EDHEC Publications
Reactions to an EDHEC Study on the Fair Value Controversy
2008
A "call for reaction" was sent by EDHEC to international institutional investors and asset managers to compare investor views of the amendments to the IAS39 and IFRS 7 standards not just with the conclusions of an initial EDHEC study ("The Fair Value Controversy: Ignoring the Real Issue"), but also with the ambitions of these reforms prepared and adopted in great haste. The call for reaction received more than 800 responses and represents the first international survey on the relevance of the reforms carried out by the IASB under pressure from the European Commission. The results of this...
Socially Responsible Investment Performance in France
2008
The results of this EDHEC position paper show that none of the sixty-two funds in the sample, covering various investment zones, manage to produce both positive and significant alpha (outperformance) over a six-year period and that the few significant alpha values are negative. Moreover, most of the funds generate negative, non-significant alpha. The study also shows that alpha values estimated over one year change greatly from one year to the next. The use of a period of various lengths shows that results can vary greatly from one length to another.
The Benefits Of Structured Products In Asset-Liability Management
2008
This paper introduces a continuous-time dynamic asset allocation model for an investor facing liability constraints in the presence of inflation and interest rate risks. When funding ratio constraints are explicitly accounted for, the optimal policies, for which we obtain analytical expressions, are shown to extend standard Option-Based Portfolio Insurance (OBPI) strategies to a relative risk context, with the liability-hedging portfolio replacing the risk-free asset. We also show that the introduction of maximum funding ratio targets would allow pension funds to decrease the cost of downside...
The Fair Value Controversy: Ignoring the Real Issue
2008
In the context of the measures being taken to put an end to the current financial crisis, the extent to which fair value accounting can be blamed—or whether it can be blamed at all—for the intensification of the slump has been widely debated. This new EDHEC position paper shows that this debate, which ignores the real issues, has led to accounting changes that are at odds with their objectives. We examine the relevance of the accusations levelled at fair value and of the responses proposed in an attempt to improve the use of fair value accounting and make it more relevant to the economic...
Transaction Cost Analysis A-Z: A Step towards Best Execution in the Post-MiFID Landscape
2008
This publication covers a broad range of material related to TCA and best execution. As understanding transaction costs is crucial to properly assessing the quality of implementation decisions and complying with the best execution obligation in the post-MiFID environment, it provides a state of the art of TCA fundamentals, undertakes a critical review of existing post-trade TCA techniques, and defines a new and complete approach.
Towards The Design Of Better Equity Benchmarks: Rehabilitating The Tangency Portfolio From Modern Portfolio Theory
2008
Following recent research on the relevance of idiosyncratic risk in asset pricing models, this paper proposes to use total volatility as a model-free estimate of a stock's excess expected return, and analyze the implications in terms of the design of improved equity benchmarks. It finds that maximum Sharpe ratio portfolios consistent with such expected return proxies, and built upon improved estimates of the correlation parameters, significantly outperform market cap weighted schemes on a risk-adjusted basis. This analysis, which rehabilitates the role of the tangency portfolio from modern...
Reactions To An EDHEC Study On Asset-Liability Management Decisions In Private Wealth Management
2008
With the great economic growth of the past decade, private wealth management has become a very profitable business for banks worldwide. As a result, more and more asset management firms have jumped into the fray and competition has increased steadily. These industry changes have led to renewed attempts to improve client relationships and to develop tools and methods to enhance advisor effectiveness. Catering to the client’s specific needs is thus a central concern of private wealth managers. To take the client objectives into account, investments are frequently adapted to the client’s risk...
Index-Exciting CAViaR: A New Empirical Time-Varying Risk Model
2008
Instead of assuming the distribution of return series, Engle and Manganelli (2004) propose a new Value-at-Risk (VaR) modeling approach, Conditional Autoregressive Value-at-Risk (CAViaR), to directly compute the quantile of an individual asset’s returns which performs better in many cases than those that invert a return distribution. This paper explores more flexible CAViaR models that allow VaR prediction to depend upon a richer information set involving returns on an index. Specifically, we formulate a time-varying CAViaR model whose parameters vary according to the evolution of the index. A...
Amaranth Lessons Thus Far
2008
In September 2006, Amaranth Advisors, LLC collapsed under the weight of losses, which were reported as $6.6-billion. Unfortunately, this meant that the fund had become responsible for the largest hedge-fund debacle to have thus far occurred. There were and are many surprising aspects of this debacle. How could a well-respected hedge fund implode so quickly? A revisited version of this paper was published in the Spring 2008 issue of the Journal of Alternative Investments.
