BNP Paribas Fortis Chair

In this paper (to be published in Applied Financial Economics), we use daily options prices on the Eurostoxx 50 stock index over the whole year 2008 to compare the performance of three popular Stochastic Volatility (SV) models (Heston, 1993; Bates, 1996; Heston and Nandi, 2000), in addition to the traditional Black–Scholes model and a proprietary trading desk model. We show that the most consistent in-sample and 15 out-of-sample statistical performance is obtained for the internal model. However, the Bates model seems to be better suited to Short Term (ST, out-of-the-money) options while the Heston model seems to perform better for medium or Long Term (LT) options. In terms of hedging performance, the Heston and Nandi model exhibits the best average, albeit 20 most volatile, result and the Heston model outperforms the Black–Scholes model in terms of hedging errors, mainly for option contracts that mature in-the-money.

Under the supervision of Pr. Mikael Petitjean and Jérémie Lefèbvre, Adrien Constant (Louvain School of Management & FUCaM) wins the ING Thesis Award for his study on the illiquidity and fair pricing of perpetual subordinated bonds during the crisis.

Using a detailed dataset of orders and trades for a sample of stocks listed on the four European markets of NYSE Euronext, we apply principal component analysis and provide evidence on the existence and magnitude of commonality in returns, order flow and liquidity. We show that commonality in order flow mainly comes from foreign members acting for their own account. Proprietary trading is a major driver in trade imbalance and return commonality. Next we provide evidence on commonality in hidden liquidity. In contrast to displayed liquidity, hidden liquidity commonality seems to be stronger for small caps. We also find that commonality in returns, order flow and liquidity is not constant throughout the day. The opening of markets in the US is a key moment where commonality often reaches its maximum level.

In this short article (published in Revue Bancaire et Financière / Bank- en Financiewezen and reproduced in L’Echo), I explain that the emergence of high-frequency trading firms comes from the increasing fragmentation of financial markets since the early 1990‟s. I also summarize the advantages and disadvantages of high-frequency trading, which have been identified in the empirical literature. I then define the role played by these high-frequency trading firms during the „flash crash‟ on Thursday May 6, 2010. I conclude by underlying that automated trading does not necessarily lead to worsening market conditions, given the animal spirits of traditional investors in stressful periods.

In this report (submitted to an international peer-reviewed journal), we shed new light on the liquidity dynamics of the Credit Default Swaps (CDS) market in Europe around the Subprime crisis. Based on an original dataset of 94 European companies from 2005 to 2009, we use a panel regression analysis to study the relationship between CDS premiums and liquidity. We measure the level of liquidity, look at liquidity risk, and study the liquidity spillovers from the bond and equity markets to the CDS market. We show that the effect of liquidity on CDS premiums is dominated by the influence of worsening credit conditions and deteriorating investors’ expectations about default risk. Controlling for credit risk, we also find that liquidity risk is priced in the European CDS market and that liquidity spillovers from the bond market matter in determining CDS premiums. All in all, our results are in line with those of Tang and Yan (2006, 2007) who cover the period 1998 to 2006 for the US.

The objective of this study (to be published in Revue des Sciences de Gestion) is to identify the warning signs of the collapse of Amaranth Advisors hedge fund, which lost more than 6 billion dollars in 2006 and broke the record loss previously held by LTCM in 1998. The method used is the one developed by EuroPerformance and EDHEC (2006) to compare the performance of hedge funds and establish the Alpha League table, which ranks hedge funds according to a multi-criteria rating. The results highlight the dramatic change of target adopted by Amaranth and the spectacular increase in risk. Based on these results, Amaranth would have been excluded from the Alpha League table one year before the bankruptcy of the fund.

In this paper (published in Revue Bancaire et Financière / Bank- en Financiewezen), we provide evidence of common variations in returns, order flow and liquidity on NYSE Euronext Brussels, based on intra-daily data for 74 continuously-traded stocks (including those belonging to the BEL20 index). We find that commonality in order flow is the strongest for principal trading. We also show that the opening of US markets plays a key role as commonality reaches its highest value at that time.

