ROCHET jean Charles

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We show that option prices can always be obtained as the values of simple optimization problems. This easy remark has two consuequences : sensitivity analysis is simplified (by applying the envelope theorem) and numerical procedures are improved. We give several examples of applications, in particular to options on portfolios and compound options (or corporate bonds).

Salop's (1979) model of monopolistic competition is widely used in industrial economics. It can also be very useful in banking economics. After recalling some recent applications of this model to the formalization of competition between banking networks (Chiappori et ali (1992), Grimaud-Rochet (1993a), Matutes-Padilla (1991)), we show that it can also provide simple and solid specifications for the monetary and financial part of a macroeconomic model in which the markets for deposits, credits and financial securities are described explicitly.

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"Using a pricing formula for options on coupon bonds (Jamshidian (1989), El Karoui-Rochet (1990)) we are able to compute the actual pricing deposit for a commercial bank. Our formula takes into account the maturity structure of the bank's balances sheet, as well market parameters such as the term structure of interest rates and the volatilities of zero coupon bonds. The relation with asset liability management methods is explored.".

La page de titre porte en plus : "This paper has evolved from a manuscript which was circulated under the title : 'Insider trading and market manipulations : existence und uniqueness of equilibrium'".

"The financial industry has made speculation accessible to all, counting on the "wisdom of crowds" to regulate the markets. But this wisdom is not always forthcoming: from the tulip mania in Holland in 1637 to the subprime crisis of 2008, there are many examples of speculative bubbles bursting! The fascinating history of speculation, recounted here, is not short of surprises. Among them, the most paradoxical is that financial speculation can be both beneficial and harmful. In small doses, it improves risk sharing in the economy and contributes to the financing of innovations. In large doses, it causes financial crises that are very costly for society. Just as we limit speed on the roads to avoid accidents, we must limit financial speculation, and to do this we must tax it. Following the subprime crisis, which caused a global recession, the European Commission had planned to introduce a tax on certain financial transactions deemed speculative. But it is very difficult to distinguish between speculative and non-speculative transactions. The authors propose here a solution applicable to all transactions. It would have a very small impact on daily life, but would hit the most speculative transactions hard. The remedy to the excesses of financial speculation exists. It remains to apply it urgently".

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The crisis of 2007-2008 can be interpreted as the failure of market discipline. External bailouts and unconventional monetary policies are signs of such failure. After the crisis, banking regulation has therefore undergone major changes. However, there is still a strong emphasis on market discipline. The purpose of this thesis is to study how market discipline has been reactivated in the recent period. The emphasis on transparency in financial reporting and the issue of internal bailouts are the two main avenues for the reactivation of market discipline. The first part of this thesis is thus devoted to an analysis of the relationship between financial disclosure, transparency and financial stability. In particular, we show that the relationship between these three terms is ambiguous, so that it is not possible to promote market discipline through disclosure requirements alone. In the second part of this thesis, we focus on the impact on bank behavior of the way financial information is produced, i.e. the impact of accounting standards. The third part of this thesis studies how market discipline could, or could not, be effectively implemented via regulatory requirements in terms of contingent convertible bonds (co-bonds). We show that the desire to reactivate market discipline through complex financial instruments such as CCOs is a dangerous oversight of history, as it was the complexity of finance that was at the origin of the crisis of the late 2000s.

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" Continuous-Time Models in Corporate Finance synthesizes four decades of research to show how stochastic calculus can be used in corporate finance. Combining mathematical rigor with economic intuition, Santiago Moreno-Bromberg and Jean-Charles Rochet analyze corporate decisions such as dividend distribution, the issuance of securities, and capital structure and default. They pay particular attention to financial intermediaries, including banks and insurance companies. The authors begin by recalling the ways that option-pricing techniques can be employed for the pricing of corporate debt and equity. They then present the dynamic model of the trade-off between taxes and bankruptcy costs and derive implications for optimal capital structure. The core chapter introduces the workhorse liquidity-management model--where liquidity and risk management decisions are made in order to minimize the costs of external finance. This model is used to study corporate finance decisions and specific features of banks and insurance companies. The book concludes by presenting the dynamic agency model, where financial frictions stem from the lack of interest alignment between a firm's manager and its financiers. The appendix contains an overview of the main mathematical tools used throughout the book. Requiring some familiarity with stochastic calculus methods, Continuous-Time Models in Corporate Finance will be useful for students, researchers, and professionals who want to develop dynamic models of firms' financial decisions. ".