The Oil Markets: Let the Data Speak for Itself
2008
In US dollar terms, crude oil prices increased 525% from the end of 2001 through July 31st, 2008. Was this rally yet another speculative bubble? Specifically, was the oil-price rally based on speculative excess rather than fundamental supply-and-demand factors? In a new position paper, “The Oil Markets: Let the Data Speak for Itself”, we argue that when the oil supply-and-demand balance becomes sufficiently tight and that when effective OPEC spare capacity becomes sufficiently low that it is logical to see very high prices to ration demand and/or encourage additional supply. That is the job...
Long-Term Sources of Return in the Commodity Futures Markets: Evidence from the Grain Markets
2008
This article provides some preliminary contributions to the debate over the sources of return in the commodity markets, based on work that is drawn from the 2007 Risk Book, Intelligent Commodity Investing. Essentially, Till (2007) and Feldman and Till (2006) find that in examining a 55-year period in three grain futures markets that the term-structure of an individual contract is the dominant source of return, but only over long (five-year) time-frames. During periods of price stability, grain commodity futures prices have been naturally mean-reverting, meaning that sources of return...
Dependence Structure and Extreme Comovements in International Equity and Bond Markets with Portfolio Diversification Effects
2008
Equity returns are more dependent in bear markets than in bull markets. Previous studies have argued that a multivariate GARCH model or a regime switching (RS) model based on normal innovations could reproduce this asymmetric extreme dependence. This paper shows analytically that it cannot be the case. It proposes an alternative model that allows for tail dependence in lower returns and keeps tail independence for upper returns. This model is applied to international equity and bond markets to investigate their dependence structure. A revisited version of this paper was published in the...
EDHEC European ETF Survey 2008
2008
The EDHEC European ETF Survey 2008 is part of the EDHEC Risk and Asset Management Research Centre’s Indices and Benchmarking research programme. This programme has led to extensive research on indices and benchmarks in both the hedge fund universe and the more traditional investment classes. In 2006, EDHEC published a study of the quality of major stock market indices. Following up on this study, EDHEC is carrying out work that assesses the advantages and disadvantages of various new forms of equity indices. In view of the growth and development of ETFs in Europe, and in view of their growing...
The Performance of Fundamentally Weighted Indices
2008
This paper analyses a set of characteristics-based indices that were recently launched on the US market and that, it has been argued, outperform standard market cap-weighted indices over particular backtest samples by a considerable margin. It analyses the performance of an exhaustive list of these indices and shows that i) the outperformance over value-weighted indices may be negative over long time periods, and ii) that there is no significant outperformance over simple equal-weighted indices. Furthermore, an analysis of both the style and sector exposures of characteristics-based indices...
The Pros and Cons of Passive Hedge Fund Replication
2008
In July of 2007, we published a major position paper on the subject of hedge fund replication, entitled "The Myths and Limits of Passive Hedge Fund Replication: An Attractive Concept… Still a Work-in-Progress." That paper examined from both a theoretical and an empirical standpoint the respective benefits and limits of the two different approaches to hedge fund replication, "factor-based replication" and "payoff distribution replication." The present publication covers the industry reactions to last year’s position paper. The objective of the current paper is to compare the results of the...
How Costly Is Regulatory Short-Termism for Defined-Benefit Pension Funds?
2008
The recent pension crisis has triggered a fierce debate in most developed countries between advocates of tighter regulation designed to provide explicit incentives for pension funds to increase their focus on risk management and those arguing that imposing short-term funding constraints and solvency requirements on such long-term investors would only increase the cost of pension financing.
Timing Commodity Momentum
2008
This paper examines simple timing strategies for commodity momentum, based on whether the market is in backwardation or contango. It finds that these timed strategies outperform winner, loser and momentum strategies. The analysis thus provides evidence that commodity momentum is a dynamic phenomenon, and has implications for commodity managers as it provides simple active strategies that outperform passive momentum benchmarks.
The Benefits of Hedge Funds In Asset Liability Management
2008
Institutional investors in general and pension funds in particular have been dramatically affected by negative stock market returns at the beginning of the millennium. In the context of a cumulative asset/liability deficit that was estimated at more than £55 billion in 2003 for the companies in the FTSE 100, institutional investors are seeking new asset classes or forms of investment management that would allow them to broaden their traditional choice of asset allocation. An alternative investment offering has been introduced in the past several years, allowing investors to optimise the risk/...
Static Allocation Decisions in the Presence of Portfolio Insurance
2008
This paper attempts to determine what fraction a static investor should optimally allocate to investment strategies with convex exposure to stock market returns in a general economy with stochastically time-varying interest rates and stock market excess returns. The results obtained using Monte Carlo analysis show that investors should allocate between 45% and 63% of their portfolio to such portfolio insurance strategies. Moreover, the inclusion of portfolio insurance strategies leads to important utility gains. The results are robust with respect to the choice of the objective, the presence...
