The Journal of Finance

Price Formation and Equilibrium Liquidity in Fragmented and Centralized Markets

Published: 3/1993,  Volume: 48,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1993.tb04705.x  |  Cited by: 166

BRUNO BIAIS

This paper compares centralized and fragmented markets, such as floor and telephone markets. Risk‐averse agents compete for one market order. In centralized markets, these agents are market makers or limit order traders. They are assumed to observe the quotes of their competitors. In fragmented markets they are dealers. They can only assess the positions of their competitors. We analyze differences in bidding strategies reflecting differences in market structures. The equilibrium number of dealers is shown to be increasing in the frequency of trades and the volatility of the value of the asset. The expected spread is shown to be equal in both markets, ceteris paribus. But the spread is more volatile in centralized than in fragmented markets.

Optimal Leverage and Aggregate Investment

Published: 8/1999,  Volume: 54,  Issue: 4  |  DOI: 10.1111/0022-1082.00147  |  Cited by: 109

Bruno Biais, Catherine Casamatta

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financial contracts can be implemented by a combination of debt and equity when the risk‐shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk‐shifting problem and increases with the effort problem.

An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

Published: 12/1995,  Volume: 50,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1995.tb05192.x  |  Cited by: 859

BRUNO BIAIS, PIERRE HILLION, CHESTER SPATT

As a centralized, computerized, limit order market, the Paris Bourse is particularly appropriate for studying the interaction between the order book and order flow. Descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the depth of the book is somewhat larger at nearby valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books result in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases).

Risk‐Sharing or Risk‐Taking? Counterparty Risk, Incentives, and Margins

Published: 7/13/2016,  Volume: 71,  Issue: 4  |  DOI: 10.1111/jofi.12396  |  Cited by: 98

BRUNO BIAIS, FLORIAN HEIDER, MARIE HOEROVA

Derivatives activity, motivated by risk‐sharing, can breed risk‐taking. Bad news about the risk of an asset underlying a derivative increases protection sellers' expected liability and undermines their risk‐prevention incentives. This limits risk‐sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers' incentives and in turn enhance risk‐sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk‐prevention incentives.

Report of the Editor of the Journal of Finance for the Year 2014

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12290  |  Cited by: 0

KENNETH J. SINGLETON, BRUNO BIAIS, MICHAEL ROBERTS

Report of the Editor of The Journal of Finance for the Year 2012

Published: 7/16/2013,  Volume: 68,  Issue: 4  |  DOI: 10.1111/jofi.12071  |  Cited by: 0

KENNETH J. SINGLETON, BRUNO BIAIS, MICHAEL ROBERTS

Equilibrium Bitcoin Pricing

Published: 2/9/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13206  |  Cited by: 217

BRUNO BIAIS, CHRISTOPHE BISIÈRE, MATTHIEU BOUVARD, CATHERINE CASAMATTA, ALBERT J. MENKVELD

We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots. This in turn implies multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of Bitcoin. In our calibration, part of the variations in Bitcoin returns reflects changes in net transactional benefits, but a larger share reflects extrinsic volatility.

Using Financial Prices to Test Exchange Rate Models: A Note

Published: 3/1987,  Volume: 42,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1987.tb02555.x  |  Cited by: 108

BRUNO SOLNIK

The Distribution of Daily Stock Returns and Settlement Procedures: The Paris Bourse

Published: 12/1990,  Volume: 45,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1990.tb03730.x  |  Cited by: 15

BRUNO SOLNIK

In many countries settlements take place a fixed number of business days after the transaction (U.S., Japan). In other countries settlements take place periodically on a fixed date when all transactions performed before this date are settled (U.K., France, Italy). In both cases settlement procedures should cause returns not to be identically distributed over all days. The effect is likely to be the largest on markets where all trades are settled only once a month. An empirical investigation of the largest of those markets, the Paris Bourse, demonstrates the importance of the settlement procedure on the distribution of daily returns.

The Relation between Stock Prices and Inflationary Expectations: The International Evidence

Published: 3/1983,  Volume: 38,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1983.tb03624.x  |  Cited by: 131

BRUNO SOLNIK

This paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971–80. The Fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world. Using interest rates as a proxy for expected inflation, our data provide consistent support for the Geske and Roll model whose basic hypothesis is that stock price movements signal (negative) revisions in inflationary expectations. Finally, a weak real interest rate effect was found for some of these countries.