We show that banker bonuses cannot be understood exclusively as incentive contracts, but also incorporate a significant risk sharing dimension between bank shareholders and bank employees. This contrasts with the conventional view whereby diversified shareholders fully insure risk averse employees. However, financial frictions imply that shareholder value is concave in a bank's cash reserves---making shareholders effectively risk averse. The optimal contract between shareholders and employees then involves some degree of risk sharing. Using extensive payroll data on 1.26 million bank employee years in the Austrian, German, and Swiss banking sectors, we show that the structure of bonus pay within and across banks is compatible with an economically significant risk sharing motive, but difficult to rationalize based on incentive theories of bonus pay only.

An important challenge for many firms is to identify the life transitions of its customers, such as job searching, being pregnant, or purchasing a home. Inferring such transitions, which are generally unobserved to the firm, can offer the firm opportunities to be more relevant to its customers. In this paper, we demonstrate how a social network platform can leverage its longitudinal user data to identify which of its users are likely job seekers. Identifying job seekers is at the heart of the business model of professional social network platforms. Our proposed approach builds on the hidden Markov model (HMM) framework to recover the latent state of job search from noisy signals obtained from social network activity data. Specifically, our modeling approach combines cross-sectional survey responses to a job seeking status question with longitudinal user activity data. Thus, in some time periods, and for some users, we observe the “true” job seeking status. We fuse the observed state information into the HMM likelihood, resulting in a partially HMM. We demonstrate that the proposed model can not only predict which users are likely to be job seeking at any point in time, but also what activities on the platform are associated with job search, and how long the users have been job seeking. Furthermore, we find that targeting job seekers based on our proposed approach can lead to a 42% increase in profits of a targeting campaign relative to the approach that was used at the time of the data collection.

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"In the 1990s, large insurance companies failed in virtually every major market, prompting a fierce and ongoing debate about how to better protect policyholders. Drawing lessons from the failures of four insurance companies, When Insurers Go Bust dramatically advances this debate by arguing that the current approach to insurance regulation should be replaced with mechanisms that replicate the governance of non-financial firms. Rather than immediately addressing the minutiae of supervision, Guillaume Plantin and Jean-Charles Rochet first identify a fundamental economic rationale for supervising the solvency of insurance companies: policyholders are the "bankers" of insurance companies. But because policyholders are too dispersed to effectively monitor insurers, it might be efficient to delegate monitoring to an institution--a prudential authority. Applying recent developments in corporate finance theory and the economic theory of organizations, the authors describe in practical terms how such authorities could be created and given the incentives to behave exactly like bankers behave toward borrowers, as "tough" claimholders".

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Some insurance markets are subject to the well-known phenomenon of "underwriting cycles," consisting of a stress phase in which premiums and profits increase while capacity decreases, followed by a slack phase characterized by falling prices and the rebuilding of capacity. These cycles are difficult to explain in the classical framework of perfect financial markets. They imply a certain predictability of premiums, a correlation between insurers' ROE (return on equity) and claims, which seems to contradict the principle of no arbitrage opportunities. We show that these properties can be perfectly explained in a competitive equilibrium model with financial frictions. Our model extends the classical ruin theory approach to a macroeconomic model where insurance premiums are endogenous and result from the equilibrium between supply and demand of contracts. Companies determine their underwriting and share issuance or redemption policies in order to maximize their market value. Insurance premiums are a deterministic function of the total market capitalization of insurers. Our results explain why insurance premiums are predictable and the correlation betweenROEand claims. In fact, rather than true cycles, premiums and capacities oscillate between two extreme values with reversals when one of these values is reached.Our model illustrates the power of the new generation of macroeconomic models with financial frictions, initiated by Brunnermeier and Sannikov (2014), that can be successfully applied to the analysis of other issues important for insurance and reinsurance markets.

