# Eric JondeauUniversity of Lausanne | UNIL · Département de finance (IBF)

Eric Jondeau

PhD Economics

Systemic (bank and climate) risks and sustainable finance

## About

178

Publications

15,553

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Introduction

My current research is on Systemic risks and Sustainable finance. The objective of my research on Systemic risks is to identify, measure, and mitigate climate risks and bank systemic risk. The objective of my research in Sustainable finance is to propose investment solutions to investors, covering ESG investing and portfolio decarbonization.

Additional affiliations

August 2004 - present

June 1995 - July 2005

June 1994 - May 1995

**Banque Indosuez**

Position

- Economist

## Publications

Publications (178)

We explore the role of public subsidies in mitigating the transition risk associated with a climate-neutral objective by 2060. We develop and estimate an environmental dynamic stochastic general equilibrium model for the world economy featuring an endogenous market structure for green products. We show that public subsidies, financed by a carbon ta...

Environmental, Social, and Governance (ESG) scores are the main tool for asset managers in designing and implementing ESG investment strategies. They amalgamate a broad range of fundamentally different factors, creating ambiguity for investors as to the signals of higher or lower ESG scores. We explore the feasibility and performance of more target...

Environmental, Social, and Governance (ESG) scores are the main tool for asset managers in designing and implementing ESG investment strategies. They amalgamate a broad range of fundamentally different factors, creating ambiguity for investors as to the signals of higher or lower ESG scores. We explore the feasibility and performance of more target...

We evaluate the sustainability of real estate investment vehicles in Switzerland according to the three Environmental, Social, and Governance (ESG) pillars. For this purpose, we conducted a survey of direct investors (real estate investment companies, funds, and foundations) inquiring about their sustainability practices. Based on the data of this...

This paper evaluates the impact of a screening process based on Environment, Social, and Governance (ESG) scores for an otherwise passive portfolio of investment-grade corporate bonds. The main result is that this filtering leads to a substantial improvement of the targeted ESG score without reducing the risk-adjusted performance but with significa...

We develop a methodology to measure the expected loss of commercial banks in a market downturn, which we call stressed expected loss (SEL). We simulate a market downturn as a negative shock on interest rate and credit market risk factors that reflect the banks’ market-sensitive assets. We measure SEL as the difference between the mark-to-market val...

With climate change accelerating, the frequency of climate disasters is expected to increase in the decades to come. There is ongoing debate as to how different climatic regions will be affected by such an acceleration. In this paper, we describe a model for predicting the frequency of climate disasters and the severity of the resulting number of d...

Previous research has provided evidence that in the last decade, investing according to screening based on environmental, social, and governance (ESG) criteria would have allowed investors to considerably improve the ESG quality of their portfolio without deterioration of its financial performance. However, a drawback of such a screening process is...

The momentum toward greening the economy implies transition risks that are new threats to financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. We show that runs can be contained by a liquidity backstop with an access fee that...

Long-term investors are often reluctant to invest in assets or strategies that can suffer from large drawdowns. A major challenge for such investors is to gain access to predictions of large drawdowns in order to precisely design strategies minimizing these drawdowns. In this paper, we describe a multivariate Markov-switching model framework that a...

We analyze the carbon footprint and emissions of the Swiss National Bank's (SNB) U.S. equity portfolio and compare its carbon performance to those of the world's largest asset manager, BlackRock, and to the Norwegian Government Pension Fund Global (GPFG). The SNB portfolio does as well as BlackRock's but has a significantly worse carbon footprint t...

We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit-spread-based correction for the value of shareholders' default option. We show that without such a correction, the estimated impact of a severe market downturn is systematically distorted, undere...

With climate change accelerating, the frequency of climate disasters is expected to increase in the decades to come. There is ongoing debate as to how different climatic regions will be affected by such an acceleration. In this paper, we describe a model for predicting the frequency of climate disasters and the severity of the resulting number of d...