International Arbitrage Pricing Theory

Published: 5/1983,  Volume: 38,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1983.tb02251.x  |  Cited by: 167

BRUNO SOLNIK

NOTE ON THE VALIDITY OF THE RANDOM WALK FOR EUROPEAN STOCK PRICES

Published: 12/1973,  Volume: 28,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1973.tb01447.x  |  Cited by: 68

Bruno H. Solnik

TESTING INTERNATIONAL ASSET PRICING: SOME PESSIMISTIC VIEWS

Published: 5/1977,  Volume: 32,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1977.tb03288.x  |  Cited by: 62

Bruno H. Solnik

Extreme Correlation of International Equity Markets

Published: 4/2001,  Volume: 56,  Issue: 2  |  DOI: 10.1111/0022-1082.00340  |  Cited by: 1898

François Longin, Bruno Solnik

Testing the hypothesis that international equity market correlation increases in volatile times is a difficult exercise and misleading results have often been reported in the past because of a spurious relationship between correlation and volatility. Using “extreme value theory” to model the multivariate distribution tails, we derive the distribution of extreme correlation for a wide class of return distributions. Empirically, we reject the null hypothesis of multivariate normality for the negative tail, but not for the positive tail. We also find that correlation is not related to market volatility per se but to the market trend. Correlation increases in bear markets, but not in bull markets.

The World Price of Foreign Exchange Risk

Published: 6/1995,  Volume: 50,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1995.tb04791.x  |  Cited by: 614

BERNARD DUMAS, BRUNO SOLNIK

Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This article investigates whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia.

Trading and Manipulation Around Seasoned Equity Offerings

Published: 3/1993,  Volume: 48,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1993.tb04707.x  |  Cited by: 110

BRUNO GERARD, VIKRAM NANDA

We investigate the potential for manipulation due to the interaction between secondary market trading prior to a seasoned equity offering (SO) and the pricing of the offering. Informed traders acting strategically may attempt to manipulate offering prices by selling shares prior to the SO, and profit subsequently from lower prices in the offering. The model predicts increased selling prior to a SO, leading to increases in the market maker's inventory and temporary price decreases. Further, since manipulation conceals information, the ratio of temporary to permanent components of the price movements is predicted to increase.

International Asset Pricing and Portfolio Diversification with Time‐Varying Risk

Published: 12/1997,  Volume: 52,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1997.tb02745.x  |  Cited by: 321

GIORGIO DE SANTIS, BRUNO GERARD

We test the conditional capital asset pricing model (CAPM) for the world's eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) parameterization. Our methodology can be applied simultaneously to many assets and, at the same time, accommodate general dynamics of the conditional moments. The evidence supports most of the pricing restrictions of the model, but some of the variation in risk‐adjusted excess returns remains predictable during periods of high interest rates. Our estimates indicate that, although severe market declines are contagious, the expected gains from international diversification for a U.S. investor average 2.11 percent per year and have not significantly declined over the last two decades.

On the Term Structure of Default Premia in the Swap and LIBOR Markets

Published: 6/2001,  Volume: 56,  Issue: 3  |  DOI: 10.1111/0022-1082.00357  |  Cited by: 169

Pierre Collin‐Dufresne, Bruno Solnik

Existing theories of the term structure of swap rates provide an analysis of the Treasury–swap spread based on either a liquidity convenience yield in the Treasury market, or default risk in the swap market. Although these models do not focus on the relation between corporate yields and swap rates (the LIBOR–swap spread), they imply that the term structure of corporate yields and swap rates should be identical. As documented previously (e.g., in Sun, Sundaresan, and Wang (1993)) this is counterfactual. Here, we propose a model of the default risk imbedded in the swap term structure that is able to explain the LIBOR–swap spread. Whereas corporate bonds carry default risk, we argue that swap contracts are free of default risk. Because swaps are indexed on “refreshed”‐credit‐quality LIBOR rates, the spread between corporate yields and swap rates should capture the market's expectations of the probability of deterioration in credit quality of a corporate bond issuer. We model this feature and use our model to estimate the likelihood of future deterioration in credit quality from the LIBOR–swap spread. The analysis is important because it shows that the term structure of swap rates does not reflect the borrowing cost of a standard LIBOR credit quality issuer. It also has implications for modeling the dynamics of the swap term structure.