We develop a continuous-time general-equilibrium model to rationalise the dynamics of insurance prices in a competitive insurance market with financial frictions. Insurance companies choose underwriting and financing policies to maximise shareholder value. The equilibrium price dynamics are explicit, which allows simple numerical simulations and generates testable implications. In particular, we find that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realises positive expected profits. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reflection of the aggregate capacity process at the dividend and recapitalisation boundaries.

The aim of this paper is to put forward a new family of risk measures that as the coherent/convex risk measures impose a preference order on random cash flows and can be interpreted as prices. But at the difference of the axiomatic approach of Artzner, Delbaen, Eber and Heath (1999) and the subsequent extensions of this model, our risk measures are associated with the optimal policies of shareholder value maximizing company. We study these optimal policies and the related risk measures that we call shareholder risk measures. We emphasize the fact that due to the specific corporate environment, in particular the limited shareholders’ liability and the possibility to pay out dividends from the cash reserves, these risk measures are not convex. Also, they depend on the specific economic situation of the firm, in particular its current cash level, and thus they are not translation invariant. This paper bridges the gap between two important branches of mathematical finance: risk measures and optimal dividends.

We develop a continuous-time general-equilibrium model to rationalise the dynamics of insurance prices in a competitive insurance market with financial frictions. Insurance companies choose underwriting and financing policies to maximise shareholder value. The equilibrium price dynamics are explicit, which allows simple numerical simulations and generates testable implications. In particular, we find that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realises positive expected profits. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reflection of the aggregate capacity process at the dividend and recapitalisation boundaries.

The capital of a bank is a key element of their soundness and in this thesis we examine its dynamics. Chapter 2 shows that the introduction of a deposit guarantee leads banks to increase their leverage. However, bank responses are heterogeneous: the effect decreases with size, systemicity and initial capitalization so that the largest banks and the initially least capitalized banks do not respond to the adoption of a deposit guarantee. Chapter 3 proposes a new measure to quantify the aggregate capitalization of banking sectors by considering market discipline and the regulatory framework. This index allows us to study how capital shortfalls relative to a bank-specific implied capital target induce aggregate credit fluctuations. The capitalization index is consistent with the Bank Lending Survey and is significantly correlated with future aggregate credit fluctuations, particularly during episodes of undercapitalization. Chapter 4 is not about bank capital but studies the impact of scientific standards and conventions (statistical significance levels) on the behavior of researchers. We identify irregularities in the distribution of t-stats from empirical papers and interpret these as the result of distorted incentives. Our identification allows us to separate publication bias from what we call inflation bias: the fact that researchers are tempted to inflate marginally rejected tests by choosing a "significant" specification.

We develop a measure of maximum sustainable government debt for advanced economies. How much investors are willing to lend to a country's government depends on the country's expected primary surplus, the level and volatility of its rate of growth, and how much debt the government expects to be able to raise in the future for the purpose of servicing the debt it seeks to raise today. We provide a simple formula that computes a country's maximum sustainable debt (MSD) as a function of four easy-to-estimate parameters. We further compute a country's theoretical probability of default (PD) as a function of its debt-to-GDP ratio. We finally calibrate our measures for 23 OECD countries and test the relation between sovereign yield spreads and our theoretical PD at prevailing debt levels. We find it to be strongly statistically significant.

In its first part, this thesis studies the optimal use of derivatives by financial intermediaries in their risk management, with specific attention to the interest rate derivatives market. By modeling the optimal capital structure of a bank, the first chapter shows how the optimal use of derivatives affects some decisions often studied in corporate finance: credit supply, maturity transformation, dividend policy or default probabilities. The second part of the thesis studies the derivatives market as a system in its own right. The second chapter uses a new and unique database of bilateral exposures on CDS contracts to provide a detailed description of the structure of the exposure network. The third chapter focuses on the regulation of derivatives markets. It studies the central clearing of standardized derivatives, and the demand for collateral induced by this reform on a global scale, under a variety of assumptions about market microstructure.