This paper evaluates the impact of a screening process based on Environment, Social, and Governance (ESG) scores for an otherwise passive portfolio of investment-grade corporate bonds. The main result is that this filtering leads to a substantial improvement of the targeted ESG score without reducing the risk-adjusted performance but with significa...

In this paper, we build portfolios with decreasing carbon footprint, which passive investors can use as new Paris-consistent (PC) benchmarks and have the same risk-adjusted returns as business as usual (BAU) benchmarks. As the distribution of firms' carbon intensity is very skewed, excluding a small fraction of highly polluting firms can massively...

Pástor and Stambaugh (2012) find that from a forward-looking perspective, stocks are more volatile in the long run than they are in the short run. We demonstrate that when the nonnegative equity premium (NEP) condition is imposed on predictive regressions, stocks are in fact less volatile in the long run, even after taking estimation risk and uncer...

In this paper, we show that the individual skewness, defined as the average of monthly skewness across firms, performs very well at predicting the return of S&P 500 index futures. This result holds after controlling for the liquidity risk or for the current business cycle conditions. We also find that individual skewness performs very well at predi...

Research on socially responsible investment in equity markets initially focused on sin stocks. Since then, the availability of data has been extended substantially and now covers environmental, social, and governance (ESG) criteria. Using ESG scores of firms belonging to the MSCI World universe, the authors measure the impact of score-based exclusi...

The cost of bank funding on money markets is typically the sum of a risk-free rate and a spread that reflects rollover risk, i.e., the risk that banks cannot roll over their short-term market funding. This risk is a major concern for policymakers, who need to intervene to prevent the funding liquidity freeze from triggering the bankruptcy of solven...

Previous research provides evidence that in the last decade, investing according to screening based on environmental, social, and governance (ESG) criteria would have allowed investors to considerably improve the ESG quality of their portfolio without deteriorating its financial performance. However, a drawback of such a screening process is that i...

Average skewness, which is the average of monthly skewness values across firms, performs well at predicting future market returns. This prediction still holds after controlling for the size or liquidity of the firms or for current business cycle conditions. Also, average skewness compares favorably with other economic and financial predictors of su...

The increase in life expectancy over the past several decades has been impressive and represents a key challenge for institutions that provide life insurance products. Indeed, when a new actuarial table is released with updated survival and death rates, such institutions need to update the amount of mathematical reserve that they need to set aside...

Research on socially responsible investment in equity markets initially focused on sin stocks. Since then, the availability of data has been extended substantially and now covers environmental, social, and governance (ESG) criteria. Using ESG scores of firms belonging to the MSCI World universe, we measure the impact of score-based exclusion on bot...

Using a sample of 188 European listed banks covering 2004 to 2016, we conduct textual analysis on banks Pillar 3 reports and annual reports to showcase how banks formulate their regulatory reports. We first develop dictionaries relying on machine learning tools and its subfield of textual analysis. In addition, we construct measures of text complex...

This paper considers a U.S. institutional investor who is implementing a long‐term portfolio allocation using forecasts of financial returns. We compare the predictive performance of two competing macrofinance models—an unrestricted vector autoRegression (VAR) and a fully‐structural dynamic stochastic general equilibrium (DSGE) model—for horizons u...

We develop a framework for the strategic interaction between a hedge fund and a prime broker. The hedge fund and the prime broker make optimal decisions to maximize their expected return on equity. We describe how the evolution of market returns a ects the equity of the hedge fund and may force it to delever or even default. We calibrate and solve...

We describe a general equilibrium model with a banking system in which the deposit bank collects deposits from households and the merchant bank provides funds to firms. The merchant bank borrows collateralized short-term funds from the deposit bank. In an economic downturn, as the value of collateral decreases, the merchant bank must sell assets on...

The increase in life expectancy over the past several decades has been impressive and represents a key challenge for institutions that provide life insurance products. Indeed, when a new actuarial table is released with updated survival and death rates, such institutions need to update the amount of mathematical reserve that they need to set aside...

