Julien Idier

How Useful is The Marginal Expected Shortfall for the Measurement of Systemic Exposure: A Practical Assessment

We explore the practical relevance from a supervisors perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis.

Stock exchanges industry consolidation and shock transmission

Stock exchange industry consolidation is at work since many years and has recently accelerated through competition for order flows, agreements and mergers. However, consolidation may not mean that all shocks are transmitted to every place. Therefore, following Forbes and Rigobon (2002) we distinguish convergence (as interdependence) from contagion. Long run interdependence is analyzed through overlapping rolling cointegration and shocks on correlations through multivariate GARCH models. The models are estimated on daily data from January 1 1994 and April 30 2006. We consider the DAX30, the CAC40, the FTSE100 and the NYSE indexes. We identify stock exchanges convergence between European places. However we mainly witness a leading role of the US market even after the euro area creation. Finally, dynamic correlations still exert local shocks while others are effectively transmitted.

Tails of Inflation Forecasts and Tales of Monetary Policy

We introduce a new measure called Inflation-at-Risk (I@R) associated with (left and right) tail inflation risk. We estimate I@R using survey-based density forecasts. We show that it contains information not covered by usual inflation risk indicators which focus on inflation uncertainty and do not distinguish between the risks of low or high future inflation outcomes. Not only the extent but also the asymmetry of inflation risks evolve over time. Moreover, changes in this asymmetry have an impact on future inflation realizations as well as on the current interest rate central banks target.

Determinants of Long-Term Interest Rates in the United States and the Euro Area: A Multivariate Approach

This article looks at the factors explaining the level of US and European long-term interest rates between 1986 and 2005. We begin by selecting the structural determinants of long-term interest rates, dealing with the US and European cases separately. However, a univariate framework cannot capture market integration and suffers from a number of statistical limitations. Switching to a multivariate setting reveals spillover from US to euro area long-term yields, with no reciprocal effect. The model allows us to draw up a timeline of events affecting the level of US and European long-term interest rates. Accordingly, the bursting of the internet bubble, purchases by foreign agents, both official and private, and the increase in global liquidity all seemingly exerted downward pressure on US long-term interest rates and, indirectly, on euro area long rates.

Long Term vs. Short Term Comovements in Stock Markets: The Use of Markov-Switching Multifractal Models

Empirical techniques to assess market comovements are numerous from cointegration to dynamic conditional correlations. This paper uses the fractal properties of asset returns and presents estimations of Markov switching multifractal models [as MSM] to give new insights about short and long run dependencies in stock returns. The main advantage of the model is to allow for the derivation of several indicators of comovements on heterogenous lasting horizons. Empirical applications are performed for four stock indices (CAC DAX FTSE NYSE) at daily frequency between 1996 and 2008.

Central Bank Liquidity and Market Liquidity: The Role of Collateral Provision on the French Government Debt Securities Market

We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.

Risk Aversion and Uncertainty in European Sovereign Bond Markets

Risk aversion and uncertainty are often both at play in market price determination, but it is empirically challenging to disentangle one from the other. In this paper we set up a theoretical model particularly suited for opaque over-the-counter markets that is shown to be empirically tractable. Based on high frequency data, we thus propose an evaluation of risk aversion and uncertainty inherent to the government bond markets in the euro area between 2007 and 2011. We particularly examine the impact of the European Central Bank Securities Markets Programme [SMP] implemented in May 2010 and re- activated in August 2011 to ease the pressure on the European sovereign bond markets. We show how this programme has killed market uncertainty but raised risk aversion for all countries except Greece in a risk-pooling mechanism: this can therefore weaken the impact of market interventions over the long-term.

Liquidity Problems in the FX Liquid Market : Ask for the BIL" "

Even though the FX market is one of the most liquid financial market, it would be an error to consider that it is immune against any liquidity problem. This paper analyzes on a long sample (2000-2009), the all set of quotes and transactions in three main currency pairs (EURJPY, EURUSD, USDJPY) on the EBS platform. To characterize the FX market liquidity, we consider the spread, the traded volume, the number of transactions and the Amihud (2002) statistic for illiquidity. We also propose the computation of a new liquidity indicator, BIL, that solely relies on price series availability. The main benefit of such measure is to be easily calculated on almost any financial market as well as to have a clear interpretation in terms of liquidity costs. Using all these advanced liquidity analyses, we finally test the accuracy of these measures to detect liquidity problems in the FX market. Our analysis, based on a signaling approach, shows that liquidity problems have arisen during specific episodes in the early 2000s and more generally during the recent financial turmoil.

(Re)correlation: A Markov Switching Multifractal Model with Time Varying Correlations

The paper develops a Markov switching multifractal model with dynamic conditional correlations. The objective is to give more flexibility to the initial bivariate Markov switching multifractal model [MSM] (Calvet et al. (2006)) by introducing some time dependency in the comovement structure. The new defined model is applied to stock index data (CAC, DAX, FTSE, NYSE) between 1996 and 2008 and compared to both the standard MSM and the DCC model of Engle and Sheppard (2002). The MSMDCC models present, in sample, better fit than the MSM and DCC models. Moreover, by combining these two setups, MSMDCC improves forecast performances for longer horizons, and provides a better understanding of market comovements during crisis episodes.

The impact of unconventional monetary policy on the market for collateral: The case of the French bond market

We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.