April 2021 Issue

EDHEC-Risk Institute - Quarterly Newsletter - Academic Roots and Practitioner Reach


Editorial by Professor Rebonato

A Case Study in Real Asset Investing: the French Non-Listed Real Estate Fund Market

In the January issue of our EDHEC-Risk Institute newsletter, Professor Rebonato reminded us of the risk of inflation created by the quantitative easing policies of leading Western central banks, thus highlighting the relative benefits of holding real assets if such a risk were to materialise. The question an investor may ask as a result is: "how do I efficiently build exposure to real assets in my overall portfolio?". A comprehensive answer is obviously beyond the scope of this newsletter, but recent research conducted by EDHEC-Risk Institute on the growing French non-listed real estate fund market may serve as a timely case study that we hope will be food for thought for investors, and perhaps spur similar analyses in other real estate markets.


Table of Contents

1. Feature | 2. Interview | 3. Industry Analysis | 4. EDHEC-Risk Publications | 5. In Video | 6. News | 7. Press Review | 8. Recruitment


Measuring and Managing ESG Risks in Sovereign Bond Portfolios

Over the past decade, sustainable and responsible investing have gained momentum and continue to grow in popularity among investors, and it is increasingly recognised that the financial system has a particularly important role to play in the transition towards a low-carbon and climate-resilient economy. The integration of sustainability considerations into the decision-making process for investments, as measured by Environmental, Social and Governance (ESG) indicators, has been driven by investor demands, fiduciary duty, climate change and the development of new regulations and values. Sustainability in the financial sector is becoming mainstream and is reshaping global markets. In a recent paper, we explore the impact of ESG factors on the risk and return of sovereign bonds from an investor perspective, in particular investigating how to measure and manage EGS risks in sovereign bond portfolios and their implications for sovereign bond portfolio strategies.



Interview - Gianfranco Gianfrate, Associate Professor of Finance

"Are Finance and Sustainability Really Compatible?"

In this month's interview, Gianfranco Gianfrate, Associate Professor of Finance, EDHEC Business School and Climate Change & Sustainable Finance lead expert, EDHEC-Risk Institute, discusses his recent nomination as Director of GRASFI. He showcases EDHEC's Sustainable Finance thought leadership throughout the research, teaching and initiatives he is involved in. He also underlines the complementarity between finance and sustainability. Finally, he tells us about EDHEC-Risk's upcoming projects on sustainable finance.


Industry Analysis

Diversification and Insurance: Which Should Come First?

The authors find that for a given insurance payoff (CPPI or OBPI), the choice of the diversification scheme matters in the sense that equal weighting, variance minimisation, risk parity and maximum diversification lead to different outcomes. Conversely, for a given diversification scheme (equal weighting, variance minimisation, risk parity and maximum diversification), the choice of the non-linear insurance payoff matters in the sense that CPPI and OBPI lead to different outcomes. While diversification and insurance are most often performed independently from each other, the findings suggest that a closer analysis of the interaction between these fundamental risk management techniques may lead to welfare improvements for investors.


A Holistic Goals-Based Investing Framework for Analysing Efficient Retirement Investment Decisions in the Presence of Long-Term Care Risk

The authors present a flexible framework developed to provide personalised advice on retirement investment decisions in the presence of life event risk. This article shows an application of this framework in a simple setting with two assets, a 50%/50% stock/bond balanced fund and an immediate annuity with a 2% COLA indexation. The analysis presented can be extended in a number of directions involving the use of alternative welfare functions or the introduction of additional assets such as target date funds or variable annuities.


Green(ish) Bonds - Is the Growth Sustainable?

On the 25th February, 2021, Justine Leigh-Bell, Deputy CEO of Climate Bond Initiative, together with Professor Gianfranco Gianfrate, professor at EDHEC Business School, held an online debate on the topic of "Green Bonds" and climate change finance. The debate, focused on the value and development of the "Green Bonds" market. Indeed, there has been an increasing focus in the past years on the numerous issues related to climate change and the environment, a focus that has spread through the financial markets. On one side, there is a strong effort for developing instruments that incentivise, or at least price correctly, initiatives that have in mind a positive effect on the environment. On the other side, as with any new movement in the market, there is the concrete risk of it being a momentary trend, perhaps even a bubble.


EDHEC-Risk Publications

Publication - Flexicure Retirement Solutions: A Part of the Answer to the Pension Crisis?

"Flexicure" Retirement Solutions: A Part of the Answer to the Pension Crisis?

Individuals preparing for retirement are currently left with an unsatisfactory choice between security with no flexibility with annuity products and flexibility without security with investment products such as balanced funds or target date funds. To get out of this impasse, the authors introduce a range of "flexicure" retirement goal-based investing (GBI) strategies that offer both security and flexibility with respect to the objective of generating replacement income in decumulation. Recent advances in financial engineering and digital technologies make it possible to apply GBI principles to a much broader population of investors than the few traditional clients who can afford customised mandates or private banking services, which suggests that these flexicure retirement solutions can be used as part of the solution to the global pension crisis.

