Articles

Working papers

Security and Efficiency in DeFi Lending, with Franck Gabriel.

(Previously circulated as ``Security and Credit in Proof-of-Stake DeFi Protocols"). 

Presentations: NEOMA Business School - ISFA Lyon - SKEMA Business School - Apéro DeFi @ Palais Brongniart, Paris - 2nd International Cardiff Fintech Conference - Dauphine Digital Days

We build a model à la Lagos-Wright to study welfare-maximizing pricing rules in decentralized finance (DeFi) lending, in the context of Proof-of-Stake blockchains. Such rules must guarantee affordable loans to borrowers; they must also take into account the implied security on the consensus layer. Viability requires an endogenous security constraint to be satisfied; when it is, a secure and a risky equilibrium coexist. We characterize the efficient affine pricing rules and the situations where, by contrast with the case of exogenous security, it is not optimal that they implement the Walrasian equilibrium. When the environment is certain, no other rule can achieve a better outcome; when uncertain, the base rate must be set to zero. 

Publications

Banks as Liquidity Multipliers, with Damien Klossner : Review of Financial Studies (forthcoming)

We characterize the interaction between banks’ liquid assets purchases and deposit issuance decisions. Using global games, we derive a liquidity multiplier : the amount of deposits a bank can create when endowed with one additional unit of liquid asset to maintain a given level of liquidity risk. In our central theorem, we prove it is larger than unity. This entails that banks have a special role in enhancing liquidity provision, “multiplying” liquid assets into a larger quantity of deposits. Our theory has implications regarding banks’ balance sheet choices, the pricing of liquid securities, and the role of public liquidity provision. 

Insider Trading with Penalties, with Pierre Collin-Dufresne and Franck Gabriel : Journal of Economic Theory (2022), volume 203, pages 1-36.

We consider a Kyle (1985) one-period model where insider trading may be subject to a penalty that is increasing in trade size. We characterize the solution - the equilibrium price and optimal trading strategy - explicitly and establish existence and uniqueness for an arbitrary penalty function for the case of uniformly distributed noise. We use this framework to capture the difference between legal and illegal insider trading, and identify the set of `efficient penalty functions' that would be optimal for a regulator that seeks to minimize expected uninformed traders' losses for a given level of price informativeness. Simple policies consisting of a fixed penalty upon nonzero trades belong to this set and can be used to implement any efficient outcome. Using numerical analysis, we show the robustness of our results to different distributional assumptions. 

Disclosures, Rollover Risk, and Debt Runs : Journal of Banking and Finance (2022), volume 142, pages 1-18.

How do opacity and disclosure policies impact short-term debt financing costs and the likelihood and cost of debt runs? I construct a dynamic model where debt yields are endogenous and mapped explicitly to the degree of transparency, the regulatory disclosure regime and the state of the economy. Different disclosure policies generate sharp differences in the rich debt and beliefs dynamics that I obtain. Short-term yields may remain low while risk builds up, and a disclosure regime might consistently induce better beliefs but imply larger financing costs. At the policy level, my model predicts that the regulator should commit to disclose except at large levels of opacity. 

The Sources of Sovereign Risk, with Daniel Cohen and Sébastien Villemot : Journal of International Economics (2019), volume 118, pages 31-43. 

This paper contributes to the literature on sovereign default. We show that the stochastic structure of GDP does matter in order to be able to reproduce the key stylized facts regarding sovereign risk: the smooth part of the GDP process explains the counter-cyclical behavior of the current account and the jump part explains the risk of default. Intuitively, it is too costly for a country to restrain consumption in such a way that it does not default even if a large negative shock happens. The country therefore behaves as if these shocks do not exist, generating high levels of debt and positive default probabilities. By contrast, when shocks are smooth, a country always finds it preferable to slightly reduce consumption when necessary in order to remain away from the default frontier, rather than risking  a costly default. This produces a counter-cyclical current account.

(Computer science/Game theory) Smart Proofs via Recursive Information Gathering, with Gabriel, Hongler, Lacerda and Capano : ACM Distributed Ledger Technologies (forthcoming).

We introduce the SPRIG (Smart Proofs via Recursive Information Gathering) protocol. SPRIG allows agents to propose, question, and defend mathematical proofs in a decentralized fashion. A structure of stakes and bounties aims at producing debates in good faith and if those persist, they must go down to machine-level details, where they can be settled automatically. We translate SPRIG into a general game-theoretic model and prove that the protocol satisfies two desirable properties: no spamming and monotonicity. We then characterize analytically the equilibrium of a simple two-player specification of the model: this provides important insights into the impact of the protocol's parameters on the probabilities that it induces type I/II errors. 

Thesis

Three Problems of Liquidity under Asymmetric Information