EDHEC Publications
Analysing Statistical Robustness of Cross-Sectional Volatility
2013
This paper proposes a robust method of estimation which is intuitive and is functionally similar to the weighted-average estimator studied by Garcia, Mantilla-Garcia and Martellini (2013) in the context of one-factor and multi-factor regression models. To meet this objective, we adopt a statistical technique called M-estimation.
LTGA Impact Assessment and Bond Management: Has Solvency II reached a Deadlock?
2013
This study analyses the effect of the new LTGA spread risk calibration on bond management. The analysis is conducted comparatively to the QIS5 calibration in order to evaluate the potential contributions of the LTGA study, particularly with respect to the quality of the bond SCR risk measure and its impact on bond investment choices.
Commodity Position Limit Rules Should Be Based on a Finding of Necessity
2013
According to a Commodity Futures Trading Commission (CFTC) official, the CFTC will unveil new speculative commodity position limits soon. Energy Risk magazine reported that CFTC Commissioner Scott O’Malia had stated in mid-May that the rules should be released within the next six weeks. Energy Risk also noted that Commissioner O’Malia “appeared skeptical that the CFTC would be able to craft a rule that would survive further court scrutiny.” On 28 September 2012, a federal court had struck down the agency’s previous efforts to impose speculative position limits because the CFTC did not...
Scepticism About Commodity Futures Markets: An Answer
2013
This paper argues that commodity futures markets and its participants have an essential economic role. As such, the task of this paper is to explain why this is the case. Specifically, given the re-emergence of controversies over commodities trading, including in the oil markets, this paper will provide a basic primer on the following topics: the role of futures prices in revealing fundamental information on commodity markets, especially in the crude oil markets; the short-term interaction effect between traders and price; the economic role of hedgers and speculators in the commodity futures...
An Update on the Debate over Commodity Futures Position Limits
2013
On 28 September 2012 a federal judge struck down the U.S. Commodity Futures Trading Commission’s (CFTC’s) current iteration of federal position limits on holdings of commodity futures contracts. A month and a half later, the CFTC announced that the commission would appeal the court’s decision. At this time, therefore, the federally imposed position limits are in limbo.
The Local Volatility Factor For Asian Stock Markets
2013
The study finds strong evidence for a very significant local volatility factor in the Asian market index returns. In particular, the analysis reveals that the relationship between the Asian equity index returns and the Asian model-free option-implied (MFOI) volatility indices is significantly stronger than the relationship between Asian equity index returns and VIX. The analysis suggests either a weaker or insignificant relationship between the Asian equity market returns and the US VIX in the presence of Asian volatilities, implying that the Asian volatility indices can absorb the...
Analysing and Decomposing the Sources of Added-Value of Corporate Bonds Within Institutional Investors' Portfolios
2013
This paper provides a formal analysis of the benefits of corporate bonds in investors’ portfolios, distinguishing between the impact of introducing them in performance-seeking portfolios and the impact of introducing them in liability-hedging portfolios. It shows that investor welfare can be improved by the design of performance-seeking portfolios with improved liability-hedging properties, or conversely by the design of liability-hedging portfolios with improved performance properties.
Measuring infrastructure debt credit risk
2013
In this paper, the authors develop a framework to measure the credit risk of unlisted infrastructure debt, including the first formulation of "distance to default" in infrastructure project finance. The authors propose to use the debt service cover ratio (DSCR or the ratio of the firm's free cash flow to its debt service in a given period), which is routinely collected by project finance lenders, to measure and benchmark credit risk in infrastructure project finance.
Tail Risk Of Asian Markets: An Extreme Value Theory Approach
2013
This paper aims to draw inference about the tail behaviour of different markets through the fitted parameters of a GARCH-EVT model, with an emphasis on Asian markets. The empirical results indicate that the tail thickness is time-varying but there is no regional structure in the tail risk across the different regions. The comparison of the in-sample and out-of-sample tail risk measures, however, reveals higher tail risk for Asian markets indicating that the key difference over the long run is in the levels of volatility rather than in the residual tail thickness. Our findings highlight the...
