EDHEC Publications
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.
Asset Prices in General Equilibrium with Transactions Costs and Recursive Utility
2012
This paper studies the effect of proportional transactions costs on asset prices and liquidity premia in a general equilibrium economy with multiple agents who are heterogeneous. The agents in the model have Epstein-Zin-Weil utility functions and can be heterogeneous with respect to endowments and all three characteristics of their utility functions—time preference, risk aversion, and elasticity of intertemporal substitution.
Competition in Portfolio Management: Theory and Experiment
2011
The authors develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. They study the resulting asset pricing in the inter-manager market.
Life-Cycle Investing In Private Wealth Management
2011
This paper argues that financial innovation is needed to design better target date funds based on stochastic life cycle investing, taking into account the presence of risk factors that impact not only asset returns, but also private investors’ wealth levels. One key element in private wealth management is the presence of income risk, which has a substantial impact on the optimal asset allocation strategy.
Response to ESMA Consultation Paper to Implementing Measures for the AIFMD
2011
Several regulatory initiatives are being taken in Europe and recommendations that will reshape the investment fund industry are being made. Existing regulations, such as UCITS, are being reshaped; the need for a regulation of depositaries has been acknowledged, and since the G20 there has been more focus on the monitoring of hedge funds. Many of these regulatory needs have converged in the alternative investment fund managers’ directive (AIFMD), which means that the AIFMD could become a unique framework that settles most of the questions related to the common framework for funds, fund...
EDHEC-Risk European Index Survey 2011
2011
As the choice of an index is a crucial step in both asset allocation and performance measurements, it is useful to investigate index use and perceptions about indices. The EDHEC-Risk European Index Survey 2011 analyses the current uses of and opinions on stock, bond and equity volatility indices with the aim of providing unique insight into the users’ perspective in the index industry. An article based on this survey was published in the Summer 2012 issue of the Journal of Index Investing.
Keynes Meets Markowitz: The Trade-off Between Familiarity and Diversification
2011
This paper develops a model of portfolio choice that nests the views of Keynes—who advocates concentration in a few familiar assets—and Markowitz—who advocates diversification across assets. It relies on the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor's "familiarity" toward assets.
Improved Beta? A Comparison Of Index-Weighting Schemes
2011
This paper analyses a set of equity indices whose aim is to improve on capitalisation weighting and thus to provide “improved beta”. Four main weighting schemes are analysed: efficient indices, fundamental indices, minimum-volatility indices, and equal-weighted indices. Empirical results for US and Developed World data on these indices show that the average returns of all four alternative index construction methods are superior to those of cap-weighted equity indices in both universes and that, by several measures of risk-adjusted performance, they are likewise superior. A revisited version...
Long-Short Commodity Investing: Implications for Portfolio Risk and Market Regulation
2011
A number of policy-makers have blamed the decade-long rise in commodity prices and recent market volatility on the growing influence of financial investors and called for new regulation restricting their participation in commodity markets. Market financialisation has also led investors to worry about higher integration between commodity and traditional financial markets weakening the portfolio benefits of commodity investment. This study, produced with market data and support from CME Group, first examines the performance and risk characteristics of long-only commodity index investments...
Structured Equity Investment Strategies for Long-Term Asian Investors
2011
This publication show that a structured target-volatility strategy significantly improves both the downside and the upside of the return distribution relative to a fixed-mix strategy and also allows investors to benefit more from the upside potential when a capital guarantee overlay is applied. It shows how the explicit management of volatility reduces the cost of the capital protection. It also documents utility gains for risk-averse investors, with and without capital guarantee overlay, and makes the case for significant allocations to structured equity investment strategies with volatility...
Capturing the Market, Value, or Momentum Premium with Downside Risk Control: Dynamic Allocation Strategies with Exchange-Traded Funds
2011
There is extensive evidence that investment strategies based on momentum and value are attractive for portfolio managers who seek higher performances. Momentum and value are among the most robust return drivers in the cross section of expected returns. Dynamic risk budgeting methodologies such as Dynamic Core Satellite strategies (DCS) are used to provide risk-controlled exposure to different asset classes. We examine how to exploit the value and momentum anomalies using a DCS investment model. This paper shows that the DCS approach can boost portfolio returns while keeping downside risk...