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We present an overview of corporate-finance models where firms are subject to exogenous market frictions. These models, albeit quite simple, yield reasonable predictions regarding financing, pay-outs and default, as well as asset-pricing implications. The price to pay for the said simplicity is the need to use non-standard mathematical techniques, namely Singular and Impulse Stochastic Control. We explore the cases where a firm with fixed expected profitability has access to costly equity issuance as a refinancing possibility, and that where issuance is infinitely costly. We also present a model of bank leverage.

This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where firms that are rendered “risk averse” by financial frictions decide on and commit to their hedging strategies before their product market strategies. We find that commitment to hedging modifies the pricing and production strategies of firms. This strategic effect is channeled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders' “risk aversion”. It has opposite effects depending on the nature of product market competition: commitment to hedging toughens quantity competition while it softens price competition. Finally, not committing to the hedging position can never be an equilibrium outcome: committing is always a best response to non-committing. In the Hotelling model, committing is a dominant strategy for all firms.

In a model where banks play an active role in monitoring borrowers, we analyze the impact of securitization on bankers’ incentives across different macroeconomic scenarios. We show that securitization can be part of the optimal financing scheme for banks, provided banks retain an equity tranche in the sold loans to maintain proper incentives. In economic downturns however securitization should be restricted. The implementation of the optimal solvency scheme is achieved by setting appropriate capital charges through a form of capital insurance, protecting the value of bank capital in downturns, while providing additional liquidity in upturns.

Several recent papers have studied the impact of macroeconomic shocks on the financial policies of firms. However, they only consider the case where these macroeconomic shocks affect the profitability of firms but not the financial markets conditions. We study the polar case where the profitability of firms is stationary, but interest rates and issuance costs are governed by an exogenous Markov chain. We characterize the optimal dividend policy and show that these two macroeconomic factors have opposing effects: all things being equal, firms distribute more dividends when interest rates are high and less when issuing costs are high.

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This thesis is composed of three essays. The first essay deals with the problem of the risk of extreme losses in the banking sector in the context of the agency problem between the shareholders and the top managers of banks. In order to induce banks not to take the risk of extreme losses, it is proposed to apply capital regulation in the form of a mandatory recapitalization policy, the parameters of which are chosen to induce shareholders to remunerate their managers in such a way as to steer them away from extreme loss strategies.The 2nd essay develops the design of bank supervision that aims to eliminate the moral hazard problem within a bank, while ensuring a minimum cost of supervision. Banks, whose financial condition begins to deteriorate, should be subject to random audits. Banks whose asset values have deteriorated significantly should be placed under conservatorship for financial recovery. External auditors can be involved in the supervisory process, but should not completely replace regulators. The third essay studies how the borrowing capacity of the non-financial firm affects its investment policy in the presence of debt issuance costs. It is shown that firms, with medium borrowing capacity, have an incentive to make a larger investment compared to firms with relatively low/high borrowing capacity. This is entirely due to the effect of fixed debt issuance costs, which emerges in the dynamic investment environment.

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Using an exhaustive database on academic publications in mathematics all over the world, we study the patterns of productivity by mathematicians over the period 1984–2006. We uncover some surprising facts, such as the weakness of age related decline in productivity and the relative symmetry of international movements, rejecting the presumption of a massive “brain drain” towards the US. We also analyze the determinants of success by top US departments. In conformity with recent studies in other fields, we find that selection effects are much stronger than local interaction effects: the best departments are most successful in hiring the most promising mathematicians, but not necessarily at stimulating positive externalities among them. Finally we analyze the impact of career choices by mathematicians: mobility almost always pays, but early specialization does not.

