Laurence Lescourret

Extreme dependence of multivariate catastrophic losses

Natural catastrophes cause insurance losses in several different lines of business. An approach to modelling the dependence in loss severities is to assume that they are related to the intensity of the natural disaster. In this paper we introduce a factor model and investigate the extreme dependence. We derive a specific extreme dependence structure when considering an heavy-tailed intensity. Estimation procedures are presented and their moderate sample properties are compared in a simulation study. We also motivate our approach by an illustrative example from storm insurance.

Transparency matters: Price formation in the presence of order preferencing

We present a model of market-making in which dealers differ by their current inventory positions and by their preferencing agreements. Under preferencing, dealers receive captive orders that they guarantee to execute at the best price. We show that preferencing raises the inventory holding costs of preferenced dealers. In turn, competitors post less aggressive quotes. Since price-competition is softened, expected spreads widen. The entry of unpreferenced dealers, or the ability to route preferenced orders to best-quoting dealers, as internalization does restore price competitiveness. We also show that a greater transparency may negatively affect expected spreads, depending on the scale of preferencing.

Transparency Regime Initiatives and Liquidity in the CDS Market

This paper investigates liquidity changes in the corporate CDS market around two events that increased market transparency in the midst of the financial crisis: the regular dissemination of post-trade data by DTCC starting November 2008, and the implementation of the Small Bang in June 2009. We build an econometric model based on intra-daily bid and ask quotes to measure liquidity and volatility in thinly traded CDS. We find that, after DTCCs release, the market-wide deterioration in CDS liquidity becomes less important for banks and major dealers, consistent with information revelation on counterparty risk. The Small Bang also improved liquidity, particularly for more illiquid CDS.

The Role of Pre-Opening Mechanisms in Fragmented Markets

Liquidity issues in financial markets arise because of two main factors: asymmetric information and cost of market participation. To alleviate these frictions, several exchanges start with a pre-opening period characterized by the accumulation of orders and the absence of trading. What is the role of Euronext’s pre-opening mechanism in the price discovery and liquidity formation of the exchange itself versus two other competing venues deprived of such a mechanism, namely BATS and Chi-X? EconPol expert Sophie Moinas (TSE) and her co-authors find evidence that tentative clearing prices set during the pre-opening period contribute to discover opening price; and that tentative clearing volume is positively correlated with liquidity across all three platforms.

Liquidity Externalities and Buyout Delisting Activity

We study the impact on industry liquidity of delistings resulting from leveraged buyout activity. Using data on U.S. LBOs during the 1985-2008 period, we uncover evidence of negative liquidity externalities. We find that the liquidity of firms in the same industry as the LBO target drops during the month of the LBO delisting. This temporary decrease is especially strong for industry firms highly correlated with the LBO firm. It is also stronger in industries characterized by higher information asymmetry and higher information heterogeneity, and in cases in which the information disclosed by the LBO firm before it goes private is more precise. Overall, our findings are consistent with the hypothesis that financial market participants use cross-asset information arising from correlated order flow and prices in their trading decisions. Delistings induced by LBO activity bring about temporary greater information asymmetry, which results in a negative transitory impact on liquidity at the industry level.

Cold Case File? Inventory Risk and Information Sharing during the pre‐1997 NASDAQ

This paper shows that dealers in Over‐The‐Counter (OTC) markets might choose to share information about transient price pressures. Using data from the pre‐1997 NASDAQ preopening, I find that the frequency and magnitude of non‐positive spreads (the information‐sharing vehicle) initiated by wholesalers (specialised market‐makers with a high exposure to inventory risk) are strongly related to opening price reversals and daily trading imbalances. This activity is more likely to occur on days of large liquidity shocks, and it is not observed for other dealers. Overall, the obligation to absorb price pressure at a yet unknown opening price might induce dealers to communicate the direction in which the opening price should move. The findings contain lessons for the design of todays OTC markets.

Cold Case File? Inventory Risk and Information Sharing during the pre-1997 NASDAQ Preopening

This paper shows that dealers in OTC markets might choose to share information about transient price pressures. Using data from the pre-1997 NASDAQ preopening, I find that the frequency and magnitude of non-positive spreads (the information-sharing vehicle) initiated by wholesalers (specialized market-makers with a high exposure to inventory risk) are strongly related to opening price reversals and daily trading imbalances. This activity is more likely to occur on days of large liquidity shocks, and it is not observed for other dealers. Overall, the obligation to absorb price pressure at a yet unknown opening price might induce dealers to communicate the direction in which the opening price should move. The findings contain lessons for the design of todays OTC markets.