M. Savatier – Academic Homepage

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Research Statement

Let’s be short. I’m still a young scholar. I believe that smart speculators do not know fundamental value. Dynamically, they cannot distinguish noise from information, and noise can accumulate in prices without necessarily leading to predictable returns. Easy to say, hard to study. My idea is to focus on partial-replication settings, where the missing piece prevents real-time verification of mispricing unless one has a valuation model. Ex-post, however, I can measure whether the replicated component co-moved with its twin. I find large underreaction, driven by the uncertainty about the value of the non-replicated section: the greater the uncertainty, the stronger the underreaction.

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Working Papers

Inconsistency in the Equity Market: Evidence from Large Cross-Holdings (Job Market Paper),
Using 187 large and liquid publicly traded parent–subsidiary pairs in the US observed over one year, I show that a daily $1 million change in the value of the stake held by the parent in the subsidiary translates into only a $0.38 million change in the parent’s market value, on average. This transmission rate is significantly below the theoretical benchmark of one. To estimate transmission rates, I control for common movements between the parent’s other assets and the subsidiary by using comparable traded assets. This econometric approach reveals ex-post the inconsistency that, without a valuation model, is unobservable in real time. The underreaction is driven by uncertainty about the parent’s other non-redundant assets. When the parent has none of these other assets, consistency is easy to verify and the transmission rate is close to one. But as uncertainty about these assets increases, the transmission rate drops. This partial-replication setting brings to light two pervasive frictions: limited hedgeability and the deeper difficulty of detecting mispricing when replication is imperfect.
Indeterminacy: The Ultimate Limit to Arbitrage,
Publicly traded parent companies are found to underreact significantly to changes in the value of their publicly traded subsidiaries. This paper resolves the puzzle by introducing the notion of price indeterminacy, arbitrageurs do not know the fundamental value with certainty and must rely on publicly available prices to guide their trades. Under this assumption, the observed underreaction becomes compatible with the absence of excess returns, that is, with no (near-)arbitrage opportunities, even for risk-neutral arbitrageurs with no capital and no short-selling constraints.
Suppose that the stock price of the subsidiary contains some noise, fluctuations driven either by inattentive traders or by factors unrelated to fundamentals, that, in the absence of arbitrage, would not transmit to the parent. If the parent also holds other assets that are not independently tradable, any movement in the subsidiary’s value that fails to transmit can just as plausibly be attributed to an offsetting change in the value of the parent’s other, unobservable assets. This ambiguity limits arbitrage, as it becomes impossible to determine with precision, on the spot, whether the discrepancy reflects a mispricing or a revaluation of the rest of the parent’s portfolio.

As a result, while the inconsistency between the subsidiary’s value and the parent’s market valuation is not directly observable at the time of trading, it can be estimated across many states of the world by an econometrician, as I do in Lost in Transmission. However, arbitrage activity eliminates any clearly exploitable inconsistency, any gap that would otherwise generate excess returns, thereby limiting the remaining degree of underreaction.

For example, when an event occurs that forces a correction, such as an equity carve-out, risk-neutral arbitrageurs will trade until the expected correction is fully priced in. If they are risk-averse, they trade only up to the point where the expected return compensates for the risk of being wrong about the size or direction of the correction. In both cases, the underreaction persists, although risk-neutrality substantially limits its magnitude.
Valuation Consistency in the Equity Market: When It Tends to Hold and When It Might Not,
This paper investigates a subtle but pervasive limit to arbitrage, ambiguity. I focus on Negative Stub Values (NSVs), situations in which a publicly traded parent company is worth less than its stake in a publicly traded subsidiary. While NSVs are often viewed as signs of mispricing, this is not always justified. The analysis distinguishes between verifiable and non-verifiable NSVs, depending on whether the value of the parent’s other assets can be inferred.

In the verifiable cases, where the parent holds few or no other assets, I find that valuation consistency holds to a satisfactory degree. In contrast, non-verifiable NSVs appear more suspicious, large discrepancies are observed, and in several cases, multibillion-dollar corrections follow events such as equity carve-outs. These corrections suggest that arbitrage was limited not by capital or short-selling constraints, but by uncertainty about whether mispricing truly existed.

The findings provide empirical support for the conjecture of Brav and Heaton, when rationality and irrationality are hard to distinguish, mispricing can persist, not because arbitrage is impossible, but because arbitrageurs cannot be certain it is warranted.