Canada Research Chair in Risk Management
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Determinants and real effects of joint hedging: An empirical analysis of US
oil and gas producers
We study the intensity of joint hedging of oil and gas prices by US petroleum firms. We aim to explain the rationale for and find the determinants of joint hedging, as well as its impact on firm market value, performance, and riskiness. Joint hedging that takes into account the interdependence between risks should have a positive impact on firm value in the presence of multiple risks. We verify this theory in an innovative way, by testing the effects of hedging oil and gas prices simultaneously and by using an instrumental variable framework to attenuate the problem of endogeneity between firm value and risk management. We find evidence of higher market value, higher accounting performance, and lower riskiness for firms with a high propensity to jointly hedge their oil and gas production to a greater extent. We show that joint hedging dominates single-commodity hedging.
International high-frequency arbitrage for cross-listed stocks
We explore mean-reverting arbitrage activities for international cross-listed stocks and develop a methodology to study the effect of information latency in high frequency trading. The high-frequency strategy is a hybrid between triangular arbitrage and pairs trading. Market frictions such as trade costs, inventory control, and arbitrage risks are considered. We test the strategy with cross-listed stocks involving three exchanges in Canada and the United States in 2019. The annual net profit with the limit order strategy is around US$6 million. International latency arbitrage with market orders is not profitable with our data.
Photo source: Reuters
Denis Kessler, a great manager
who always remained close to his university roots
French version published in: Risques - Les cahiers de l'assurance 135, 162-163, 2023
In 2002, Denis Kessler took up the great challenge of leading SCOR, which had been weakened by major losses following the events of September 11, 2001. Recent articles have described how he saved the Group and gave it a significant boost from 2002 to 2023. During his long tenure as CEO of SCOR, the company funded insurance research chairs and sponsored important conferences, including one on the aftermath of the 2007-2009 financial crisis. Denis Kessler contributed to this event not only financially, but also as a highly remarkable speaker. His message was that the insurance industry had not really been a victim of systemic risk during the financial crisis, unlike the banks. His talk was published as an article in the Journal of Risk and Insurance, and his stance is still widely discussed today.
Photo source: Commercial Risk
Hierarchical random-effects model for the insurance pricing of vehicles belonging to a fleet
We are please to announce that our article on hierarchical random-effects model of estimation is now published in the Journal of Applied Econometrics. This model can be used in any count-data applications with random individual and common effects on events involving many agents having activities with a principal in a hierarchical principal-agent environment, such as in education, health care management, finance, risk management, and business firms.
The cover image is based on the Research Article Hierarchical random-effects model for the insurance pricing of vehicles belonging to a fleet by Denise Desjardins et al., https://doi.org/10.1002/jae.2949.
Published in Journal of Risk, 2023
We demonstrate how a mixture of two SEP3 densities (skewed exponential power distribution of Fernández et al., 1995) can model the conditional forecasting of VaR and CVaR to efficiently cover market risk at regulatory levels of 1% and 2.5%, as well as at the additional 5% level. Our data consists of a sample of market asset returns, relating to a period of extreme market turmoil, showing typical leptokurtosis and skewness. The SEP3 mixture outcomes are benchmarked using various competing models, including the generalized Pareto distribution. Appropriate scoring functions quickly highlight valuable models, which undergo conventional backtests. As an additional backtest, we argue for and apply the CVaR part of the optimality test of Patton et al. (2019) to assess the conditional adequacy of CVaR. An additional aim of this paper is to present a collaborative framework that relies on both comparative and conventional backtesting tools, all in compliance with the recent Basel regulation for market-risk.
Photo source: BIS web site, 13 March 2023.
This report analyzes the difference between mergers and acquisitions (M&As) of target insurers in the US life and non-life insurance sectors. We first document M&A transactions in the US insurance market between 1990 and 2021 and select the M&A transactions related to US target insurers. We empirically test the difference between the M&As of the life and non-life insurance sectors by employing a natural experiment method and verify whether climate risk has been a causal factor in the observed difference in mergers and acquisitions between the two sectors after 2012. Our results do not support a causal link between climate risk and M&As. Insurers choose other diversification sources of capital, including reinsurance, premium management, CAT bonds, and better capital management under stronger risk regulation.
Photo source: Le Midi, 29 September 2022.
Georges Dionne, from HEC Montréal, and Casey Rothschild, of Wellesley College, won the 2022 Harris Schlesinger Prize from the European Group of Risk & Insurance Economists (EGRIE). The prize is annually awarded to the authors of the best article of the last ten years of Geneva Risk and Insurance Review.
The title of the article is Economic Effects of Risk Classification Bans, published in September 2014. The winners received the Prize at the 49th EGRIE Seminar, on September 19, in Vienna.
Georges Dionne wins the American Risk and Insurance 2020 Best Article Award for the article "The Governance of Risk Management: The Importance of Directors’ Independence and Financial Knowledge" published in Risk Management and Insurance Review in 2019.
His coauthors are Olfa Maalaoui-Chun from Bloomberg and Thouraya Triki from the International Fund for Agricultural Development, two Ph.D. graduates in finance at HEC Montréal.
The 2020 winners will be recognized at this year’s virtual World Risk and Economic Congress Conference in early-August.
For his outstanding contributions to academic research, training of human capital and mentoring, the Canadian Economics Association is proud to induct Georges Dionne as a fellow of the Canadian Economics Association, the highest honour the Association can bestow.
Click here to read the CAE Website page about Georges Dionne.
Using high-frequency transaction and Limit Order Book (LOB) data, we extend the identification dimensions of High Price Impact Trades (HPITs) by using LOB matchedness.
HPITs are trades associated with disproportionately large price changes relative to their proportion of volume. Authors find that a higher presence of HPITs leads to a decline in volatility due to more contrarian trades against uninformed traders, but this decline varies with information environments and liquidity levels. Further, they show that more HPITs lead to higher price efficiency for stocks with greater public disclosure and higher liquidity. Their empirical results provide evidence that HPITs mainly reflect fundamental-based information in a high public information environment, and belief-based information in a low public information environment.