Publications
Stock Market Reaction to News: Do Tense and Horizon Matter?
with Marie Brière, Karen Huynh and Olav Laudy, 2023, Finance Research Letters 58 (D)
Using textual data extracted from a large variety of news sources (news stories, call transcripts, broker research, etc.), we build a daily aggregate news signal that takes into account the tone and tense of various news statements about a given firm. We test the informational content of this signal and examine how news about events happening in different tenses or at different horizons is incorporated into stock prices. We document large and significant market reactions around news publication. News’ tense and horizon matter. News about the future drives much larger reactions than those about the present or the past. Additionally, the market reaction to future news is mainly driven by near rather than distant future news.
with Christian Gollier, 2022, Economica 89
Socially responsible investors constitute an important force in today's global financial markets. This paper examines conditions under which socially responsible investors induce companies to behave responsibly. We develop an asset pricing model in which some shareholders are active owners, that is, they engage companies by voting on strategic decisions. Differences of objective among shareholders arise because socially responsible investors value corporate externalities. In our baseline model, we show that a firm may choose a responsible strategy even if the majority of investors are not responsible. We also demonstrate that such a choice of a responsible strategy might be fragile because it might depend on investors' self‐fulfilling beliefs. We then extend our baseline model to analyse the link between divestment and engagement strategies, the case with multiple firms, the role of benefit corporation charters, and the impact of a large investor.
Learning in Speculative Bubbles: Theory and Experiment
with Jieying Hong and Sophie Moinas, 2021, Journal of Economic Behavior & Organization 185
Does learning reduce or fuel speculative bubbles? We study this issue in the context of the Bubble Game proposed by Moinas and Pouget (2013). Our theoretical analysis based on adaptive learning shows that i) in the long run, learning induces convergence to the unique no-bubble equilibrium, ii) in the short run, more experienced traders create more bubbles, and iii) learning is more difficult when more steps of reasoning are necessary to reach equilibrium. These predictions are consistent with our experimental observations. We find that reinforcement learning rather than belief-based learning is driving behavior in our experiment.
Liquidity Formation and Preopening Periods in Financial Markets
with Jieying Hong, 2021, Economica 88
This paper studies the role of preopening periods in liquidity formation and welfare in financial markets. Because no transaction occurs during these preopening periods, their economic significance could be questioned. We model a market where costly participation and asymmetric information prevent latent liquidity from being expressed. At equilibrium, risk-averse insiders use preopening periods to better coordinate supply and demand of liquidity by communicating liquidity needs, thus improving welfare. Partial or full communication of private signals by the insider with the asset at preopening periods does not always enhance liquidity formation, but improves welfare through reducing adverse selection risk faced by the outsider and increasing the likelihood of her entry. Our findings have implications for portfolio management and the design of financial markets.
The Present Value Relation Over Six Centuries: The Case of the Bazacle Company
with David Le Bris and Will Goetzmann, 2019, Journal of Financial Economics 132
This paper tests present value theory using the Bazacle company of Toulouse, the earliest documented shareholding corporation. We collect share prices and net dividends from its foundation in 1372 to its nationalization in 1946. We find an average dividend yield of 5% per annum and no long-term price growth. An asset pricing model with persistent dividends and a time-varying risk correction is not rejected by the data.
Sovereign Bond Spreads and Extra-Financial Performance: An Empirical Analysis of Emerging Markets
with Paula Margaretic, 2018, International Review of Economics and Finance 58
This paper studies the impact of a country’s extra-financial performance on its sovereign bond spreads. Sovereign bond spreads reflect both an economic default risk and a strategic default risk. We hypothesize that a country’s extra-financial performance reduces default risk by signaling good commitment ability. We test this hypothesis for the countries which bonds are included in the JP Morgan Emerging Markets Bond Index Global. Over the period from 2001 to 2010, we find that an emerging country’s average cost of capital decreases with its governance and social performance. Furthermore, we demonstrate that a good social performance signals an emerging economy’s long-term orientation and commitment to repay its debt in the future.
A Mind is a Terrible Thing to Change: Confirmatory Bias in Financial Markets
with Julien Sauvagnat et Stéphane Villeneuve, 2017, Review of Financial Studies 30 (6)
This paper studies the impact of the confirmatory bias on financial markets. The confirmatory bias provides a unified rationale for several existing stylized facts including excess volatility, excess volume and momentum. It also delivers novel predictions: at the individual level, traders’ belief updating depends on the sign of past signals and previous beliefs, and, at the stock level, differences of opinion should be larger when past subsequent signals have different signs. Using data on US firms’ earnings announcements and analysts’ earnings forecasts from 1982 to 2014, we find strong empirical support for these predictions, suggesting that the confirmatory bias is at work in financial markets.