This thesis focuses on two major financial innovations that have occurred in the banking sector in recent decades: securitization and credit scoring. More specifically, we propose three theoretical analyses concerning i) the link between the generalization of the use of these tools and the intensification of banking competition. ii) the impact of the use of these tools on the information production function of banks (monitoring and screening). The main results of this work are as follows: 1) The principle of competition does not guarantee the adoption of the most efficient technology when two banks, differentiated according to their credit granting technology, lending relationship or credit scoring, compete twice in both the credit and deposit markets. 2) Banks can use loan assignment to avoid revealing private information that they may have collected on their customers through the customer relationship when the possession of private information is likely to provide a future competitive advantage in the context of intertemporal competition . 3) Securitization can be used strategically to mitigate competition in the credit market. Specifically, securitization can be used by a bank as a means of signaling to its competitors that it will reduce the intensity of its monitoring in order to mitigate the adverse selection problem they face. By doing so, banks manage to increase their overall profit, but at the expense of market efficiency.

This thesis focuses on the study of the long memory of the volatility of stock returns. In the first part, we provide an interpretation of long memory in terms of agents' behavior thanks to a long memory volatility model whose parameters are related to the heterogeneous behaviors of agents that can be rational or boundedly rational. We determine theoretically the conditions necessary to obtain long memory. We then calibrate our model on the basis of daily realized volatility series of US mid and large cap stocks and observe the change in agents' behavior between the period preceding the bursting of the internet bubble and the one following it. The second part is devoted to the consideration of long memory in portfolio management. We start by proposing a model of portfolio choice with stochastic volatility in which the dynamics of log-volatility is characterized by an Ornstein-Uhlenbeck process. We show that increasing the level of uncertainty about future volatility induces a revision of the consumption and investment plan. Then, in a second model, we introduce the long memory thanks to the fractional Brownian motion. This has the consequence of transposing the economic system from a Markovian framework to a non-Markovian framework. We then provide a new resolution method based on the Monte Carlo technique. Then, we show the importance of modeling volatility correctly and warn the portfolio manager against model specification errors.

The objective of this thesis is to show the role of information on the individual risk of loss in the context of the insurance market. In Chapter 1, the theories of asymmetric information allow us to understand that the existence of an equilibrium and an optimum in this market depends on the holder of this information: do companies know the risk of potential policyholders better than the latter (Rothschild and Stiglitz hypothesis), or is it the opposite? Then, the type of information comes into play: does it concern the risk ex ante (before the choice of insurance contract, Adverse Selection theory) or ex post (Moral Hazard theory)? In Chapter 2, I have selected empirical studies (econometric and experimental) that are partly concerned with the market as a whole: they test the actual existence of this information asymmetry. Other studies consider only the "demand" side of the market: they examine the factors involved in the decision to insure. In the light of these theoretical and empirical developments, I then focused my research on the individual choice of an insurance contract (Chapter 3): the notion of information on risk is approached from the more precise angle of the individual perception of risk. By analyzing a database of car drivers insured with a French company, my intention is to determine whether individuals are realistic about their accident liability risk. The econometric models considered lead to the conclusion that the risk is overestimated. Furthermore, comparisons on this realism are presented according to the past liability of the insureds, as well as socio-economic criteria. In conclusion, I propose the possible use of my results in reality.

This thesis deals with three different topics of the asymmetric information aspect, more particularly with adverse selection: study of the "relationship banking" in the framework of competition between banks . introduction of the shares of a firm in the stock market (conflicts of interest between the issuing firm, the financial firm in charge of the sale and the investors) . mechanism of the optimal pricing of a monopoly with budget constrained consumers and proposal of a new approach of this problem of the two-dimensional asymmetric information.