Market Risks in Asset Management Companies
2011
This paper shows that revenues from a sample of publicly traded US asset management companies carry substantial market risks. Not only does this challenge the academic risk management literature about the predominance of operative risks in asset management. It also is at odds with current practice in asset management firms. Asset managers do not hedge market risks even though these risks are systematically built into the revenue generation process. A revisited version of this paper was published in Quantitative Finance, Volume 12, Issue 10, 2012.
A Review of the G20 Meeting on Agriculture: Addressing Price Volatility in the Food Markets
2011
This paper examines food price volatility in the context of the G20 meeting of agriculture ministers. In reviewing the evidence so far regarding the impact of commodity trading, speculation, and index investment on price volatility, the report finds that the evidence for the prosecution does not seem particularly compelling at this point.
A Short Note on the Tobin Tax: The Costs and Benefits of a Tax on Financial Transactions
2011
Almost each time volatility in equity, debt, or currency markets increases, there are cries to introduce a tax of financial transactions, first proposed in Tobin (1974). This tax is motivated by the view that the excess volatility in financial markets is the result of trading by "speculators"; thus, even a small tax on financial transactions would "throw some sand in the wheels" of financial markets, and hence, by slowing down the trading activity of speculators would reduce volatility.
Skin in the Game versus Skimming the Game: Governance, Share Restrictions and Insider Flows
2011
Hedge-fund managers justify share restrictions as means of protecting the common interest of the shareholders. However, this paper advances that such restrictions can adversely induce information asymmetry between managers and their clients about future fund flows. The paper demonstrates that share-restricted funds with recent outflows underperform funds with recent inflows by about 5.6% annually over 1998—2008. No such return spread is observed for funds with low-share restrictions. As managers may also act as investors in their own funds, the information asymmetry potentially allows them to...
A New Measure of Equity Duration: The Duration-Based Explanation of the Value Premium Revisited
2011
This paper proposes a new methodology to estimate a share's equity duration by using analysts' cash-flow forecasts. It finds that short duration is associated with high expected and realised returns — which cannot be attributed to the shares' systematic risk exposure as implied by the market beta. Instead, the paper shows that this measure of a company's average cash-flow maturity is a priced risk factor that has similar properties as the Fama-French factor B/M ratio. Our analysis suggests that the value premium might be a compensation for the value firms' higher exposure to cash-flow risk.
An Integrated Approach To Sovereign Wealth Risk Management
2011
Sovereign wealth funds (SWFs) typically have no direct earmarked liabilities. Nor should they, as the financial asset they represent is only part of total sovereign assets, which in turn guarantee all sovereign liabilities. The objective of this paper is to incorporate the economic balance sheet of the sovereign sponsor into the optimal asset allocation problem of the SWF. This paper outlines an easy to implement solution that nests well in the literature on SWFs. We show that economic leverage will reduce speculative demand but leave hedging demand (against fluctuations in the net fiscal...
Bond Liquidity Premia
2011
Asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries. In the US, the Treasury repo market is the key funding market and, hence, theory predicts that the liquidity premium of Treasury bonds share a funding liquidity component with risk premia in other markets. This paper identifies and measures the value of funding liquidity from the cross-section of bonds by adding a liquidity factor correlated with age to an arbitrage-free term structure model. A revisited version of this paper was published in the April 2012 issue of The...
Force-fitting CDS Spreads to CDS Index Swaps
2011
Issues of contemporaneity, liquidity, different restructuring clauses and market supply and demand, all contribute to the fact that the market quoted term structure of CDS index spreads does not always agree with the term structure of CDS index spreads implied by the CDS term structures of the constituent credits. A revisited version of this paper was published in the Spring 2011 issue of the Journal of Derivatives.
Into a Distant Mirror: the 1870s
2011
On October 16th, 2010, the front page of the Wall Street Journal (WSJ) carried a story entitled, “Flashback to 1870 as Cotton Hits Peak” (Cancryn and Cui, 2010). The article noted that cotton prices had not been this high since at least 1870. Since this WSJ µ article was published, cotton prices have continued to reach new highs. If one looks into the distant mirror of the 1870s, one can spot other parallels to our current circumstances beyond the similarly explosive cotton price rally. As a result, one can find some very interesting, and potentially useful, historical lessons to draw on from...
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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.