We describe a statistical technique, which we call Moment Component Analysis (MCA), that extends Principal Component Analysis (PCA) to higher co-moments such as co-skewness and co-kurtosis. This method allows us to identify the factors that drive co-skewness and co-kurtosis structures across a large set of series. We illustrate MCA using 44 interna...

The asymmetry in the tail dependence between U.S. equity portfolios and the aggregate U.S. market is a well-established property. Given the limited number of observations in the tails of a joint distribution, standard non-parametric measures of tail dependence have poor finite-sample properties and generally reject the asymmetry in the tail depende...

This paper investigates the ability of a fully structural macro-finance model to forecast long-term financial returns. We estimate a Dynamic Stochastic General Equilibrium (DSGE) model that describes the dynamics of the U.S. economy. The model includes government bond and stock market returns, which allows us to describe bond and stock risk premia....

This chapter introduces a flexible copula-based multivariate distributional specification that allows for wide possibilities of dynamics for conditional systematic (co) higher moments. The chapter develops a new methodology to measure conditional dependency between daily stock-market returns, which are known to be driven by complicated marginal dis...

This paper investigates using the average skewness, which is defined as the average of the monthly skewness values across firms, to predict future market return. Although the empirical evidence is not conclusive about the predictive ability of the average volatility, we show that in contrast, the average skewness performs very well at predicting th...

We describe a general equilibrium model with a banking system in which the deposit bank collects deposits from households and the merchant bank provides funds to firms. Merchant banks borrow collateralized short-term funds from deposit banks. In a financial downturn, as the value of collateral decreases, the merchant bank must sell assets on short...

The aggregation of individual random AR(1) models generally leads to an AR(∞∞) process. We provide two consistent estimators of aggregate dynamics based on either a parametric regression or a minimum distance approach for use when only macro data are available. Notably, both estimators allow us to recover some moments of the cross-sectional distrib...

The paper investigates the properties of a portfolio composed of a large number of assets driven by a strong multivariate GARCH(1,1) process with heterogeneous parameters. The aggregate return is shown to be a weak GARCH process with a (possibly large) number of lags, which reflect the moments of the distribution of the individual persistence param...

In this paper, we document evidence that downside betas tend to comove more than upside betas during a financial crisis, but upside betas tend to comove more than the downside betas during financial booms. We find that the asymmetry between Downside-Beta Comovement and Upside-Beta Comovement is the main driving force for market level skewness. An i...

We build a macroeconomic model for Switzerland, the Euro Area, and the USA that drives the dynamics of several asset classes and the liabilities of a representative Swiss (defined-contribution) pension fund. This encompassing approach allows us to generate correlations between returns on assets and liabilities. We calibrate the economy using quarte...

The aim of this paper is to investigate long-term portfolio management in a fully structural macro-�financial framework. First, we estimate a Dynamic Stochastic General Equilibrium (DSGE) model that describes the dynamic of the US economy and �financial markets. In addition to the typical macro-economic variables, the model includes fi�nancial vari...

We estimate a general microstructure model of the transitory and permanent impact of order flow on stock prices. The model’s parameters and volatilities are updated in real time and incorporate jumps into both the price (observation equation) and fundamental value (state equation). Prices can be altered by both the size and direction of trades, and...

It is well known that strategies that allow investors to allocate their wealth using return and volatility forecasts, the use of which are termed market and volatility timing, are of significant value. In this paper, we show that distribution timing, defined here as the ability to use forecasts for moments up to the fourth one, yields significant i...

Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system
as a whole is undercapitalized. In this article, we investigate the case of non-US institutions, with several factors explaining
the dynamics of financial firms returns and with asynchronicity of time zones. We apply this metho...

Sector-level Phillips curves are estimated in French data. There is considerable heterogeneity across sectors, with vastly different estimates of the backward looking component of inflation and the duration of nominal rigidities. A multi-sector model of inflation dynamics is calibrated on the basis of these sectoral estimates. Aggregate inflation,...

