The 2022 for the Best Young Researcher in Finance and Insurance IEF / SCOR Foundation for Science was awarded on 22 March, during the second day of the Risk Forum, organised by the Institut Louis Bachelier (ILB), which took place at the Paris Chamber of Commerce and Industry. This year, the Award, sponsored by the SCOR Foundation for Science (see box below), was awarded to Jean-Édouard Colliard, associate professor of finance at HEC Paris. On the sidelines of the award ceremony, he answered our questions.

How do you feel about receiving the IEF / SCOR Foundation for Science Best Young Researcher Award in Finance and Insurance?

I am honoured and very happy to have received this award. It is very visible in France and has helped to identify many talented people working in the field of financial risks. I am therefore proud to join the prestigious list of winners of the Best Young Researcher Award.

Can you tell us about your main areas of research?

Generally speaking, my research work consists in carrying out microeconomic modelling applied to finance around two main themes: banking economics and the microstructure of financial markets. The first concerns the behaviour and activities of banks (regulatory capital, lending, etc.). The second one is about the exchanges and the organisation of financial markets, in particular the transactions of shares on the stock exchange and of bonds on the OTC markets. In both cases, I am particularly interested in issues related to potential market failures that may lead to instabilities, risks or crises, while trying to find solutions. 

How can your research contribute to a better understanding of the financial sector?

This type of academic work contributes to a better understanding of financial markets and their regulation in several ways. One way is to reflect on existing regulations, understand their rationale and observe possible negative effects. For example, in a research paper entitled Strategic Selection of Risk Models and Bank Capital Regulation, I studied the internal models used by banks to calculate their regulatory capital in the context of banking regulation. This is a long-standing and important debate among researchers and practitioners. In fact, I started working on this topic during my thesis after the 2008 crisis. In short, for banks to be properly regulated, their regulatory capital must reflect as much as possible the risks they take. However, they are in the best position to assess and estimate their own risks. In this context, the use of internal models by banks makes sense. However, these internal models can sometimes be too optimistic, which requires supervision. But this implies additional costs, which has generated a lot of regulatory debate. And since the 2008 crisis, regulators have required banks to rely less on internal models. My research paper discusses the costs and benefits of this phenomenon using a theoretical model.

Another way of informing the public debate and regulation is to study the empirical effects of a policy. In the research article Financial Transaction Taxes, Market Composition, and Liquidity – co-authored with Peter Hoffmann and published in the Opinions & Débats series – we looked at the impacts of the financial transaction tax introduced in France in 2012. By observing very detailed data, we were able to see that this tax had led to a drop in volumes and a reduction in the liquidity of securities, particularly for equities, which were already not very liquid. On the other hand, the tax had no effect on highly liquid shares. Without getting into the debate on taxation, on which we do not comment, we conclude that this tax is not a suitable tool for correcting market imperfections, because, for example, volatility has not decreased.

Finally, to give a last example of the contribution of my work to a better understanding of the financial sector, the article Inventory Management, Dealers’ Connections, and Prices in OTC Markets, co-authored with Thierry Foucault and Peter Hoffmann, proposes a model of trading in OTC markets, for example the corporate bond market on which there is a lot of empirical work, particularly in the United States. Our model tries to describe a realistic functioning of this market: the transactions that are observable and that must be carried out, as well as the price variations according to the different actors involved. These elements make it possible to make empirical predictions that can then be tested and compared with real data by other researchers.

Are risks in the banking sector better assessed than in the past, especially before 2008?

Compared to the 2008 crisis, banking regulation is much stricter and requires higher minimum capital levels. The supervisory framework has been much improved, especially in Europe with the European Banking Union, which is one of my other research topics. Many opportunities for regulatory arbitrage have ceased with the Basel accords and/or the new accounting standards. There is no doubt that the banking sector is better regulated than before the 2008 crisis. For example, European banks have weathered the crisis generated by the Covid-19 pandemic very well, which was an unprecedented shock. One of the reasons for this resilience is that they had high regulatory capital ratios and that the understanding of the banking sector has improved considerably thanks to the efforts of supervisors and the extensive research conducted since the financial crisis.

To conclude, what are your next research topics?

My current research topics remain in the continuity of the previous ones, while being approached from a new angle, namely the use of data in finance, whether in the banking sector or in the markets. In short, I am interested in the economics of data, which raises many questions: what happens when agents try to get the same or different data at higher prices? What are the potential problems if they are misused? What about the algorithms and interactions between these different decision support tools? These questions thus require analysis to try to identify potential risks or problems in the financial sector.


The IEF / Scor Foundation for Science Best Young Researcher Award in Finance and Insurance

Since 2005, the Europlace Institute of Finance (IEF), a foundation of the Louis Bachelier Group, has been awarding the Best Young Researcher Award in Finance to promising researchers under 40 years of age.

Candidates are nominated by the members of the Scientific Council of the Institut Louis Bachelier (ILB) and the members of the Scientific Council of the IEF. The final winner is then elected by Louis Bachelier Academic Fellows. In 2017, the Scientific Council of the IEF decided to extend this prize to insurance research.

Finally, as a reminder, this award is sponsored, since 2016, by the SCOR Foundation for Science, whose mission is to support scientific research by providing support for different types of projects related to risk and (re)insurance, including academic chairs, research projects, conferences and publications.

Read the press release here.