MERLI Maxime

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John Hull's book is essentially devoted to the regulation and management of risks by financial institutions. This book, adapted to European specificities by Christophe Godlewski and Maxime Merli, offers a complete vision of the tools implemented in these institutions to measure and manage risks. Integrating the sovereign debt crisis, this third edition has been considerably revised and enriched, and all its chapters have been updated. In particular, it benefits from: a new chapter on Basel 2.5, Basel III (international agreements on banking regulation) and the Dodd-Frank Act (regulation of the financial markets and protection of American consumers, under the impetus of President Obama), important in-depth studies on: the calculation of the amount of capital, counterparty risk, the method of calculating credit VaR, centralized offsets, the challenges of collateral, the use of Vasicek-type models, and the implementation of the AMA approach to operational risk. The rigor and pedagogy of John Hull, whose manuals such as Options, Futures and Other Derivative Assets are indispensable references, are no longer in need of demonstration. Once again, the link between theory and practice is omnipresent, thanks in particular to the many examples, illustrations and practical cases. The technical points and mathematical demonstrations are deliberately reduced to the essential. Finally, each chapter is concluded by a large number of questions and problems corrected at the end of the book, i.e. over 200 exercises. With this third edition, Risk Management and Financial Institutions becomes the reference book for students and banking professionals who want to have a synthetic and complete vision of this subject.

In this article, we propose an original analysis of advice given by financial analysts prior to WW1. Our article focuses on the writings of A. Neymarck, one of the most popular French analysts in the early 20th Century. The creation of portfolios from a new database composed of the monthly returns of all the security types listed on the official Paris Stock Exchange from 1903 to 1912 has provided results demonstrating that Neymarck correctly identified the risk in a number of sectors. The performances of these portfolios, which were built according to Neymarck’s guidelines, confirm Neymarck’s ranking in terms of both risk and return: the richer the investor, the riskier and the more profitable his portfolio was seen to be. Finally, the Modern Portfolio Theory enables us to pinpoint the few imperfections in Neymarck’s advice, which globally appears to be driven by reliable financial analysis.

We study the behavior of individual investors in the financial markets by combining MiFID questionnaire responses and bank data from over 98,000 customers of a major European bank. First, we study participation in equity markets. We show that customers' risk tolerance and self-assessed loss attitudes are strong predictors of equity investment while controlling for classical determinants. Then, within the framework of mental accounting, we create a typology of mental goals and show that clients' financial decisions are consistent with their mental goals. Finally, we analyze the behavior of investors who directly hold at least one foreign stock. We show that they hold more diversified stock portfolios than domestic investors. These sophisticated investors are more risk-tolerant, less loss-sensitive and more financially literate but are subject to home bias.

This thesis is composed of four chapters dedicated to the study of the Paris Stock Exchange and French investments between 1874 and 1914. It is based on a cliometric approach: the historical facts are analyzed by mobilizing the statistical and theoretical tools of financial economics.The first chapter participates in the rewriting of the history of financial economics. It demonstrates that French financial advice before 1914 was a proto-science, the premise of Modern Portfolio Theory (MPT) developed in the 1960s. He justifies the use, in the second chapter, of MPT to evaluate the rationality of international portfolio choices. We demonstrate the rationality of massive capital flows abroad and in particular to European countries. We find the rationality of the European preference of French investors and the bias of British investments in favor of the "new nations". The third chapter presents an unpublished database of monthly returns for all types of securities listed on the Paris Stock Exchange between 1874 and 1914. This is a reliable indicator of the performance of the Paris Stock Exchange and of public information in France over this period. In the fourth chapter, we make the first evaluation of the advice of the French financial analyst A. Neymarck (1913), on the eve of 1914. We show that the risk of each asset class is correctly perceived, the existence of a hierarchy of proposed portfolios according to the wealth of the investor and highlight the imperfections of this advice.

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This study uses a database of over 6million trades from a large European brokerage house to investigate the stock repurchase behavior of individual investors from 1999 to 2006. Running survival analysis techniques, we show at an individual level that the duration between a sale and a repurchase is shorter when the investor has had a positive experience with the stock or when the stock has lost value since being sold. More sophisticated investors are significantly less prone to this behavior. Our findings emphasize the importance of regret in financial decisions. Public and private information, tax considerations and contrarian strategy do not drive repurchase behavior.