On the Financial Performance of Socially Responsible Investments
2014, Bankers, Markets and Investors 128
This paper discusses the fundamental drivers of the financial performance of various Socially Responsible Investment strategies, including exclusion, best-in-class, and engagement strategies.
Equilibrium Discovery and Preopening Mechanisms in an Experimental Market
with Bruno Biais and Christophe Bisière, 2014, Management Science 60 (3)
We experimentally analyze equilibrium discovery in i) a pure call auction, ii) a call auction preceded by a non-binding preopening period, and iii) one preceded by a binding preopening period. We consider two sets of parameters: one with a unique equilibrium and low gains from trade, the other with two equilibria, including a high gain from trade equilibrium. We show that a preopening period can facilitate coordination on the Pareto dominant equilibrium if it is binding. The non-binding preopening period offers traders the opportunity to place manipulative orders. After observing such orders, participants learn to distrust cheap talk and coordinate less on Pareto dominant outcomes.
The Bubble Game : An Experimental Analysis of Speculation
with Sophie Moinas, 2013, Econometrica 81 (4)
We propose a bubble game that involves sequential trading of an asset commonly known to be valueless. Because no trader is ever sure to be last in the market sequence, the game allows for a bubble at the Nash equilibrium when there is no cap on the maximum price. We run experiments both with and without a price cap. Structural estimation of behavioral game theory models suggests that quantal responses and analogy-based expectations are important drivers of speculation.
Sunshine Trading in an African Stock Market
with Magueye Dia, 2011, Managerial Finance 37 (3)
How is liquidity formed in emerging financial markets? Do traders preannounce their orders to attract outside liquidity providers (a practice referred to as sunshine trading)? This paper studies liquidity formation of infrequently traded stocks. It also investigates the role of preopening periods in the formation of liquidity. We focus on the 8 largest stocks traded on the West African Bourse in 2000. The evidence is consistent with broker-dealers engaging in sunshine trading. Our analysis suggests that the actual liquidity on the West African Bourse is higher than what is indicated by the average state of the order book.
Adaptive Traders and The Design of Financial Markets
2007, The Journal of Finance 62 (6)
This paper studies a financial market populated by adaptive traders. Learning is modeled following Camerer and Ho (1999). A Call Market (CM) and a Walrasian Tatonnement (WT) are compared in an environment where both institutions have the same Nash and competitive equilibrium outcomes. When traders learn via a belief-based model, equilibrium is discovered on both market institutions. On the contrary, when traders learn via a reinforcement-based model, convergence to equilibrium is achieved in the WT but not in the CM. This suggests that market mechanisms can be designed to foster traders’ learning of equilibrium strategies.
Market Design and Traders' Bounded Rationality : An Experiment
2007, Journal of Financial Markets 10 (3)
This paper experimentally compares a Call Market (CM) and a Walrasian Tâtonnement (WT) under asymmetric information. The experimental environment and the market institutions have been designed such that, at equilibrium, the two trading institutions exhibit identical prices and surplus. During the experiment, the informational efficiency is almost perfect on the two trading venues. However, the gains from trade are higher on the WT than on the CM. Because uninformed agents' deviations from equilibrium are less frequent on the WT, the market experiences a higher liquidity and a higher allocative efficiency. This paper supports the view that trading institutions should be designed including cognitively ergonomic features to fit the limited nature of human rationality.
Judgemental Overconfidence, Self-Monitoring, and Performance in an Experimental Financial Market
with Bruno Biais, Denis Hilton and Karine Mazurier, 2005, Review of Economic Studies 72 (2)
We measure the degree of overconfidence in judgment (in the form of miscalibration, i.e., the tendency to overestimate the precision of one's information) and self-monitoring (a form of attentiveness to social cues) of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information. Miscalibrated traders, underestimating the conditional uncertainty about the asset value, are expected to be especially vulnerable to the winner's curse. High self-monitors are expected to behave strategically and achieve superior results. Our empirical results show that miscalibration reduces and self-monitoring enhances trading performance. The effect of the psychological variables is strong for men but non-existent for women.