Publication - Do the Shades of Green Matter? The Pricing and Ownership of "Dark-green" Bonds

Do the Shades of Green Matter? The Pricing and Ownership of "Dark-green" Bonds

This study explores whether the green bonds rated "dark green" by CICERO are priced differently in the market from the light/medium-green ones as well as from the conventional bonds. They find that on average dark-green bonds are not priced differently from otherwise similar non-green bonds. However, they find that the premium for dark-green bonds increases over time and has been particularly penalised in 2020, possibly because of less investor focus on assets' environmental footprint during the COVID-19 crisis.

Publication - Capital Structure Choices, Pension Fund Allocation Decisions and the Rational Pricing of Liability Streams

Capital Structure Choices, Pension Fund Allocation Decisions and the Rational Pricing of Liability Streams

The authors introduce an integrated asset-liability management model that allows for the joint quantitative analysis of capital structure choices, pension fund allocation decisions and rational pricing of liabilities. They confirm that capital structure decisions have a substantial impact on the value of pension claims, and provide a quantitative assessment of the mispricing induced by the use of an arbitrary regulatory discount rate. They also present a quantitative assessment of the asset substitution effect implied by a change in the pension fund allocation to risky assets taking place after the corporate and pension obligation claims have been issued.



Replay Webinar: Green(ish) Bonds?

Webinar: Green(ish) Bonds?

Set against the background of an ongoing policy and academic discussion on the need for more transparent green bond markets, this video discusses the merits and limits of green bond financing. Gianfranco Gianfrate, together with Justine Leigh-Bell (Climate Bonds Initiative) answer the following questions: 1/How green are green bonds really? 2/ How could trust in the green bond market place be increased and sustained? 3/ Are non-binding green bond standards showing their limits? 4/ Is a new and binding green bond standard needed to eliminate any risk of greenwashing?

Interview of Riccardo Rebonato: Science and Finance to Tackle Climate Change

Interview: Science and Finance to Tackle Climate Change

Riccardo Rebonato, Professor of Finance at EDHEC Business School leads a research programme on the Impact of Climate Change on Asset Prices and Risk Management within the EDHEC-Risk Institute. In this exclusive interview, he discusses how and why climate change, finance and sciences are intertwined. He then emphasises why the permanence of CO2 in the atmosphere is particularly important. He concludes by explaining why EDHEC and EDHEC-Risk Institute are well placed to make a contribution in this crowded field.


News - Green and sustainable finance: the new normal?

Green and sustainable finance: the new normal?

Gianfranco Gianfrate, Professor of Finance, EDHEC Business School has been invited to discuss the promises and perils of green finance. Since 2007, when the first green bonds were issued to support the development of climate change solutions, the market has substantially grown. The panel discussion looked at the latest trends, such as ESG upcoming disclosure standards and soaring of "transition finance", with a focus on related new jobs and skills.

News - Leong Sing Chiong appointed as a new member on EDHEC-Risk international advisory board

Leong Sing Chiong appointed as a new member on EDHEC-Risk international advisory board

EDHEC-Risk Institute is pleased to announce that Leong Sing Chiong, Deputy Managing Director for Markets and Development, Monetary Authority of Singapore (MAS), has joined its international advisory board, which brings together distinguished scholars, representatives of regulatory bodies, as well as senior executives from business partners and other leading institutions.

News - Are you a European investor? Your opinion matters

Are you a European investor? Your opinion matters

2020 was another record year for the ETF industry, with total AUM topping US$1.3tn. Against this backdrop and following the growing appetite of investors for ETFs, we would like to invite you to participate in the 14th ETF, Smart Beta and Factor Investing survey. This survey continues to analyse European investor practices, perceptions in terms of challenges and benefits, and future plans for investing into ETF, with an increased emphasis on ESG investing for this 14th edition.

News - Climate change and finance are intertwined

Climate change and finance are intertwined

EDHEC Business School has a solid reputation in the field of finance. The school also has faculty members with physics backgrounds, which makes them valuable contributors to the debate on climate change. MSc in Climate Change & Sustainable Finance Professor Riccardo Rebonato, an asset-pricing specialist and one of those faculty members with a PhD in physics, explains how climate change and finance are intertwined.


Press Review

EDHEC-Risk Institute has been cited widely in the business and industry press. A selection of articles may be found below.


Director EDHEC Risk Climate Impact Institute (ERCII)

EDHEC's ambition is to make the EDHEC Risk Climate Impact Institute an international centre of reference in the area of fundamental and applied research on measuring the impact of climate change on asset prices and on the financial industry's participation in mitigating climate change. The Director will participate in building a team of researchers and development support staff of around 15 people. The director will have direct responsibility for the implementation of the institute's outreach, whether it involves organising presentation events and promoting the research to the industry or scientific cooperation with the industry. To apply, please send your CV and a cover letter to [email protected].