LEGROS Florence

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This thesis studies the long-term evolution and the main determinants of equity market comovements. These issues are important for investors and regulators, as interdependencies between stock markets (i) are a key element of the benefits of international portfolio diversification and (ii) may affect financial stability by facilitating the propagation of shocks across countries. Our contributions to the literature are both methodological and empirical. We develop indicators that shed new light on the evolution of the benefits of international diversification. Then, we study the long-term impact of globalization on the increase of comovements between stock markets over the last four decades. Finally, we examine the interconnections of insurance companies that have become a central feature of macroprudential supervision of the sector.

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This chapter deals with the French PAYGO mandatory occupational pension scheme for the private sector workers (AGIRC-ARRCO), one of the world’s oldest pension point systems. In a first section, we trace the history of the setup of this system which relies on a particular mode of governance (joint administration by trade union and employers’ respective representatives). The second section is dedicated to the analysis of the tax distortion properties of the calculation rule of this defined contribution supplementary pension system. We also discuss the similarities with the German and Swedish pension systems. Weakened by the 2008 economic crisis, this jointly administered French supplementary pension scheme had to undergo a severe adjustment in “emergency mode” (Turner, Social security financing: Automatic adjustments to restore solvency, Washington, DC: AARP Public Policy Institute, 2009), in October 2015. We detail this agreement and show how it restores medium term balance and enacts the principles of sustainable governance.

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Despite numerous reforms and the introduction of automatic or semi-automatic adjustment mechanisms, pension system future solvency is not guaranteed. Then, setting up an automatic balancing mechanism can offer several advantages. This article proposes to detail the specific properties of various adjustment rules prevailing in different countries to see to what extent their understanding may be helpful to determine public choices ensuring sustainable retirement systems. Several of such adjustment rules are possible. Three rules will get our attention. The American case is radical. The prohibition to resort to public debt, the so-called “fiscal cliff”, forces the balance by a drastic reduction of pensions whenever the reserve fund is exhausted. The underlying idea is that this socially unacceptable perspective will force the parliament to take measures to restore solvency. The Swedish approach relies on an adjustment through the general level of pensions to guarantee a notional asset/liability ratio. A huge reserve fund smooths the shock associated with the aging of the population. The Canadian approach is based on an “inadequate rate provision” which increases the contribution rate and a pension freeze as long as the federal and provincial finance ministers do not reach an agreement.

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This volume gathers selected peer-reviewed papers presented at the international conference ”MAF 2016 – Mathematical and Statistical Methods for Actuarial Sciences and Finance”, held in Paris (France) at the Université Paris-Dauphine from March 30 to April 1, 2016. The contributions highlight new ideas on mathematical and statistical methods in actuarial sciences and finance. The cooperation between mathematicians and statisticians working in insurance and finance is a very fruitful field, one that yields unique theoretical models and practical applications, as well as new insights in the discussion of problems of national and international interest. This volume is addressed to academicians, researchers, Ph.D. students and professionals.

The first chapter examines the long-term statistical characteristics of financial returns in France and the United States. The properties of the different assets show that, in the long run, equities provide a significantly lower risk. Moreover, the mean-reversion properties of equities justify their use in a life-cycle strategy as a "default option" for retirement savings plans. Chapter Two provides an explanation for the debate over the efficient market hypothesis. The cause of the debate is often attributed to small sample sizes and the low power of dedicated statistical tests. In order to circumvent this problem, we use the approach developed by Campbell and Viceira (2005) who use a VAR method to highlight the existence of mean reversion in risky asset prices.The third chapter evaluates the speed of convergence of stock prices. A classic way to characterize the speed of mean reversion is the "half-life". By comparing stock market indexes of four developed countries (the United States, the United Kingdom, France, and Japan) over the period 1950-2014, we establish a significant speed of convergence, with a half-life between 4.0 and 5.8 years.The final chapter presents the results of a model designed to study the interactions between demographics and pension plans. In order to study the risks inherent in using capital income to finance pensions, we use a "Trending OR process" instead of a classical MBG to model returns. For a risk-averse investor, the market could compete with pay-as-you-go schemes.

