EDHEC Publications
EDHEC-Risk North American Index Survey 2011
2012
As the choice of an index is a crucial step in both asset allocation and performance measurement, it is useful to investigate index use and perceptions about indices. The EDHEC-Risk North American Index Survey 2011 aims to analyse the current uses of and opinions on stock, bond and equity volatility indices. While information on index vehicles is widely available, particularly in the case of exchange-traded vehicles, the objective of the survey is to provide unique insight into the users’ perspective in the index industry, not only including a description of the current practices, but also...
Improving Time-Series Momentum Strategies: The Role of Trading Signals and Volatility Estimators
2012
Constructing a time-series momentum strategy involves the volatility-adjusted aggregation of univariate strategies and therefore relies heavily on the efficiency of the volatility estimator and on the quality of the momentum trading signal. Using a dataset with intra-day quotes of 12 futures contracts from November 1999 to October 2009, we investigate these dependencies and their relation to time-series momentum profitability and reach a number of novel findings.
Executive Stock Options as a Screening Mechanism
2012
The finance literature has shown that option grants can help to screen out low-ability executives. In this paper we develop a framework that allows us to analyse when options are likely to be optimal for this purpose. We consider a dynamic setting with asymmetric information, in which risk-neutral firms hire risk-averse executives who can exercise costly effort and choose among a menu of risky projects. We show that the likelihood of using options increases with the dispersion of types and the size of the firm, and decreases with the availability of growth opportunities for the firm.
Revisiting Mutual Fund Performance Evaluation
2012
Mutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark results in different measurement of stock selection and timing components of excess performance. This paper revisits baseline empirical evidence in mutual fund performance evaluation utilising stock selection and timing measures that incorporate the self-reported benchmark.
Reactions to the EDHEC Study “Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks”
2012
EDHEC-Risk Institute has conducted extensive research into advanced debt management practices, including a study on the possibility of increasing firm value through the issuance of an optimal level of inflation-linked bonds, which would allow for a reduction in the variability of cash flows, net of debt costs.
The Benefits of Volatility Derivatives in Equity Portfolio Management
2012
The focus of this paper is to provide a formal analysis of the benefits of volatility derivatives in equity portfolio management from the perspective of a European investor. Its main contribution is to compare the risk/return characteristic of equity portfolios combined with long volatility exposure to those of a GMV equity portfolio – the conventional approach to managing equity volatility. This paper is in fact the first to provide an explicit comparison of managed volatility strategies based on GMV portfolios and managed volatility strategies based on volatility derivatives. The results...
New 'Stylised facts' about Hedge Funds and Database Selection Bias
2012
This paper presents new stylized facts about hedge fund performance and database selection biases based on a novel database aggregation. By highlighting economically important effects of database selection bias on previously documented results we aim to improve the ability of researchers in this literature to compare results across different studies. We carefully motivate and test a set of eight hypotheses regarding the impact of database selection biases on stylised facts.
Revisiting Core-Satellite Investing - A Dynamic Model of Relative Risk Management
2012
Tracking error is not necessarily bad. Just like with good and bad cholesterol, there is “good” tracking error, which refers to out-performance of a portfolio with respect to the benchmark, and “bad” tracking error, which refers to underperformance with respect to the benchmark. By severely restricting the amounts invested in active strategies as a result of tight tracking error constraints, investors forgo an opportunity for significant out-performance, especially during market downturns. In this paper, the authors introduce a new methodology that allows investors to gain full access to good...
EDHEC-Risk Asian Index Survey 2011
2012
This is the first comprehensive survey of Asian investment professionals that identifies the criteria investors use to assess and select stock and bond indices, measures satisfaction of Asian investors with existing indices, and documents their segmentation practices. It includes comparisons with results from sister surveys of European and North-American investors. This new survey-based evidence will be useful to Asian investors who wish to benchmark their indexation practices to research advances as well as to the practices of their peers in the region and globally. It will also provide much...
Stock Return Predictability of Cross-Market Deviations in Option Prices and Credit Default Swap Spreads
2012
Cross-market deviations in (deep out-of-the-money) equity put option prices and credit default swap spreads of the same firm are temporary and predict future movements in the put options and credit default swaps (Carr and Wu, 2011). We document that these deviations are only temporary and the prices of the two insurance contracts revert to their usual level shortly after they occur, on average within about one week. The process of reversion involves changes in the CDS and the equity option, and, as we show for the first time, also involves largely predictable changes in the equity values of...