Transparency and Accountability
2008
This paper is part of a broader project examining the rules of political disclosure and their consequences. It presents new measures of disclosure by MPs in 126 countries, and examines their determinants as well as consequences for corruption. The measures distinguished between disclosure by law and in practice, between public and non-public disclosure, as well as between more and less comprehensive disclosure. These distinctions motivated the creation of several indices of disclosure in sample countries.
Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals
2008
This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14% and 12.66% respectively, the momentum and term structure strategies appear profitable when implemented individually. A revisited version of this working paper was published in the October 2010 issue of the Journal of Banking and Finance.
Low-Cost Momentum Strategies
2008
The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. A revisited version of this paper was...
The Value Premium and Time-Varying Volatility
2008
Numerous studies have documented the failure of the static and conditional capital asset pricing models to explain the differences in returns between value and growth stocks. This paper examines the post-1963 value premium by employing a model that captures the time-varying total risk of the value-minus-growth portfolios. The results show that the conditional variance model incorporating time-varying idiosyncratic risk can fully capture the post-1963 value premium. The conclusion is robust to the criterion used to sort stocks into value and growth portfolios, to the inclusion of the size...
Fundamental Differences? Comparing Alternative Index Weighting Mechanisms
2008
le an ever increasing share of equity assets is invested in indexing strategies, the standard practice of using capitalisation weighting to construct stock market indices has been the object of much criticism. In response to this criticism, equity indices with different weighting schemes have emerged. Some indices use "fundamental" metrics (Arnott, Hsu, and Moore 2005) to weight the component stocks. In recent years, the market for such characteristics-based indices has grown tremendously, with more and more providers launching and offering them. Institutional investors have allocated...
The Divergence of Legal Procedures
2008
Djankov et al. (2003a) propose and measure for 109 countries in the year 2000 an index of formalism of legal procedure for two simple disputes: eviction of a non-paying tenant and collection of a bounced check. For a sub-sample of 40 countries, that authors compute this index every year starting in 1950, which allows them to study the evolution of legal rules. They find that between 1950 and 2000 the formalism of legal procedure did not converge, and possibly diverged, between common law and French civil law countries. At least in this specific area of law, the results are inconsistent with...
EDHEC Hedge Fund Reporting Survey 2008
2008
Like any investors, investors in hedge funds are naturally interested in knowing how hedge fund managers allocate their initial investment, and whether this allocation yields positive returns or not. It is not only information on past investment returns that is of particular interest; prospects for future gains or losses are relevant to investors as well. Yet, unlike mutual funds, hedge funds are reluctant to provide detailed information on their investment portfolios. Since many hedge funds use highly speculative investment strategies, fund managers fear that a thorough disclosure of their...
Oil Prices: the True Role of Speculation
2008
To analyse the significant variations in oil prices over the past year, EDHEC have produced a new position paper entitled "Oil Prices: the True Role of Speculation," which argues that, despite the appeal of blaming speculators, supply-and-demand imbalances, the fall in the dollar and low spare capacity in the oil-producing countries are the major causes of this sharp rise.
Banking: Why does regulation alone not suffice? Why must governments intervene?
2008
If all institutional investors are bound by regulations that force them to sell risky assets during downturns, these assets will ultimately be absorbed by unregulated long-term investors. Additional examination shows that, in the current environment, sovereign wealth funds and governments are the possible buyers of these assets. As public intervention entails moral hazard, it follows that for the stability of the financial system throughout the business cycle regulations must be improved.
A Comparison Of Fundamentally Weighted Indices: Overview And Performance Analysis
2008
This paper analyses a set of characteristics-based indices that have recently been launched on the US market and have been said to outperform standard market cap-weighted indices over particular backtest samples. The EDHEC authors, Noël Amenc, Felix Goltz and Véronique Le Sourd, analyse the performance of an exhaustive list of such indices and show that the outperformance over value-weighted indices may be negative over long time periods and that characteristics-based indices do not significantly outperform simple equal-weighted indices. Furthermore, an analysis of both the style exposures...
Hedge Fund Analysis — Reading the Multi-Factor Tea Leaves
2008
During the last few years, there has been growing interest in the use of factor models for performing risk and exposure analysis of hedge funds. While interpreting directional and spread related factors in this context is fairly straightforward, interpreting non-linear options exposures often is not. Given the variety of activities that can produce options exposures, the interpretation of multi-factor output in this regard can be more of an art than a science. This paper explores the variety of hedge fund manager activities that can drive options exposures in multi-factor analysis.
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About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