In this paper (submitted to an international peer-reviewed journal), we analyze the impact of the switch to anonymity on Euronext Paris on April 23, 2001. Compared to previous studies on that subject, we extend the time and geographical scope of the analysis and find that (i) the choice of the pre-event and post-event periods may qualitatively affect the results, and (ii) applying the same methodology to the NYSE for the same period also shows a significant liquidity improvement. The impact of the switch to anonymity is greatly reduced when we take into account that global liquidity evolution. We thus provide further evidence on the existence of global liquidity.

We adapt the Weinstein and Abdulali (2002) approach to price ‘transluscent’ assets, that is, assets featuring low liquidity. The methodology aims at extracting the information content of quotes available in the market to determine the ‘fair’ price of assets which are traded from time to time only. We use intra-day data provided by Bloomberg on Tier 1 perpetual bonds. In most cases, these bonds have the following features: they are issued by financial institutions (to meet capital requirements); they are (deeply) subordinated; they are callable; they pay coupons which can be deferred; and they (must) offer high yields (as a consequence). These bonds are often called ‘hybrid bonds’ in the financial press. The liquidity of these bonds has been very much affected by the crisis since they combine features of both debt and equity (long maturities and conditional periodic payments). We compare the fair price obtained by applying the above methodology to the ‘Bloomberg Generic Price’ and find that the former looks more reliable than the latter.

A paper entitled 'Order aggressiveness and the diagonal effect in experimental double auction markets' (click here) will be published in Economic Letters. This paper analyzes the behavior of players in experimental double auction markets. We show that the “diagonal effect”, a well-known phenomenon observed in real markets, also shows up in experimental markets and is mainly due to order splitting.

The opening conference of the Chair will take place on September 30, 2010. We will have the pleasure to welcome two keynote speakers: Jacques de Larosière, advisor to the BNP Paribas Fortis Chairman, who also chaired the high-level group on financial supervision in the EU in 2009, leading to the publication of the ‘de Larosière Report’, as well as Peter Praet, Director at the National Bank of Belgium, often known as ‘Mister Financial Stability’ in European regulatory circles. The title of Jacques de Larosière’s speech is ‘Three years after the crisis: An appraisal of the efforts made to reinforce regulation and supervision in the financial system’. The title of Peter Praet’s speech is ‘Financial regulation: The need to maintain a right balance’.

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A research paper on 'volatility Regimes and liquidity co-movements in cap-based portfolios' will be published in Revue Finance, which is the official research journal of the French Association of Finance (AFFI). 

We have recently submitted for publication a research paper entitled ‘Transparency in Limit-Order Markets: An Experimental Investigation of Traders' Behavior and Identity Disclosure’.

This column has been publihsed in L'Echo, which is the most popular Belgian economic newspaper published daily in French. It is about 'learning by (mis)doing'.

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A research paper on 'Trading activity, realized volatility, and jumps' will be published in the Journal of Empirical Finance.

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We presented recent research findings on the intraday dynamics of liquidty around price jumps. During the presentation (Powerpoint ), we described the intraday dynamics of liquidity around price jumps using the event study methodology and we identified the most relevant liquidity determinants of price jumps at the intra-day level.

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This paper will be published in Revue Bancaire et Financière / Bank- en Financiewezen, which is the official practitioner-oriented journal of the Belgian Financial Forum.

We presented recent research findings on the liquidity of block trades at LSM (Mons Campus).

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In this recent working paper on volatility models, we assess the performance of the Heston (1993), Bates (1996), and Heston and Nandi (2000) models against two benchmarks, i.e. the Black and Scholes model and a proprietary trading desk model.

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We presented recent research findings on legal insider trading and market liquidity at Tilburg University (Septembre 17, 2009) and at the Dutch Authority for the Finalcial Markets (AFM - Autoriteit Financiële Markten) in Amsterdam (Septembre 24, 2009).

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We presented recent research findings on legal insider trading in the Netherlands at the annual meeting of the European Economic Association in Barcelona (Powerpoint ).