University of the Negev);

We document that coordination among institutional investors affect how firms behave in the takeover market. We use geographic distance between the largest firms' institutional investors as proxy for the ease of communication, cooperation and coordination among institutional investors. Consistent with the view that geographic proximity allows investors to facilitate more deals, firms with geographically close institutional shareholders are more likely to acquire other companies. We also show that M&As carried out firms for which institutional investors are geographically close, tend to generate higher abnormal returns around their announcement. Overall, these findings indicate that coordination among investors not only increases takeover activity, but also it improves its quality. We provide further support by showing that when corporate governance quality of the acquiring firm is low, or when its information cost is high, geographic closeness between main institutional owners plays a more important role.

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Takeover Duration and Negotiation Process

Authors : Calcagno Riccardo (EMLYON Business School); de Bodt Eric (Université de Lille); Demidova Irina (Ecole des sciences de la gestion - Université du Québec à  Montréal);

We study the determinants of the takeover processes duration. Risk averse bidders submit bids to targets. Targets either accept, and the transaction is completed, or negotiate one more period. As time goes on, bidders and targets learn about true synergies thanks to the due diligence process. But rival bidders can show up and compete to acquire targets, a desirable event from targets point of view, but costly for bidders. Our simulations characterize the relation between negotiation duration, pressure of potential competition and the learning process. Our empirical exercise is based on a large sample of merger negotiations identified through the manual examination of SEC filings. We use the simulated method of moments to match the frequency distribution of private negotiation duration in a calibration exercise. Our results show that a 10% ex-ante probability of new bidders entering in the M&A process each month is consistent with the data.

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Weak Credit Covenants

Authors : Ivashina Victoria (Harvard University); Vallee Boris (Harvard Business School - Finance Unit);

Using novel data on 1,240 credit agreements for large corporate loans, we show that while inclusion of negative covenants that restrict new debt issuance, payments, asset sales, affiliate transactions and investments is widespread, clauses that weaken these restrictions are almost as common. We measure the deductions for the core covenants in terms of their potential impact on overall leverage and show that they are large, and concentrated in already highly levered transactions. We analyze the cross-sectional variation in contractual weaknesses introduced through deductions and exclusions to negative covenants and show that such contractual provisions are characteristic of leveraged buyouts.

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Cocktail & Awards (12/21/2017 at 18:00)


  • In 2016, the prize was awarded to:
    • Matthew DARST & Ehraz REFAYET for the paper entitled "Credit Default Swaps in General Equilibrium:
      Spillovers, Credit Spreads, and Endogenous Default".
  • In 2015, the prize was awarded to:
    • Roberto MARFE for the paper entitled "Labor Rigidity and the Dynamics of the Value Premium"
  • In 2014, the prizes were awarded to:
    • Corporate finance: Taylor BEGLEY for the paper entitled "The Real Costs of Corporate Credit Ratings"
    • Financial markets: Shiyang HUANG for the paper entitled "The Effect of Options on Information Acquisition and Asset Pricing"
  • In 2013, the prizes were awarded to:
    • Corporate finance: Clemens OTTO & Paolo VOLPIN for the paper entitled "Marking to Market and Inefficient Investment Décisions"
    • Financial markets: Matthias EFING & Harald HAU for the paper entitled "Structured Debt Ratings: Evidence on Conflicts of Interest"
    • High frequency data / Microstructure: Bart YUESHEN for the paper entitled "Queuing Uncertainty"


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The Paris December 2017 Finance Meeting will be held on December 21, 2017 at the Novotel Paris les Halles hotel in the heart of historical Paris.


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Place Marguerite de Navarre
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