Economies are constantly evolving. New issues, potential research topics in the field of information economics, are therefore constantly arising. In this thesis some of these new topics are treated, using the tools of information theory. After an introductory chapter, the second and third chapters deal with the regulation of multinational firms. Many firms have the capacity to act in different markets at the same time and this substantially modifies the task of the regulator. The new problems posed are analyzed from a positive but also a normative point of view. The fourth chapter analyzes the international trade of innovative goods that are characterized by scientific uncertainty or by the absence of information about their effects on the health of consumers. We show that a new type of trade protectionism may emerge because of scientific uncertainty. We study the role played by producer lobby groups in revealing information about the effects of consuming these goods. Some widely diffused regulatory practices such as product labeling and corporate liability are analyzed. The last chapter examines a contractual situation where two principals interact in a sequential manner with the same agent who possesses hidden information. The information flow between the two contractual relationships is endogenous to the model. We show that the first principal has an incentive to offer a contract that allows information flow to the second principal. We also show that information flow, even if it is done for strategic reasons, can lead to increased welfare for all players because it reduces distortions due to information asymmetry. We apply our results to the economics of electronic commerce.

This thesis involves a study of the optimal mechanism in financial markets. The search for an optimal trading structure in these markets remains a priority for financiers. The proliferation of trading structures in the major financial centers and the free flow of capital around the world make this search a necessity for regulators and all intermediaries in the financial markets. The first chapter analyzes the problems associated with determining optimal trading structures in secondary and primary markets and presents a review of the literature on the subject. In the second chapter, a comparison is made between the two most commonly used structures, auction markets (concentrated order-driven markets) and counterparty markets (fragmented quote-driven markets). The advantages and disadvantages of each structure are determined. This comparison is made according to different measures of market performance. In this way, a hybrid structure can be identified that improves the performance of the original structures. The third chapter applies mechanism design techniques to search for optimal procedures in IPOs. This optimal procedure provides incentives for informed agents to honestly reveal their private information. Of particular interest is the question of whether this optimal procedure could be implemented by a uniform price sale or by a discriminatory price sale. The fourth and last chapter studies the problem of total surplus extraction from the informed in mechanism design theory. It proposes an analysis of this problem when the informed are risk averse and their signals are correlated. We show that Cremer and McLean's (1988) result on total surplus extraction is no longer valid when considering risk averse agents.

The modeling of bond prices is the subject of this thesis. Our results concern two types of problems: (i) the valuation of bonds in the framework of Gaussian general equilibrium models. (ii) the valuation of private sector bonds in the framework of arbitrage pricing models. The four chapters of the paper lead us to: (i) establish new formulas for the valuation of bond products, (ii) analyze simultaneously the issuer's default risk and the interest rate risk, (iii) introduce a new methodology for the valuation of optionals based on a variational approach, (iv) study empirically the price of private sector bonds

The objective of this research is to analyze the properties of optimal insurance demand in the presence of multiple insurable risks. The idea is that the insurance decision concerning a particular risk asset is not separable from the insurance decisions concerning the other risk assets held by the insured. We first investigate the effect of a better diversification of the risky component of wealth on the demand for insurance. We then show that the effect of risk diversification on the demand for insurance is conditioned by the existence of a positive or negative correlation between risk assets and by the greater or lesser homogeneity of these assets. Finally, we analyze the effect of a compulsory insurance constraint or a non-insurance constraint on the demand for freely chosen insurance.

This thesis studies debt contracts between a lender and a borrower, and the optimality of the classical debt contract in various contexts. The use of this contract has the consequence of making financial intermediaries vulnerable to bank panics. We justify the provision of a government guarantee, but we show that a limited liability bank benefiting from this guarantee adopts inefficient investment behavior.

In his theory of monopolistic competition Chamberlin, 1933, postulated that products by firms are not perfectly substitutable. Since Hotelling, 1929, many models of product differentiation with "address" have been developed. We show in this thesis how these models differ and how they can be applied to contexts as different as industrial economics and political science. In the first part, we analyze horizontal integration and show that the existence of product differentiation leads to incentives to merge when the merged firms continue to produce their full set of qualities. The freedom to enter the market appears to be the only disincentive to horizontal integration. In the second part we use location models to understand the behavior of voters and candidates in the run-up to an election. We then show how it is possible to estimate the distribution of the electorate on a left-right axis and to locate the candidates on this same axis.