Abstract Purpose – The authors aim to demonstrate the importance of taking into account “mean reversion” in asset prices and show that this type of modeling leads to a high share of equities in pension funds’ asset allocations. Design/methodology/approach – First, the authors will study the long-run statistical characteristics of selected financial assets during the 1895-2011 period. Such an analysis corroborates the fact that, for long holding periods, equities exhibit lower risk than other asset classes. Moreover, they will provide empirical evidence that stock market returns are negatively skewed in the short term and show that this negative skewness vanishes over longer time horizons. Both these characteristics favor the use of a semi-parametric methodology. Findings – This empirical study led to two major findings. First, the authors noticed that the distribution of stock returns is negatively skewed over short time horizons. Second, they observed that the fat-tailed shape of the returns distribution disappears for time periods longer than five years. Finally, they demonstrated that stock returns exhibit “mean-reversion”. Consequently, the optimization program should not only take into account the non-Gaussian nature of returns in the short run but also incorporate the speed at which volatility “mean reverts” to its long-run mean. Originality/value – To simulate portfolio allocation, the authors used a Cornish–Fisher Value-at-Risk criterion with the advantage of providing an allocation that is independent of the saver’s preferences parameters. A backtesting analysis including a calculation of replacement rates shows a clear dominance of the “non-Gaussian” strategy because the retirement outcomes under such a strategy would be positively affected.

We build a "smooth" automatic balance mechanism (S–ABM) which would result from an optimal tradeoff between increasing the receipts and reducing the pension expenditures. The S-ABM obtains from minimizing an intertemporal discounted quadratic loss function under an intertemporal budget balance constraint. The main advantage of our model of "optimal" adjustment is its ability to analyse various configurations in terms of automatic balance mechanisms (ABM) by controlling the adjustment pace. This S-ABM permits to identify two limit cases: the “flat Swedish-type ABM” and the “fiscal-cliff US- type ABM”. These cases are obtained by assuming very high adjustment costs on revenue (implying only pension benefit adjustment) and by choosing particular sequences of public discount rates. We then apply this ABM to the case of the United States Social Security to evaluate the adjustments necessary to ensure financial solvency. These assessments are made under various assumptions about forecast time horizon, public discount factor and weighting of social costs associated with increased receipts or lower expenditures.

Purpose We will demonstrate the importance of taking into account \mean reversion in asset prices and will show that this type of modeling leads to a high share of equities in pension funds' asset allocations. Design/methodology/approach Firstly, we will study the long-run statistical characteristics of selected financial assets during the 1895-2011 period. Such an analysis corroborates the fact that, for long holding periods, equities exhibit lower risk than other asset classes. Moreover, we will provide empirical evidence that stock market returns are negatively skewed in the short term, and show that this negative skewness vanishes over longer time horizons. Both these characteristics favor the use of a semi-parametric methodology. Findings Our empirical study led us to two major findings. Firstly, we noticed that the distribution of stock returns is negatively skewed over short time horizons. Secondly, we observed that the fat-tailed shape of the returns distribution disappears for time periods longer than five years. Finally, we demonstrated that stock returns exhibit \mean-reversion\. Consequently the optimization program should not only take into account the non-Gaussian nature of returns in the short run, but also incorporate the speed at which volatility \mean reverts to its long-run mean. Originality/value To simulate portfolio allocation, we used a CF VaR criterion with the advantage of providing an allocation that is independent of the saver’s preferences parameters. A backtesting analysis including a calculation of replacement rates shows a clear dominance of the “non-Gaussian” strategy, as the retirement outcomes under such a strategy would be positively affected.

The articles in this thesis analyze the financial market failures traditionally identified by economists (associated with externalities, information asymmetries and market incompleteness) and the responses of public authorities. A central observation is that public interventions are almost never the result of a cold analysis of these market failures, but are decided upon in an emergency to respond to the most obvious dysfunctions observed during a crisis. This pragmatic and a-theoretical approach leads to poorly calibrated interventions. In particular, these articles attack the lender-of-last-resort policy that encourages short-term indebtedness of financial institutions and feeds systemic risk. They also highlight the risks of some of the reforms introduced in the wake of the subprime crisis. Governments should focus on providing the public goods clearly identified by economic analysis (control of "agents" and information), and not multiply hazardous interventions that sometimes create more market imperfections than they claim to solve.

Despite significant changes in pension systems, including the shift from pay-as-you-go to funded systems, several problems remain. The demographic structure is one of the main factors of systemic risk, threatening the equilibrium of pension funds and favoring instability and poor economic performance. In this thesis, we mobilize empirical and theoretical analysis to provide an investment strategy response to this problem. We first synthesize the existing literature and highlight the importance of intergenerational risk sharing and the differences between individual and collective investments. Using a nested generation model, we study the effects of demographic structure on asset prices. We identify a positive correlation between the inverse of the dependency ratio and asset prices (asset meltdown). Then, using simulated pension contracts, we study the effects of increasing life expectancy and decreasing fertility rates on intergenerational risk sharing. Although the group defined contribution (DC) pension plan better amortizes demographic risks, similar performance can be achieved through individual funding. Moreover, individual funding outperforms the group plan when regulations are highly restrictive. Our results suggest the need for a continuous reform process based on investment strategies. Thus, the effectiveness of fund selection methods such as the false positive rate method seems to be confirmed.