Inferring the Value of Intangible Assets
2012
This paper examines whether financial statement analysis can be effective in inferring the intangible value of firms. It measures the intangible value by means of a firm’s Intellectual Capital, which encompasses the intangible assets and the organizational knowledge of a firm that are not reported directly by financial statements. Our analysis decomposes Intellectual Capital into its three primary components: Human Capital, Structural Capital, and Relational Capital.
Optimal Market Estimates of French Office Property Performance
2012
In the world of institutional investment, the performance of the office property sector has traditionally been valued using indices constructed from appraisal values, rather than values derived from transactions. These indices constructed from appraised values are obtained by gathering in a single database property experts’ valuations of the largest possible number of institutional portfolios invested in office properties. This analysis is carried out in a comprehensive manner so as to diversify away the idiosyncratic risk of each property. Appraisals requiring a lot of information and...
Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios?
2012
This paper compares the performance of equal-, value-, and price-weighted portfolios of stocks in the major U.S. equity indices over the last four decades. It finds that the equal-weighted portfolio with monthly rebalancing outperforms the value- and price-weighted portfolios in terms of total mean return, four factor alpha, Sharpe ratio, and certainty-equivalent return, even though the equal-weighted portfolio has greater portfolio risk.
Performance of Socially Responsible Investment Funds against an Efficient SRI Index: The Impact of Benchmark Choice when Evaluating Active Managers - An Update
2012
This paper conducts a performance measurement of SRI funds and assesses the impact of changing the reference from a standard SRI index to an efficient SRI index. The analysis of fund performance shows that an efficient SRI index raises the bar for actively managed SRI funds. While about 62% of funds have a positive information ratio when compared to the cap-weighted EuroStoxx Sustainability Index, only about 36% of funds do so with respect to the Efficient SRI Index. It is also interesting to note that the median information ratio across funds is slightly positive (0.04) when using the...
What Asset-Liability Management Strategy For Sovereign Wealth Funds?
2012
This publication presents the industry reactions to an EDHEC-Risk Institute study entitled “Asset-Liability Management Decisions for Sovereign Wealth Funds”. That study put forward a model to optimise the investment and risk management practices of sovereign wealth funds, which can be regarded as the extension to sovereign wealth funds of the liability-driven investing paradigm recently developed in the pension fund industry. The model suggested that the investment strategy of a sovereign wealth fund should involve a state-dependent allocation to three main building blocks: a performance-...
The EDHEC European ETF Survey 2011
2012
The EDHEC European ETF Survey 2011 presents the results of a comprehensive survey of 174 institutional investment managers and private wealth managers. In addition to analysing ETF investment, the survey sheds light on the role of ETFs in asset allocation and compares ETFs and other investment products traditionally used as indexing vehicles – namely futures, index funds and total return swaps.
Shifting Towards Hybrid Pension Systems: A European Perspective
2012
This paper examines recent developments and the major risks of retirement systems, from both the sponsor and pension risk perspective, while focusing on European pension schemes. The study looks at plan design and governance, with the aim of moving towards an ideal retirement plan, and analyses the challenges for the financial management of hybrid pension plans.
Commodity Futures Returns and Idiosyncratic Volatility
2012
This paper studies the relationship between idiosyncratic volatility and expected returns in commodity futures markets. Measuring idiosyncratic volatility relative to traditional pricing models that fail to account for backwardation and contango leads to the puzzling conclusion that idiosyncratic volatility is negatively priced. In sharp contrast, idiosyncratic volatility is not priced when the fundamental backwardation and contango cycle of commodity futures markets is factored in an appropriate benchmark. Further evidence suggests that the idiosyncratic volatility inferred from traditional...
Pension Fund Investment in Social Infrastructure: Insights from the 2012 reform of the private finance initiative in the United Kingdom
2012
In February 2012, EDHEC-Risk Institute responded to the UK Treasury’s Call for Evidence about the reform of the Private Finance Initiative (PFI) with a particular reference to the opportunity for pension funds to invest in infrastructure assets, which the UK Treasury has earmarked as a priority theme. In this publication, we extend our response to the issues relating to pension fund investment in social µ infrastructure.
Dynamic Investment Strategies For Corporate Pension Funds In The Presence Of Sponsor Risk
2012
This paper aims to go beyond simple forms of dynamic strategies, and to show that more sophisticated dynamic allocation strategies could usefully be implemented by pension funds. For instance, it shows that imposing a cap on the funding ratio, in addition to a floor, has a positive impact on both pensioners and bondholders, while only having a minor negative effect on equity value. The paper also introduces novel forms of dynamic strategies that recognise that pension risk is not only driven by the funding ratio of the pension fund, but also by the financial strength or weakness of the...