Using daily data covering the 1988-1995 period, this paper checks the effects of three kinds of determinants on the main stock market indices of the G5: interactions between return and volatility, international transmission mechanisms and impact of trading volumes. The non-significance of expected volatility in return equation can be explained by t...

It is well known that non-normality plays an important role in asset and risk management. However, handling a large number of assets has long been a challenge. In this paper, we present a statistical technique that extends Principal Component Analysis to higher moments such as skewness and kurtosis. This method allows us to identify factors that dr...

We implement a long-horizon static and dynamic portfolio allocation involving a risk-free and a risky asset. This model is calibrated at a quarterly frequency for ten European countries. We also use maximum-likelihood estimates and Bayesian estimates to account for parameter uncertainty. We find that for most European countries the dividend-price r...

In this paper, we investigate the asymmetry in the tail dependence between US equity portfolios and the aggregate US market. Given the limited number of ob-servations in the tails of a joint distribution, standard non-parametric measures of tail dependence often have poor finite-sample properties. We therefore develop a parametric model for measuri...

Our paper addresses the correction of the aggregation bias in linear rational expectations models when there is some unobserved micro-parameter heterogeneity and only macro data are available. Starting from Lewbel (1994), we propose two new consistent estimators, which rely on a flexible parametric specification of the cross-sectional parameter dis...

In this paper, we extend the concept of the news impact curve of volatility developed by Engle and Ng (1993) to the higher moments and co-moments of the multivariate generalized autoregressive conditional heteroskedasticity (GARCH) model with non-normal innovations. For this purpose, we present a new methodology to describe the joint distribution o...

In this paper, we consider block trading strategies and characterize the times when a block trade is a popular choice. We also study the economic relevance of optimal liquidation strategies by calibrating a recent and realistic microstructure model with data from the Paris Stock Exchange. We distinguish between two cases: one in which the parameter...

It is well known that strategies that allow investors to allocate their wealth using return and volatility forecasts, the use of which are termed market and volatility timing, are of significant value. In this paper, we show that distribu-tion timing, i.e., the ability to use distribution forecasts for for deciding asset allocation, also yields sig...

Most rational expectations models involve equations in which the dependent variable is a function of its lags and its expected future value. We investigate the asymptotic bias of generalized method of moment (GMM) and maximum likelihood (ML) estimators in such models under misspecification. We consider several misspecifications, and focus more spec...

This paper investigates the implications of cross-country heterogeneity within the euro area for the design of optimal monetary policy. We build an optimization-based multicountry model (MCM) describing the euro area in which differences between structural parameters across countries are allowed. Using Bayesian techniques, we estimate the MCM and i...

It is well known that the class of strong (Generalized) AutoRegressive Conditional Heteroskedasticity (or GARCH) processes is not closed under contemporaneous aggregation. This paper provides the dynamics followed by the aggregate process when the individual persistence parameters are drawn from the same (unknown) distribution. Assuming heterogenei...

It is well known that the class of strong (Generalized) AutoRegressive Conditional Heteroskedasticity (or GARCH) processes is not closed under contemporaneous aggregation. This paper provides the dynamics followed by the aggregate process when the individual persistence parameters are drawn from the same (unknown) distribution. Assuming heterogenei...

This note estimates several constrained versions of an optimization-based multi-country model to test the sources of heterogeneity within the euro area. We show that the main source is the asymmetry of shocks affecting the economies and that the heterogeneity of behaviors does not seem to be of empirical relevance for the euro area.

This paper investigates the implications of cross-country heterogeneity within the euro area for the design of optimal monetary policy. We build an optimizing-based multi-country model (MCM) describing the euro area in which differences between structural parameters across countries are allowed. Using Bayesian techniques, we estimate the MCM and it...