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Less than three years after the 2011 pension reform, the government made new adjustments in early 2014, leading to a reform described by its promoters as "sustainable and fair". The following article examines the assumptions underlying the return to equilibrium foreseen in the 2014 reform. it also analyses the sensitivity of the results to the macroeconomic assumptions used. The second part examines in great detail the balancing role of the deterioration in the purchasing power of pensioners and concludes with a worrying outlook for that purchasing power.

In this paper, we apply two types of automatic balance mechanism (ABM) to the French first pillar pension system for private sector employees (CNAV). One is based on a tax gap ratio (TGR-ABM) and the other is the smooth ABM (S-ABM) developed by Gannon, Legros and Touzé (2013). Two long-run forecast scenarios over the period 2014-2063 are analysed. The first is optimistic (“benchmark”) and assumes a 4.

In this paper, we apply two types of automatic balance mechanism (ABM) to the French first pillar pension system for private sector employees (CNAV). One is based on a tax gap ratio (TGR-ABM) and the other is the smooth ABM (S-ABM) developed by Gannon, Legros and Touzé (2013). Two long-run forecast scenarios over the period 2014-2063 are analysed. The first is optimistic (“benchmark”) and assumes a 4.

After a review of the theoretical and empirical literature on the causes and observations of mimetic behavior by institutional investors, we focus on the threat it poses to financial stability. Our work then provides a new analysis of mimicry: that of a central bank. Based on a monograph from the ECB's perspective, we consider a monetary policy response to mimetic risk. Indeed, recent work and the experience of the financial crisis suggest that a preventive policy is now not only desirable but also more operational than in the past. We then analyze the mechanisms by which the two essential tools of modern monetary policy, policy rates and communication, could counter mimeticism and influence investor sentiment. Finally, after examining the ECB's communication on financial stability through its two main channels, we model a case of conflict of objectives between monetary stability and financial stability illustrating the limits of transparency for the central bank.

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The present research proposes a theoretical and empirical analysis of the mechanisms of employee savings, with a particular focus on the influence of employee savings on the accumulation choices of employees who benefit from them. The first chapter provides a generic definition of the concept of employee savings and a typology of this savings instrument. It provides an exhaustive review of the literature on the role of employee shareholders in their firms and on the effectiveness of tax incentives to save in firms. The second chapter conducts a theoretical analysis of the portfolio allocation choices of employee shareholders in their firms. Savings incentives do not always have the expected effects and sometimes carry very high risks for the employees concerned. Chapter three presents an econometric analysis of the specific investment determinants of employee shareholders in a large French firm. Chapter four deals with the crucial role played by the terms of the employee savings offer, through a second econometric study.

Over the last three decades, the career paths of private sector employees have gradually moved away from the paragon of the continuous career that was previously used for the financial projections of the old-age insurance system. This thesis seeks to identify a "new model" by proceeding in three stages: I- isolating typical career profiles through a classification analysis that preserves the longitudinal nature of the career paths, II- linking a typology of careers to a typology of retirement behaviors, III- developing the core of a financial projection model structured around representative profiles. In a transverse way, the thesis addresses the evolution of the links between the labor market and the public pension system. By aiming for financial equilibrium, the latest pension reforms have shifted the trade-off between social risk coverage and financial constraints. In a context where the labour market - and careers - are changing, they thus reflect a modification of the place given to the values of intra- and intergenerational equity.

We present a quantitative analysis of the impact of differences in the aging process and of pension reforms on capital flows in the monetary union. To this end, we develop a general equilibrium model applied to the case of three Eurozone countries: Germany, France and the Netherlands. We show that the dynamics of capital accumulation and the financial sustainability of pension systems differ according to the assumption made about the openness of the economy. Two main conclusions emerge from the examination of the different forecasting scenarios considered. The first concerns the importance of the assumptions made regarding activity behavior for the question of the financial solvency of pension systems. The second is the impossibility of borrowing alone in the long term.

After having questioned the specificities of the "commodity" of labor, and of the associated market, we conclude that the particular contracts that are concluded there rest entirely on the nature of these specificities. But these specificities do not appear explicitly in the labor contract. This is because they are entirely in the hands of the contracting parties themselves: they are malleable by them, they can disguise them, hide them... . In terms of insurers, they are a source of moral hazard. The labor market has, in fact, imagined a certain number of implicit insurances (implicit contracts, in the etymological sense) which allow each of the contractors to cover themselves against this moral risk. However, the counterpart of these hedges is a series of sub-optimalities: unemployment, segmentation of the labor market, etc. . We show, using a panel of sectors, that this thesis is true in the French case.