Research
Publications
On the Choice of Central Counterparties in the EU (with Gabrielle Demange), Journal of Financial Markets, 2023
We study competition between European Union’s Central CounterParties (CCPs) on the credit default swap (CDS) market. Using data on market shares, we show that CCPs have a monopoly for single-name CDSs and compete on indices along various dimensions. Using transactions data, we focus on the major dealers who alternatively clear their transactions on the two main CCPs. Estimating their choice of CCP reveals that fees, CCPs’ robustness and activity, dealers’ risk, and market volatility are significant. Dealers’ positions indicate that saving on collateral costs is secondary relative to the benefits of dual membership and quality.
Shock amplification in an interconnected financial system of banks and investment funds (with Matthias Sydow et al.), forthcoming Journal of Financial Stability
This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. The joint modelling of banks and funds provides new insights for the assessment of financial stability risks. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks’ capital ratios by around one percentage point.
Working papers
Habitat Sweet Habitat: the Heterogeneous Effects of Eurosystem Asset Purchase Programs (with Moaz Elsayed, Dorian Henricot, and Julien Idier), 2023
The impact of central bank asset purchase programs depends on the investment habitat of investors owning the assets purchased. Using granular data on the Eurosystem central bank purchases over 2014-2020, and on detailed securities holdings by financial institutions, we show that banks were the largest euro area counterparts to purchases of sovereign securities and bank covered bonds, while investment funds accommodated the bulk of corporate securities purchased. We also show that investors’ rebalancing patterns depend on their habitat. Purchasing securities from banks will spur bank lending, while investment funds may increase their demand for riskier securities if they have the required mandate.
Clustering the State of the French Economy, a Qualified View on Financial Crises (with Anthony Galtier, Guillaume Lecué, and Baptiste Poterszmann), 2023
Financial crises carry significant economic and social costs. While the existing literature focuses on predicting them, typically in a binary framework, we propose a more qualified assessment of the French economy, relying on an unsupervised clustering algorithm. We namely manage to discriminate the 2008 subprime crisis from the sovereign crisis, date post-crisis episodes, and discriminate between slow-growth and overheating periods of the economy. Diving into each cluster enables us to understand the determinants of financial distress as well as to identify broader patterns that characterize the French economy.
CDS Trading Strategies and Credit Risk Reallocation (with Dorian Henricot), Banque de France working papers, 2022, submitted
We study how Credit Default Swaps (CDS) reallocate credit risk between investors. Using data on granular holdings of debt and CDS referencing non-financial corporations, we propose a methodology to disentangle CDS positions between three strategies: hedging, speculation, and arbitrage. In our dataset, arbitrage remains anecdotal and the bulk of net positions are speculative, which implies that CDS increase total exposures at default. Hedgers purchase CDS to shed off their most concentrated exposures, while speculators sell them as a complement to debt to gain synthetic leverage. CDS also facilitate risk-taking by speculators and allow hedgers to cover their riskiest exposures.
Secured and Unsecured Interbank Markets: Monetary Policy, Substitution and the Cost of Collateral (with Dilyara Salakhova), Banque de France working papers, 2019
We study the substitution between secured and unsecured interbank markets. Banks are competitive andsubject to reserve requirements in a corridor rate system with deposit and lending facilities. Banks face counterparty risk in the unsecured market and incur an opportunity cost to pledge collateral. The model provides insights on interest rates, trading volumes and substitution between the two markets. Using transaction data on the Euro money market, we provide new empirical findings that the model accounts for: (i) borrowing banks are active on both markets even when their collateral constraint is not binding, (ii) secured interest rates may fall below the deposit facility rate. We derive and empirically test predictions on how "conventional" and "unconventional" monetary policies impact interbank markets, depending on whether marketable collateral is purchased or not.