In Chapters 4 to 6, we considered the modeling of the entire (univariate or multivariate) distribution of returns. When it is possible as well as effective, the modeling of the entire (univariate or multivariate) distribution of returns is very useful, because it allows a full characterization of returns. However, in some cases, modeling their enti...

This chapter features jump, which is a key element in Chapters 4, 7, and 12. Jump processes are useful at modeling temporal behavior of asset prices such as crashes or the arrival of orders in a microstructure context. Jumps are also the key ingredients in Lévy processes, the latter of which will be discussed in detail in Chapter 17. For the reader...

In his seminal work, Markowitz (1952) describes how an investor should allocate her wealth when asset returns are normally distributed. In this context, the optimization problem reduces itself to a mere mean-variance analysis. However, when returns are non-normal, the mean-variance criterion may fail to select the optimum portfolio. Its relevance d...

Until quite recently, the variance was a widely accepted measure of risk. It is very easy to understand and to compute. A shortcoming of this measure is that it is a symmetric one, in the sense that large gains and losses are equally penalized. Financial institutions however are much more concerned by large losses than by large gains.

In various chapters of this book, we will consider modeling the temporal and cross-sectional behavior of asset returns. As already documented in the previous chapter, asset returns follow a non-normal distribution. As an intermediate step between the description of stylized features and the modeling of asset returns, it is worth considering some hi...

In this chapter, we provide some technical details on the fundamentals regarding martingale and the changing measure approach to option pricing. This approach is very popular among some mathematicians because for martingales, many results have already been established. We perform a change of measure to convert the price process into a martingale. B...

In option pricing, the first sign that asset returns may not have a normal distribution surfaced as Black-Scholes implied volatility smile discussed in the previous chapter. The volatility smile is clear evidence that options are priced as if the tails of the distribution are much fatter than those of the normal distribution. There have been many e...

Practitioners and researchers who have handled financial market data know that asset returns do not behave according to the bell-shaped curve, associated with the Gaussian or normal distribution. Indeed, the use of Gaussian models when the asset return distributions are not normal could lead to a wrong choice of portfolio, the underestimation of ex...

This paper analyzes the relationship between banksâ€™ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banksâ€™ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail be...

We evaluate how non-normality of asset returns and the temporal evolution of volatility and higher moments affects the conditional allocation of wealth. We show that if one neglects these aspects, as would be the case in a mean variance allocation, a significant cost would arise. The performance fee the investor is willing to pay to benefit from ou...

In this paper, we extend the concept of News Impact Curve developed by Engle and Ng (1993) to the higher moments of the multivariate returns' distribution, thereby providing a tool to investigate the impact of shocks on the characteristics of the subsequent distribution. For this purpose, we present a new methodology to describe the joint distribut...

Since it burst onto the scene of mainstream monetary economics, the New Neo-Classical Phillips Curve has been the focus of two important empirical debates. First, to what extent properly measured marginal costs affect inflation dynamics. Second, to what extent purely forward looking inflation can be reconciled with the data. In this paper, we show...

Modeling the dependency between stock market returns is a difficult task when returns follow a complicated dynamics. When returns are non-normal, it is often simply impossible to specify the multivariate distribution relating two or more return series. In this context, we propose a new methodology based on copula functions, which consists in estima...

We evaluate how departure from normality may affect the allocation of assets. A Taylor series expansion of the expected utility allows to focus on certain moments and to compute the optimal portfolio allocation numerically. A decisive advantage of this approach is that it remains operational even for a large number of assets. While the mean-varianc...

The “New Keynesian” Phillips Curve (NKPC) states that inflation has a purely forward-looking dynamics. In this paper, we test whether the inflation dynamics in European countries can be adequately described by this model. For this purpose, we estimate hybrid Phillips curves, which include both backward- and forward-looking components, for major Eur...

We evaluate how departure from normality may affect the conditional allocation of wealth. The expected utility function is approximated by a forth-order Taylor expansion that allows for non-normal returns. Market returns are characterized by a joint model that captures the time dependency and the shape of the distribution. We show that under large...