Research interests

My research interests include asset (mainly derivatives) pricing and the term structure of interest rates. My interest in option pricing has evolved from a more traditional strand of the literature (consisting in designing better option pricing model) to a new avenue where derivatives are used to better understand equity-, variance-, skewness- and jump- risk premia. On the term structure of interest rates, I have depart from traditional Markov-style models to non-Markovian and non-linear models with the aim of studying the link between interest rate dynamics and macro-economic indicators. Recently, I have been paying more attention to the transmission of policy and macro shocks to yields and the Canadian dollar.

Derivatives and risk premium

This research focusses on dissecting the variance risk-premium (VRP) in terms of its upside (UVRP) and downside (DVRP) components. On one hand the DVRP is the premium paid by investors to hedge against negative shocks to the economy (which mechanically generate spikes in the so-called realized variance). On the other hand, the UVRP is the premium they are willing to pay to be exposed to positive shocks to the economy. I have already made several contributions to this agenda. The most recent one includes `` Downside Variance Risk Premium''(with Jahan-Parvar Mohammad and Cedric Okou) where we establish that the DVRP is the main component of the VRP. We find a positive and significant link between the DVRP and the equity premium, and a negative but statistically insignificant link between the UVRP and the equity premium. The opposite relationships between these two components and the equity premium explains the stronger link found between the DVRP and the equity premium compared with the well-established relationship between VRP and the equity premium. Cedric and I have made another contribution entitled `` Good Volatility, Bad Volatility and Option Pricing'' where we establish that modeling distinctively the downside and upside components substantially reduces option pricing errors.

On-going Projects

Romeo, Ricardo, Lai and I have recently circulated a working paper where we dissect the VRP of over 5000 firms into its bad and good components. We find that DVRP is important economically; in the cross-section, a one-standard-deviation increase is associated with an increase of up to 13% in annualized expected excess returns. Simultaneously, going long stocks with high DVRP and short stocks with low DVRP yields an annualized risk-adjusted expected excess return of 18%. The four of us are currently working on two projects. The first one consists of studying the term structure of DVRP and UVRP , and the second one evaluates the ability of existing structural asset pricing models to fit the dynamics of both components of the VRP. The end-goal is to design new model able to replicate the observed features of the data.

Term structure of interest rates and macro variables

This research focusses on (1) extracting expectations of macro variables from the term structure of interest rates, (2) decomposing the nominal interest rate into its components including inflation expectations, the inflation risk-premium, the expected real rate and the real term premium, (3) designing better models for the bond risk-premium, (4) designing a term structure model with ZLB features, and (5) relating movements in the interest rate to monetary policy and macro news with a dynamic model of the term structure of interest rates. I have made progress on (1), (2) and (3) with Jean-Sebastien Fontaine. With Jean-Sebastien Fontaine and Anh Le we have circulated a working paper tackling (4), and Jean-Sebastien Fontaine, Guillaume Roussellet and I are currently working on (5).