How fundamental is the one-period trinomial model to European option pricing bounds. A new methodological approach

International audienc

Public versus private insurance system with (and without) transaction costs: optimal segmentation policy of an informed monopolist

International audienceComputer-mediated transactions allow insurance companies to customize their contracts, while transaction costs limit this tendency toward customization. To capture this phenomenon, we develop a complete-information framework in which it is costly to design a new market segment when the segmentation policy (number and design of segments) is endogenously chosen. Both the case of a private and a public insurer are considered. Without transaction costs, these two insurance systems are equivalent in terms of social welfare and participation. With transaction costs, this equivalence is no longer present, and the analysis of this difference is the subject of this article

On the welfare effects of regulating the number of discriminatory prices

International audienceWe consider a profit-maximizing monopolist that faces different markets while the number k of discriminatory prices is chosen by the regulator. Unlike the classical approach in which only the polar cases are considered, we explicitly analyze the case in which k is an integer between 1 and N. As a consequence, the monopolist׳s profit maximization program is a mixed-integer programming problem, the solution of which is called the optimal profit policy. Assuming that demands are linear, we show that the socially optimal number of discriminatory prices is never higher than a threshold , defined as the smallest integer such that all the markets are served. This result allows us to disentangle the good aspect of price discrimination from the bad one and this shows that regulating the number of discriminatory prices is welfare enhancing, compared to the classical approach. Further welfare results are derived when demands are parallel, and a discussion of the conditions under which regulating the market segmentation itself is socially worthwhile is also provided. Finally, we consider the case of three markets and derive sufficient conditions under which the socially optimal number of discriminatory prices is equal to two

Committee, Expert Advice, and the Weighted Majority Algorithm: An Application to the Pricing Decision of a Monopolist

Experts, Diversity, Learning, Weighted majority algorithm, Sample mean, Surowiecki, D42, D70, D83,

Risk-Based Capital Requirements and Optimal Liquidation in a Stress Scenario*

International audienceWe develop a simple yet realistic framework to analyze the impact of an exogenous shock on a bank’s balance-sheet and its optimal response when it is constrained to maintain its risk-based capital ratio above a regulatory threshold. We show that in a stress scenario, capital requirements may force the bank to shrink the size of its assets and we exhibit the bank’s optimal strategy as a function of regulatory risk-weights, asset market liquidity, and shock size. When financial markets are perfectly competitive, we show that the bank is always able to restore its capital ratio above the required one. However, for banks constrained to sell their loans at a discount and/or with a positive price impact when selling their marketable assets (large banks) we exhibit situations in which the deleveraging process generates a death spiral. We then show how to calibrate our model using annual reports of banks and study in detail the case of the French bank BNP Paribas. Finally, we suggest how our simple framework can be used to design a systemic capital surcharge

Financing constraint, over-investment and market-to-book ratio

In a simple symmetric information continuous-time model, we consider leverage as way to finance a fraction of the investment cost. We show that underinvestment cannot arise while overinvestment may and the room for overinvestment is negatively related with the fraction paid by equityholders. Finally, we show that our model predicts the (empirically observed) negative relation between the market-to-book ratio and the leverage ratio.Financing constraint Overinvestment Profitability Market-to-book ratio Leverage ratio

International banking regulation and Tier 1 capital ratios. On the robustness of the critical average risk weight framework

International audienceUnder Basel III, the current international banking regulation, banks must maintain two Tier 1 capital ratios that treat risky assets differently. The Basel Committee uses the critical average risk weight (CARW) framework developed by the Bank of England to determine which ratio is the binding constraint. This methodology, which implicitly assumes that each asset is subject to a uniform shock, consists in comparing the implied average risk weight of a bank to a regulatory critical threshold. Using a stress test approach, we examine whether, and under which conditions, the CARW framework identifies the correct binding capital ratio. We find important errors that are attributable to a series of simplifying assumptions made by the regulator. We finally generalize the methodology used by the Basel Committee and show how our stress-test approach can be used to determine which ratio is binding when only a (single class of) asset(s) is shocked

Pour des stress-tests bancaires réglementaires plus transparents

International audienceLes auteurs proposent une méthode alternative de stress-tests, où les actifs de la banque sont directement stressés, qui prend en compte les éventuels effets de rétroaction (vente d’actifs, coûts de liquidations), et utilisant uniquement des données publiques. L’objectif est de supprimer l’effet « boîte noire » reproché aux stress-tests actuels

Les taux directeurs de la BCE et la réforme de l’EONIA

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