This thesis consists of three separate chapters. In the first chapter, I test the hypothesis that the display format of financial information affects the decisions of individual investors. I show that a more efficient display allows individuals to better manage their limit orders by minimizing the adverse selection risk incurred by using these orders. This suggests that individual investors have bounded rationality. In the second chapter, I test whether liquidity-providing trading strategies can generate profits, after transaction costs, for the active traders who implement them. I show that only individuals in the highest performance decile can persistently beat the market using highly contrarian strategies that require the massive use of limit orders. Limit-to-arbitrage seems to explain this phenomenon. In the third chapter, I study individuals' strategies around earnings announcements. I show that round-trips that are implemented one day before an announcement generate on average higher profits and are shorter in duration than those implemented in normal times. Individuals close their winning positions on the day of the announcement, which may slow down the price adjustment following the announcement.

This thesis is composed of four chapters that contribute to a better understanding of individual investors' trading behavior and performance. In the first chapter, we conduct the first study devoted to the portfolio performance of French individual investors. Using a database of more than 8 million transactions by 56,723 investors, we show that French investors have negative risk-adjusted returns on their portfolios and make penalizing investment choices. In the second chapter, we show that individual aspiration is a key determinant to explain portfolio performance heterogeneity. We define aspiration according to the Behavioral Portfolio Theory. Investors with high aspirations hold riskier portfolios, trade more frequently and diversify less than investors with low aspirations. Controlling for trading frequency, diversification, and usual risk factors, we show that high aspirational investors underperform low aspirational investors.In the third chapter we analyze the performance of individual investors via measures tailored to their preferences. When their performance is evaluated with these measures rather than with the Sharpe ratio, a larger share of investors beat the market index. This observation sheds new light on the management capabilities of individual investors. However, we show that the performance improvement is related to portfolio skewness rather than to relevant stock selection.In the final chapter, we explore the redemption behavior of individual investors. We show that investors prefer to repurchase (1) stocks for which they have realized a capital gain at the time of sale (2) stocks whose price has decreased since the sale. Our tests rule out rational explanations and confirm that regret avoidance is at the root of such behavior. Based on a survival analysis, we show that sophisticated investors are less prone to these preferences.

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The geographical distributions of French and British foreign investment portfolios differ markedly before World War I. Did French portfolios favor European investments just as British portfolios favored “New World” assets? Should economic rationality have encouraged investors to invest widely in the “New World” rather than in Europe? Combining Modern Portfolio Theory and a new data set comprising assets listed on the Paris and London Stock Exchanges, we show that investing in the “New World” did not yield higher returns than investing in Europe. The “European preference” of the Paris Bourse and, by extension, of French investors was not inefficient.

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Over the past half-century, financial theory has been built on the assumption that investors are perfectly rational. However, in recent years, research in behavioral finance has tended to show that investor behavior is not always consistent with this hypothesis. Numerous "biases" or "errors" of behavior have been highlighted by researchers. This thesis sheds original light on two "biases" or "errors" of behavior to which investors are subject: the disposition effect and overconfidence. The disposition effect is the tendency of investors to sell winning stocks more easily than losing stocks. A direct consequence of overconfidence is excessive trading in the markets. Our analysis is based on a database provided by the French online broker Cortal Consors. We track 9,619,898 positions taken by 92,603 individual investors in the French market over an eight-year period between 1999 and 2006. The results show that the investors studied are indeed subject to disposition bias and overconfidence.

Default risk is the most important risk faced by a bond investor since it reflects the possibility of non-payment of a coupon or coupon and principal by the issuer. In practice, two + tools are generally used to measure it. The rating, a qualitative tool, is attributed to the issuer by agencies specialized in this activity. The yield spread, a quantitative tool, is the result of the market quotation of the loan. This research work focuses on the construction and validation of models integrating this potential issuer default using market data. Several original models are proposed in an actuarial framework or in a dynamic evolution of zero-coupon prices. In an actuarial approach, we propose an original two-parameter model allowing the construction of the term structure of default probabilities from the market prices of the short and long term debt of each issuer. In this theoretical framework, we also show a positive link between the profitability spread and the general level of interest rates. This result goes against many theoretical works (e.g. Leland and Toft (1996)). We also present an extension of the dynamic zero-coupon price evolution model of Jarrow and Turnbull (1995). In particular, the model proposed in this work allows us to consider various forms of default within a unified theoretical framework. From an empirical point of view, we propose original alternative measures to the actuarial spread (a commonly accepted measure), based on the deformation of the term structure of zero-coupon rates. Finally, we test these measures on various samples of French bonds. In particular, we find a weak link between the issuer's rating and the level of remuneration demanded by investors. In other words, four rating classes seem sufficient to describe the French market. The impact of rating changes on bond market prices is also studied and the various tests highlight an anticipation of this change by investors.