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Presentation of the Partner

The Banque de France is the French pillar of the Eurosystem, a federal system formed by the European Central Bank and the national central banks of the euro area. Its three main missions are monetary strategy, financial stability and the provision of economic services to the community.
With regard to monetary strategy, it plays a crucial role as its teams of economists and market operators help to prepare and implement the decisions of the ECB’s Governing Council:
• Its reports and research, analyses and forecasts, and surveys and statistics enable it to construct in-depth macroeconomic and financial assessments which are used to inform the ECB’s policy decisions.
• Its presence in the markets, expertise on counterparties and guarantees, and thorough knowledge of monetary policy transmission mechanisms enable it to implement ECB decisions effectively and take part in deliberations on changes to the operational framework.

As guardian of the currency, the Bank is charged with delivering price stability and maintaining public confidence in cash:
• The Banque de France is the largest printer of euro bank notes and has two manufacturing sites in the Auvergne region: a paper-mill in Vic-le Comte and a printing works in Chamalières.
• It ensures the quality of banknotes and coins, taking worn or damaged banknotes out of circulation.

With regard to financial stability, the Banque de France plays a dual role of protection and supervision:
• It is responsible for strengthening regulations and monitoring risks, and for ensuring the safety of savers’ deposits.
• In conjunction with the ACPR, it oversees the financial sector (777 banks and 827 insurance companies and mutual institutions), ensures the smooth operation of payment systems and market infrastructures and regularly assesses the risks and weaknesses in the financial system.

Its economic services are targeted at households and businesses:
• It provides practical services to people in severe financial difficulty. In 2015 it handled and resolved some 237,000 cases of household over-indebtedness and ensured 69,000 people were given access to basic banking services.
• For SMEs, its services include company ratings, credit mediation and support for very small enterprises.
• The Bank also compiles national and regional surveys of economic conditions that are widely sought after by business leaders.


Presentation of the Partnership


The chair looks at the question of forming bond portfolios with optimal risk/reward by optimising in the absence of credit risk or within a homogenous credit risk category, in the presence of heterogeneous credit risk, and with a fixed horizon.

It has been argued that portfolio rebalancing, defined as the simple act of resetting portfolio weights back to the original weights, can be a source of performance.

This effect is known as the rebalancing premium effect, also sometimes called the volatility pumping effect (since volatility turns out to be a key component of the rebalancing premium).

The goals of this research project are:
(i) Provide a thorough analysis of the volatility pumping effect;
(ii) Analyze the conditions under which it can be maximized;
(iii) Assess how the rebalancing premium can be best harvested;
(iv) Analyze its portability and impact in a portfolio context.

Research Outputs:

Maximising an Equity Portfolio Excess Growth Rate: A New Form of Smart Beta Strategy?

Jean-Michel Maeso, Senior Quantitative Research Engineer, EDHEC-Risk Institute
Lionel Martellini, Professor of Finance, EDHEC Business School, Director, EDHEC-Risk Institute

This paper provides a thorough empirical analysis of the maximisation of an equity portfolio excess growth rate in a portfolio construction context both for individual stocks and factor-tilted equity portfolios.

Measuring Volatility Pumping Benefits in Equity Markets

Jean-Michel Maeso, Senior Quantitative Research Engineer, EDHEC-Risk Institute
Lionel Martellini, Professor of Finance, EDHEC Business School, Director, EDHEC-Risk Institute

The purpose of this paper is to provide a thorough numerical and empirical analysis of the volatility pumping effect in equity markets and to examine the conditions under which it can be maximised. Our main contribution to the understanding of the rebalancing premium is an effort to disentangle and separately measure the isolated impact of various components of the total effect.