Shedding Light on Non-Financial Risks - A European Survey
2012
This survey analyses the views of European fund industry professionals on non-financial risk and performance in a changing regulatory framework. It analyses the risks those in the industry face as a result of regulation and of their practices, assesses their importance and impact in terms of solvency and business models, and proposes methods to attenuate them. The survey is based on replies from 163 high-level professionals of diverse horizons from the European fund management industry. The results show that at the top of the list of concerns are transparency, information and governance,...
Capturing the Risk Premium of Commodity Futures: The Role of Hedging Pressure
2012
This paper constructs long-short factor-mimicking portfolios that capture the hedging pressure risk premium of commodity futures. It considers single sorts based on the open interests of either hedgers or speculators, as well as double sorts based on both positions. We find positive and significant commodity futures risk premiums from both single and double sorts, alongside with Sharpe ratios that systematically exceed those of long-only commodity portfolios. Further tests show that the hedging pressure risk premiums rise with the lagged volatility of commodity markets and that the cross-...
Lessons from History on Commodity Futures Trading Controversies
2012
Public scrutiny of, and scepticism about, commodity futures markets has had a long tradition in both the United States and in Continental Europe, dating back to (at least) the last great era of globalisation in the 1890s. Over the past 120 years, two determinations have historically prevented futures trading from generally being heavily restricted.
Introducing the EDHEC-Risk Solvency Benchmarks - Maximising the Benefits of Equity Investments for Insurance Companies facing Solvency II Constraints
2012
This study proposes a methodological framework, based on objective and thoroughly tested academic references, to design dynamic risk management strategies in the form of benchmarks that allow for exposure to equity markets, while maintaining a target solvency capital requirement.
What do Short Sellers Know?
2012
Using proprietary short-sale order data, we investigate the sources of short sellers’ informational advantage. Heavier shorting occurs the week before negative earnings surprises, analyst downgrades, and downward revisions in analyst earnings forecasts. The biggest effects are associated with analyst downgrades.
What are the Risks of European ETFs?
2012
This paper outlines EDHEC-Risk Institute's positions on the major concerns of counterparty risk, liquidity risk, confusion between ETFs and other ETPs, risks associated with special types of ETFs, and potential impact of ETFs on the underlying markets and systemic risks. The focus is solely on European ETFs, the bulk of which are regulated by UCITS Directives. Prior to looking at the potential risks of ETFs, the paper presents ETFs and sizes-up the European ETF landscape.
Solvency II : A unique opportunity for hedge fund strategies
2012
There is growing empirical evidence that the complexity of financial markets makes it increasingly challenging for institutional investors to manage their asset/liability profile efficiently. Changes in the regulatory framework and in accounting rules make it even trickier for insurance companies. Against this backdrop, insurers have no choice but to rethink their overall investment policy. A revisited version of this paper was published in the Fall 2012 issue of the Journal of Alternative Investments.
Sensitivity of portfolio VaR and CVaR to portfolio return characteristics
2012
Risk management through marginal rebalancing is important for institutional investors due to the size of their portfolios. This paper considers the problem of marginally improving portfolio VaR and CVaR through a marginal change in the portfolio return characteristics. It studies the relative significance of standard deviation, mean, tail thickness, and skewness in a parametric setting assuming a Student's t or a stable distribution for portfolio returns. A revisited version of this paper was published in the May 2013 issue of Annals of Operations Research.
The Link between Eurozone Sovereign Debt and CDS Prices
2012
This paper performs a theoretical and empirical analysis of the relationship between the price of Eurozone sovereign-linked credit default swaps (CDS) and the same sovereign bond markets during the Eurozone debt crisis of 2009-2011. It first presents a simple model which establishes the no-arbitrage relationship between CDS and bond yield spreads. A revisited version of this paper was published in the March 2012 issue of Bankers, Markets & Investors.
Response to the European Commission White Paper "An Agenda for Adequate, Safe and Sustainable Pensions"
2012
On February 16th, 2012, the European Commission published a White Paper entitled “An Agenda for Adequate, Safe and Sustainable Pensions”. It proposes a series of measures related to information and monitoring, European harmonisation and portability, and pension design. The enclosed paper provides a short summary of some of the main challenges facing European pension systems, and then discusses the Commission’s proposals point by point.
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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.
