Inventory Management, Dealers' Connections, and Prices in OTC Markets, with Thierry Foucault and Peter Hoffmann. Journal of Finance, Vol. 76 (5), 2021.
We propose a new model of trading in OTC markets. Dealers accumulate inventories by trading with end-investors and trade among each other to reduce their inventory holding costs. Core dealers have access to a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers' aggregate inventory position differs from zero. The resulting price dispersion increases in the size of this position. The model generates new predictions about the joint effects of peripheral dealers' connectedness and dealers' aggregate inventories on transaction prices, both among dealers and between dealers and their clients.
[Published version] [Working Paper version] [Online Appendix] [Codes]
Asset Dissemination Through Dealer Markets, with Gabrielle Demange. Management Science, Vol. 67 (10), 2021.
Many financial assets are disseminated to final investors via chains of over-the-counter transactions between intermediaries (e.g., 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.
[Published version] [Working Paper version] [Internet Appendix]
Optimal Supervisory Architecture and Financial Integration in a Banking Union. Review of Finance, Vol. 24 (1), 2020.
Cross-border banks can be supervised either by a better informed local agency or by a central agency free from local/national biases. The solution chosen affects the banking sector, leading to multiple equilibria: local supervision hinders market integration, making centralized supervision apparently unnecessary, while a superior equilibrium with high integration and central supervision could be achieved.
[Published version] [Internet Appendix] [Working Paper version]
Multinational Banks and Supranational Supervision, with Giacomo Calzolari and Gyongyi Loranth. Review of Financial Studies, Vol. 32 (8), 2019.
A supranational supervisory architecture increases supervisory monitoring of the foreign subsidiaries of multinational banks by solving coordination problems between national supervisors. This decreases the incentives for multinational banks to use subsidiaries rather than branches, and may even make the bank close its foreign unit altogether. The possibility for multinational banks to adjust their legal structure thus generates unintended consequences of supranational supervision.
[Published version] [Internet Appendix] [Working Paper version]
Strategic Selection of Risk Models and Bank Capital Regulation. Management Science, Vol. 65 (6), 2019.
When capital requirements depend on banks' internal models, supervisory audits are necessary to prevent banks from using over-optimistic risk models. If these audits are conducted by national supervisors, they may audit less than is optimal so as to implement capital requirements different from the Basel level. I derive empirical predictions on the use of biased models by banks and discuss several policy responses.
[Published version] [Internet Appendix] [Working Paper version]
Financial Transaction Taxes, Market Composition, and Liquidity, with Peter Hoffmann. Journal of Finance, Vol. 72 (6), 2017.
We use the introduction of a financial transactions tax in France in 2012 to study how such a policy affects market quality by modifying the composition of trading activity. Our results provide support for some of the economic mechanisms highlighted in the theory literature on FTTs.
[Published version] [Internet Appendix] [Working Paper version]
Catching Falling Knives: Speculating on Liquidity Shocks. Management Science, Vol. 63 (8), 2017.
Agents privately informed about market liquidity rather than fundamentals cannot be modeled as traditional informed traders. While they stabilize the market in the short-run, they jam the inference process of uninformed market participants and can slow down long-run price discovery.
[Published version] [Internet Appendix] [Working Paper version]
Where the Risks Lie: A Survey on Systemic Risk, with Sylvain Benoît, Christophe Hurlin and Christophe Pérignon. Review of Finance, Vol. 21 (1) 2017.
A comprehensive survey on systemic risk, linking together and comparing theoretical foundations, empirical measures, and regulatory tools.
[Published version] [Working Paper version]
Trading fees and efficiency in limit order markets, with Thierry Foucault. Review of Financial Studies, Vol. 25 (11), 2012.
Trading fees on limit order markets matter: while asymmetric make/take fees can make spreads look artificially tight, the total level has an impact on the liquidity suppliers' market power, so that higher fees can counter-intuitively increase trading volume.
[Published version] [Internet Appendix] [Working Paper version]
Measuring Regulatory Complexity, with Co-Pierre Georg. R&R at the Journal of Financial Economics.
We link the notion of regulatory complexity to the notion of algorithmic complexity developed in computer science. We develop new measures of regulatory complexity and apply them to bank capital regulation. We also propose an experimental protocol to to validate our measures.
Financial Restructuring and Resolution of Banks, with Denis Gromb. R&R at the Review of Financial Studies.
Bank resolution frameworks affect the incentives of shareholders to restructure their debt by negotiating with creditors. More emphasis on bailing-in the creditors of a distressed bank makes the bank's debt more information sensitive. This effect worsens informational frictions, which can lead to longer delays in the bargaining game between the bank and its creditors, and to a lower probability that the bank is restructured.
A non-exhaustive list of tributes to Denis: [HEC Finance Department], [Denis Gromb Memorial Day at HEC Paris], [FIRS], [FMG].
Algorithmic Pricing and Liquidity in Securities Markets, with Thierry Foucault and Stefano Lovo. R&R at the Review of Financial Studies.
Simple machine learning algorithms learn how to play in Glosten and Milgrom's market-making model. Their behavior is significantly affected by the amount of adverse selection in the market. This suggests ways to spot the "footprints" of machine learning algorithms in trading data.
The Economics of Research Reproducibility, with Christophe Hurlin and Christophe Pérignon.
Empirical evidence documents a relatively low level of research reproducibility in economics. In this paper, we investigate why this is the case and what can be done to move out of this low-reproducibility equilibrium. We study the supply and demand for research reproducibility, provide empirical evidence on authors' preferences for reproducibility, and estimate the cost of verifying reproducibility. We theoretically show that competition between journals to attract authors leads to a suboptimally low level of reproducibility. Leading journals with sufficient market power can set higher reproducibility standards, which is consistent with recent changes in data availability policies.
Working with Machines, with Junli Zhao.
Economics of the Subsidiarity Principle, with Armin Steinbach.
Dynamics of the Securities Lending Market, with Markus Bak-Hansen, Thierry Foucault, and Pekka Honkanen.