The Journal of Finance

Equilibrium Subprime Lending

Published: 5/20/2013,  Volume: 68,  Issue: 3  |  DOI: 10.1111/jofi.12022  |  Cited by: 9

IGOR MAKAROV, GUILLAUME PLANTIN

This paper develops an equilibrium model of a subprime mortgage market. Our goal is to offer a benchmark with which the recent subprime boom and bust can be compared. The model is tractable and delivers plausible orders of magnitude for borrowing capacities, as well as default and trading intensities. We offer simple explanations for several phenomena in the subprime market, such as the prevalence of teaser rates and the clustering of defaults. In our model, both nondiversifiable and diversifiable income risks reduce debt capacities. Thus, debt capacities need not be higher when a larger fraction of income risk is diversifiable.

Rewarding Trading Skills without Inducing Gambling

Published: 5/11/2015,  Volume: 70,  Issue: 3  |  DOI: 10.1111/jofi.12257  |  Cited by: 39

IGOR MAKAROV, GUILLAUME PLANTIN

This paper develops a model of active asset management in which fund managers may forgo alpha‐generating strategies, preferring instead to make negative‐alpha trades that enable them to temporarily manipulate investors' perceptions of their skills. We show that such trades are optimally generated by taking on hidden tail risk, and are more likely to occur when fund managers are impatient and when their trading skills are scalable, and generate a high profit per unit of risk. We propose long‐term contracts that deter this behavior by dynamically adjusting the dates on which the manager is compensated in response to her cumulative performance.

Loan Sales and Relationship Banking

Published: 5/9/2008,  Volume: 63,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2008.01358.x  |  Cited by: 274

CHRISTINE A. PARLOUR, GUILLAUME PLANTIN

Firms raise money from banks and the bond market. Banks sell loans in a secondary market to recycle their funds or to trade on private information. Liquidity in the loan market depends on the relative likelihood of each motive for trade and affects firms' optimal financial structure. The endogenous degree of liquidity is not always socially optimal: There is excessive trade in highly rated names, and insufficient liquidity in riskier bonds. We provide testable implications for prices and quantities in primary and secondary loan markets, and bond markets. Further, we posit that risk‐based capital requirements may be socially desirable.

The Value of Central Clearing

Published: 4/25/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12902  |  Cited by: 29

GUILLAUME VUILLEMEY

I study a contracting innovation that suddenly insulated traders of hedging contracts against counterparty risk: central clearing counterparties (CCPs) for derivatives. The first CCP was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference‐in‐differences estimation, I show that central clearing changed the geography of trade flows Europe‐wide, to the benefit of Le Havre. Inspecting the mechanism using trader‐level data, I find that the CCP solved both a “missing market” problem and adverse selection issues. Central clearing also facilitated entry of new traders in the market. The successful contracting innovation quickly spread to other exchanges.

The Private Production of Safe Assets

Published: 12/18/2020,  Volume: 76,  Issue: 2  |  DOI: 10.1111/jofi.12997  |  Cited by: 52

MARCIN KACPERCZYK, CHRISTOPHE PÉRIGNON, GUILLAUME VUILLEMEY

Using high‐frequency, granular panel data on short‐term debt securities issued in Europe, we study the existence, empirical boundaries, and fragility of private assets' safety. We show that only securities with the shortest maturities, issued by banks (certificates of deposit, or CDs), benefit from a safety premium. The supply of such CDs responds positively to excess safety demand. During periods of stress, this relation vanishes for all issuers of private securities, even though their aggregate volumes do not collapse. Other dimensions of heterogeneity, including issuers' balance sheets or their domicile countries' fiscal capacity, are less relevant for private safety.

Wholesale Funding Dry‐Ups

Published: 2/21/2018,  Volume: 73,  Issue: 2  |  DOI: 10.1111/jofi.12592  |  Cited by: 122

CHRISTOPHE PÉRIGNON, DAVID THESMAR, GUILLAUME VUILLEMEY

We empirically explore the fragility of wholesale funding of banks, using transaction‐level data on short‐term, unsecured certificates of deposit in the European market. We do not observe a market‐wide freeze during the 2008 to 2014 period. Yet, many banks suddenly experience funding dry‐ups. Dry‐ups predict, but do not cause, future deterioration in bank performance. Furthermore, during periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. We therefore fail to find evidence consistent with adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders.

Retracted: Risk Management in Financial Institutions

Published: 2/17/2020,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12868  |  Cited by: 35

ADRIANO A. RAMPINI, S. VISWANATHAN, GUILLAUME VUILLEMEY

We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to declines in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise‐similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.

Frailty Correlated Default

Published: 9/28/2009,  Volume: 64,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2009.01495.x  |  Cited by: 409

DARRELL DUFFIE, ANDREAS ECKNER, GUILLAUME HOREL, LEANDRO SAITA

The probability of extreme default losses on portfolios of U.S. corporate debt is much greater than would be estimated under the standard assumption that default correlation arises only from exposure to observable risk factors. At the high confidence levels at which bank loan portfolio and collateralized debt obligation (CDO) default losses are typically measured for economic capital and rating purposes, conventionally based loss estimates are downward biased by a full order of magnitude on test portfolios. Our estimates are based on U.S. public nonfinancial firms between 1979 and 2004. We find strong evidence for the presence of common latent factors, even when controlling for observable factors that provide the most accurate available model of firm‐by‐firm default probabilities.

Default Risk and the Pricing of U.S. Sovereign Bonds

Published: 1/6/2026,  Volume: 81,  Issue: 2  |  DOI: 10.1111/jofi.70014  |  Cited by: 1

ROBERT F. DITTMAR, ALEX HSU, GUILLAUME ROUSSELLET, PETER SIMASEK

We examine the relative pricing of nominal Treasury bonds and Treasury inflation‐protected securities in the presence of U.S. default risk. Hedged breakeven inflation is significantly positively related to U.S. default risk, driven by correlation between shocks to default risk and both shocks to inflation swap premia and Treasury yields. To understand the mechanisms through which default risk is related to inflation swaps and sovereign yields, we estimate an affine term structure model to capture their joint dynamics. Our estimation implies that the interaction between inflation dynamics and default is the primary source of differential pricing.