COLLIARD Jean Edouard

The thesis contains three essays. In the first essay, I investigate whether financial experts benefit from more machine-readable data in producing information in asset management. Exploiting an exogenous regulatory shock that makes firms' filings more machine-readable, I find that institutions with more financial experts have greater performance improvement than institutions with fewer financial experts, suggesting that financial experts benefit from more machine-readable data. This result allows for an assessment of the likelihood that algorithms will replace highly trained financial practitioners. In the second essay, I study the rationale and implications of the recent MiFID II regulation in Europe, which has made delegated asset managers' spending on sell-side analyst research more transparent to their clients. We show that transparency decreases the use of sell-side research but stimulates more buy-side research activity, which is consistent with the empirical results. Our model has additional predictions on managerial performance, liquidity, and social welfare. In the third essay, I study brokers in the private placement markets, who intermediate about 20% of the capital raised by non-financial firms in this market. I find that projects intermediated by brokers with better reputations are more likely to be fully funded. Contrary to existing theories about underwriters, projects sold through brokers are on average less likely to be fully funded and most issuers prefer direct sales. A model with both search frictions and asymmetric information suggests that these non-regularities may be due to the fact that the certification role of brokers is limited by competition between intermediated and direct sales. The model also explains some of the non-intuitive patterns of commission fees in the data. These results contribute to a better understanding of private equity markets and intermediaries in other financial markets.

In over-the-counter markets for assets, such as bonds and securitizations, large volumes can be split into smaller pieces and gradually sold to several final investors with the intermediation of multiple dealers. This paper proposes a model to study this process, called asset dissemination. A dealer buys several units of an asset from a customer and then sells some units to the dealer’s customers and to a second dealer, who sells to the second dealer’s customers and to a third dealer, and so on. The extent of dissemination is measured by the number of dealers involved and the total customer demand served. We show that asymmetric information on customer demand hinders both dimensions of dissemination. We also study how the quantity to disseminate and the dealers’ funding costs impact dissemination and the prices and quantities in interdealer transactions. This paper was accepted by Gustavo Manso, finance.

Despite a heated debate on the perceived increasing complexity of financial regulation, there is no available measure of regulatory complexity other than the mere length of regulatory documents. To fill this gap, we propose to apply simple measures from the computer science literature by treating regulation like an algorithm - a fixed set of rules that determine how an input (e.g., a bank balance sheet) leads to an output (a regulatory decision). We apply our measures to the regulation of a bank in a theoretical model, to an algorithm computing capital requirements based on Basel I, and to actual regulatory texts. Our measures capture dimensions of complexity beyond the mere length of a regulation. In particular, shorter regulations are not necessarily less complex, as they can also use more "high-level" language and concepts. Finally, we propose an experimental protocol to validate measures of regulatory complexity.

The last decade has been marked by several new regulations in response to the financial crisis of 2007-2008. In order to contribute to the debate, this thesis consists of three chapters that address different aspects of the regulation of the stock and derivatives markets. The first chapter provides a clear assessment of the impact of increasing the KOSPI 200 option multiplier on investor participation and market efficiency for the period 2011-2013. We use two measures of market efficiency: the participation share of noise traders and asymmetric volatility. Along the same lines, Chapter 2 examines the impact of the capital gains tax (CGT) on the quality and efficiency of the KOSPI 200 options market. We use various measures of market liquidity: trading volume, trading value, and the bid-ask spread over the period August 2015 to December 2016. The third chapter assesses the impact of the French financial transaction tax (STT) on market liquidity and volatility. Unlike previous studies, the format of the French STT allows us to test its effect over a longer period 2012-2019.

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How do resolution frameworks affect the private restructuring of distressed banks? We model a distressed bank’s shareholders and creditors negotiating a restructuring given asymmetric information about asset quality and externalities onto the government. This yields negotiation delays used to signal asset quality. We find that strict bail-in rules increase delays by worsening informational frictions and reducing bargaining surplus. We characterize optimal bail-in rules for the government. We then consider the government’s possible involvement in negotiations. We find this can lead to shorter or longer delays. Notably, the government may gin from committing not to partake in negotiations.

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Many financial assets are disseminated to final investors via chains of over-the-counter transactions between dealers. We model such an intermediation process as a game with successive take-it-or-leave-it offers: A dealer buys several units of an asset, and can sell some of them to his customers or to a second dealer, who can sell to his customers or to a third dealer, and so on. In equilibrium, the asset is disseminated through a sequence of OTC transactions between dealers. The number of dealers involved, the inventories they keep, and the prices and quantities they offer are endogenously determined. Our model gives a framework to analyze how assets are disseminated through OTC markets, how liquidity evolves along a sequence of transactions, and varies across different sequences of different lengths.

We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers’ connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers’ clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.

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Both in the United States and in the Euro Area, bank supervision is the joint responsibility of local and central supervisors. I study a model in which local supervisors do not internalize as many externalities as a central supervisor. Local supervisors are more lenient, but banks also have weaker incentives to hide information from them. These two forces can make a joint supervisory architecture optimal, with more weight put on centralized supervision when cross-border externalities are larger. Conversely, more centralized supervision endogenously encourages banks to integrate more cross-border. Due to this complementarity, the economy can be trapped in an equilibrium with both too little central supervision and too little financial integration, when a superior equilibrium would be achievable.

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We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.

We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.

We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.

Many financial assets are disseminated to final investors via chains of over-the-counter transactions between intermediaries (investors or dealers). We build a model where an agent buying some units of the asset can offer to sell part of them to an OTC partner. Intermediation chains are endogenously formed and impact the asset's market liquidity, its issuance, and who ultimately holds the asset. An increase in the intermediaries' funding liquidity (e.g. a lower haircut on the asset) makes intermediation less necessary but also makes it cheaper to issue the asset, increasing the total volume to be distributed and the number of intermediaries and agents holding the asset. We derive implications on liquidity in OTC markets, the dissemination of ''toxic" assets and the collateral policy of central banks and CCPs.

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I study the optimal architecture of bank supervision in a federal system. A central supervisor gets information about a bank, for instance through stress-testing, and decides whether an on-site examination should be performed by a local or a central authority. Local supervisors have lower inspection costs, but do not internalize cross-border externalities. The optimal degree of centralization depends on the severity of these externalities, the opacity of the supervised bank and the specificity of its assets. The market reacts to the chosen architecture, so that a centralized supervision endogenously increases market integration and cross-border externalities, strengthening the need for centralized supervision. The economy can be trapped in an equilibrium with low supervision and integration, while a forward-looking design of the supervisory architecture would coordinate economic agents on a superior equilibrium.

This thesis includes three theoretical papers whose aim is to take into account institutional or regulatory frictions to explain certain market failures, from temporary episodes of illiquidity to financial crises. This research program, associated with what is sometimes called institutional finance, is developed here in three applications: bank regulation, information aggregation in financial markets, and the dynamics of limit order markets. The common theme of these three articles is to show how financial markets are affected by the interaction of frictions and strategic behavior and, eventually, to study possible remedies.