Optimal Hedging With Higher Moments
2013
This study proposes a utility-based framework for the determination of optimal hedge ratios that can allow for the impact of higher moments on hedging decisions. We examine the entire hyperbolic absolute risk aversion (HARA) family of utilities which include quadratic, logarithmic, power and exponential utility functions. We find that for both moderate and large spot (commodity) exposures, the performance of out-of-sample hedges constructed allowing for non-zero higher moments is better than the performance of the simpler OLS hedge ratio. A revisited version of this paper was published in the...
Stock Return Serial Dependence and Out-of-Sample Portfolio Performance
2013
This paper studies whether investors can exploit stock return serial dependence to improve the out-of-sample performance of their portfolios. To do this, it first shows that a vector-autoregressive (VAR) model estimated with ridge regression captures daily stock return serial dependence in a stable manner. Second, it characterizes (analytically and empirically) expected returns of VAR-based arbitrage portfolios, and shows that they compare favorably to those of existing arbitrage portfolios. Third, it evaluates the performance of VAR-based investment (positive-cost) portfolios. The paper...
The Trial-and-Error Development of the Chicago Futures Markets
2013
Financial professionals are well aware that the ongoing implementation of the Dodd-Frank Act may cause changes to market structure, including in the futures markets. Should market participants be concerned? The short answer is not necessarily, given that the history of U.S. futures trading is one of responding to constant adversity through innovation.
Momentum Strategies in Futures Markets and Trend-Following Funds
2013
In this paper, we rigorously establish a relationship between time-series momentum strategies in futures markets and commodity trading advisors (CTAs) and examine the question of capacity constraints in trend-following investing. First, we construct a very comprehensive set of time series momentum benchmark portfolios. Second, we provide evidence that CTAs follow time-series momentum strategies, by showing that such benchmark strategies have high explanatory power in the time-series of CTA index returns. Third, we do not find evidence of statistically significant capacity constraints based on...
Smart Beta 2.0
2013
This position paper seeks to draw the attention of investors to the risks of traditional smart beta equity indices and proposes a new approach to smart beta investing to take account of these risks. This new approach, referred to as “Smart Beta 2.0,” enables investors to measure and control the risks of their benchmark and revolutionises the offerings of advanced equity benchmarks.
Investment Solutions For East Asia's Pension Savings
2013
Two of the most commonplace stylised facts about East Asia have to do with pension issues: the region's population is ageing fast and its household sector has high savings rates. Both ideas are intuitively related: as demographic transitions occur, more individuals should save in preparation for their retirement. This paper examines the relationship between savings and retirement income in East Asia, defined as North-East Asia and Greater China (Japan, Korea, Taiwan, China and Hong Kong).
The Benefits of Sovereign, Municipal and Corporate Inflation-Linked Bonds in Long-Term Investment Decisions
2013
This paper proposes an empirical analysis of the opportunity gains involved in investing in inflation-linked bonds for long-term investors facing inflation-linked liabilities. Using formal intertemporal spanning tests, it finds that substantial welfare gains are obtained, especially over long-horizons. Introducing inflation-linked bonds allows investors to improve investor welfare because of their hedging and performance benefits; hence investors may attain the same welfare (risk-return trade-off) with a lower initial investment when inflation-linked bonds are available compared to investing...
Returns-Based Analyses of Hedge Funds
2013
This article discusses the state of the art in applying returns-based analyses to hedge funds. It pays particular attention to those hedge fund strategies where the use of derivatives and dynamic trading strategies can lead to highly asymmetric outcomes.
Implicit Options in Hedge Fund Products
2013
This article discusses the option-like exposures of a number of hedge fund strategies based on a review of the literature on the topic. Specifically, recent academic articles have argued that implicit options arise in hedge fund products due to a number of factors. Accordingly, it will briefly cover the investor preferences, risk-transfer function, and manager incentives that lead to the implicit optionality embedded in hedge fund products.
Related Securities and Equity Market Quality: The Case of CDS
2013
We document that the emergence of markets for single-name credit default swap (CDS) contracts adversely affects equity market quality. The finding that firms with traded CDS contracts on their debt have less liquid equity and less efficient stock prices is robust across a variety of market quality measures and to controlling for endogeneity. We analyse the potential mechanisms driving this result and find evidence consistent with negative trader-driven information spillovers that result from the introduction of CDS.
Short interest, returns, and fundamentals
2013
This paper shows that short interest predicts stock returns because short sellers are able to anticipate bad news, negative earnings surprises, and downward revisions in analyst earnings forecasts. They appear to have information about these events several months before they become public. Most importantly, the cross-sectional relation between short interest and future stock returns vanishes when controlling for short sellers’ information about future fundamental news. Thus, short sellers contribute, in a significant manner, to price discovery about firm fundamentals, but the source of their...
The Relevance of Country- and Sector-specific Model-free Volatility Indicators
2013
This paper tests for the presence of local volatility factors using model-free volatility indicators in contrast to the classical model-dependent approach through GARCH-type processes. It employs three different model-free methodologies – model-free option implied volatility (MFOI), realised volatility, and cross-sectional volatility (CSV).
The EDHEC European ETF Survey 2012
2013
The EDHEC European ETF Survey 2012 presents the results of a comprehensive survey of 212 European ETF investors. The aim of the study is to analyse the usage of exchange-traded funds (ETFs) in investment management and to provide a detailed account of the current perceptions and practices of European investors in ETFs. Overall, the survey has revealed some interesting trends with regard to investor behaviour, investor perceptions and the general outlook for the ETF industry.
Who is Afraid of Construction Risk?
2013
This paper examines the known investment characteristics and portfolio diversification properties of infrastructure debt. The analysis is focused on project finance debt since it represents the bulk of existing and, in all likelihood, future infrastructure debt and also because, contrary to the notion of `infrastructure', it benefits from a clear and internationally recognised definition.
Hedging Versus Insurance: Long-Horizon Investing With Short-Term Constraints
2013
This study provides comprehensive insights into all of EDHEC-Risk Institute’s research on dynamic allocation in asset-liability management. The publication builds on these previous findings and illustrates that failing to separate long-term risk-aversion and short-term loss-aversion may lead to poor investment decisions.
Taking Full Advantage of the Statistical Properties of Commodity Investments
2013
Academic and practitioner research has documented that commodities yield important risk-reduction benefits for a portfolio invested mainly in financial assets. It is perhaps less well known that individual commodity strategies can be so uncorrelated that they can significantly dampen the risk of a commodity-only portfolio. In this article we discuss how an investor can take full advantage of the unique statistical properties of this asset class. A revisited version of this paper was published in the Summer 2001 issue of the Journal of Alternative Investments.
An Analysis Of The Convergence Between Mainstream And Alternative Asset Management
2013
This paper provides an academic analysis of the main techniques that are currently used by hedge fund managers and that could be transported to the mutual fund and alternative UCITS space in a straightforward manner so as to provide better forms of risk management in a regulated environment. It also examines the convergence between the mainstream and the alternative asset management industry by studying UCITS and non-UCITS hedge funds.
Assessing the Quality of Asian Stock Market Indices
2013
There has been increasing demand for equity indices in Asia. This is because global investors wish to benefit from the region’s growth, and consequently from its financial markets. As many US- and Europe-based investors do not have the expertise to conduct stock picking in Asia, equity investments are often passive for Asian-oriented portfolios. Therefore, the question of index quality in Asia is an important issue. This study addresses that question by focusing on three aspects: efficiency, concentration and stability.
Reactions to "A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures"
2013
The results of a call for reaction conducted to help gather evidence on investor perceptions of the issues related to corporate bond indexing, further to the EDHEC-Risk Institute study published in 2011 that found highly unstable risk exposure, and notably highly unstable duration, across eight indices through time, in the eurozone and the US, and with heightened instability in two so-called “investable” indices.
Construction Risk in Infrastructure Project Finance
2013
We know from the project management literature that construction risk is significant in public infrastructure projects delivered through traditional procurement methods. We also know that, when similar projects are procured using project financing, construction risk is passed on through date-certain, fixed price contracts. However, there is, to our knowledge, no available empirical research on the significance of construction risk once it has been passed on. Using a dataset of ex ante and ex post construction costs in infrastructure project finance, we find, with a high degree of statistical...
Towards Better Consideration of Pension Liabilities in European Union Countries
2013
The goal of this study is to provide a broad picture of explicit and implicit pension liabilities in the EU-27 countries’ pension systems, together with an assessment of the risks each of them face. As structural deficits become a target in the Eurozone and beyond, it is fundamental to evaluate the extent to which the increasing funding needs, and the decreasing funding basis of public pensions, could add to public deficits.
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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.
