Editorial - Sustainable Investing – How Finance Can Help Address the Tragedy of the Horizon - Financial decisions worldwide are increasingly influenced by the scarcity of resources and climate change.

Edhec-Risk Institute - Quarterly Newsletter
June/July 2019
Professor Lionel Martellini Sustainable Investing – How Finance Can Help Address the Tragedy of the Horizon
Financial decisions worldwide are increasingly influenced by scarcity of resources, and climate change. The extent of the environmental impact from climate change is still uncertain, but the recent scientific evidence is increasingly worrisome (IPCC, 2018), and many governments are taking decisive steps to avert a catastrophe. As very eloquently put by Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, “Climate change is the tragedy of the horizon. We don't need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.”

Table of Contents
1. Feature | 2. Interview | 3. Industry Analysis | 4. Research Publications | 5. In Video | 6. News | 7. Events | 8. Press Review

Factor Investing in Sovereign Bond Markets: A Time-Series Perspective
The abundance of theoretical and empirical research on factor investing in the equity universe stands in sharp contrast to the relative scarcity of research about how to efficiently harvest risk premia in bond markets. That relatively little is known about the out-of-sample performance of factor-based bond portfolio optimisation models is perhaps surprising given the importance of fixed-income investments in institutional and private investors' portfolios. From the investment practice standpoint, a similar contrast actually exists between factor investing in the equity space, which is a relatively mature subject, and factor investing in bond markets which still is in its infancy.The paper "Factor Investing in Sovereign Bond Markets: A Time-Series Perspective" is the first of three papers that provide a detailed analysis of the theoretical, empirical and practical challenges related to factor investing in sovereign bond markets. This paper has a focus on factors that are relevant from a time-series perspective (i.e. factors such as the “level” or “slope” of the yield curve that explain for any maturity a large fraction of differences over time in bond returns).

Professor Laurent Deville "Climate Change and Sustainability in EDHEC Financial Economics Programme: Educating students in finance who will have a positive Impact on the world and society"
In this interview, Laurent Deville, professor of Finance and director of EDHEC Business School's Financial Economics track, discusses climate change, one of the most important issues we face today, and the role that the finance industry can and should play. He also explains how to better equip students to help them tackle business issues relating to climate change and sustainability, before providing more details about the new programmes dedicated to climate change, sustainability and finance due to be offered by the school as early as the next academic year.
Industry Analysis
Taxonomy of Sustainable Investing - An Investment Process Perspective
We strongly believe that creating a common language for all actors in the financial system will be helpful in promoting the private sector's contribution to long-term sustainable growth. This paper contributes to this objective by providing clarification and a taxonomy from an investment process perspective. Similar to common practice in investment management, it initiates a discussion on the commitment to earning social and environmental returns by drawing on the key distinction between objectives and constraints. Its two main sections then discuss the selection and allocation phases. We hope our paper will provide useful clarification to asset managers and asset owners seeking to promote sustainable investing practices.
Second Thoughts about Adaptive Markets
In truth most of the current marketing of funds focuses on the first (factor based investing) and the third (ESG or sustainable investing) but the rise of multi factor black box solutions also suggests that there's an untapped thirst for the second narrative based around some kind of magical, undiscovered alpha. Readers of this publication will know that there's any number of quantitative studies that have sought to prove or disprove all of these narratives. I'd suggest that you'll probably find a paper that backs up whatever is your narrative, replete with convincing treasure troves of data.
Monetary Easing at a Crossroads - Comments on FOMC & FED's meeting
Riccardo Rebonato, Professor of Finance, EDHEC-Risk Institute, EDHEC Business School is specialist in interest rate risk modelling with applications to bond portfolio management and fixed-income derivatives pricing. He commented on June FOMC & FED's meeting. The equity markets heaved a sigh of relief after Chairman Powell's words at the post-FOMC meeting conference, interpreting his remarks as an implicit assurance that (if needed) the policy of the Greenspan / Bernanke / Yellen ‘put’ will be continued under his stewardship. Matters are not quite as straightforward, however, for two important reasons.
Research Publications
Factor Investing in Fixed-Income - Defining and Exploiting Value in Sovereign Bond Markets Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets
Value has been recognised as one of the most important factors for equities since the pioneering work by Fama and MacBeth (1973). In equities, the book-to-market value ratio has traditionally been used as a proxy for the value factor. Natural as this choice is for this asset class, it is difficult to translate the concept of value to the fixed-income domain. In this paper, authors propose a definition of value in Treasury bonds that, they believe, is more satisfactory than definitions found in the recent literature, and that allows statistically significant and economically relevant predictions of cross-sectional excess returns. They show that the profitability of the strategy they build using our value signal is closely linked to Treasury market volatility, and they provide an explanation for this strong link using arguments similar to those that can be found in the recent literature on liquidity in Treasuries.
Factor Investing in Fixed-Income - Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets Factor Investing in Fixed-Income – Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets
Looking at momentum in fixed-income markets at the security level is very important, because studies that employ ‘synthetic’ zero-coupon bonds can be vitiated by the well-known serial autocorrelation of pricing errors, which can masquerade as a momentum effect. Authors find that there exist look-back and investment periods for which momentum times series strategies (both ‘self’ and ‘market’) give rise to statistically and economically significant positive Sharpe ratios. They also find that, after adjusting for duration, the reversal cross-sectional strategy has even larger Sharpe ratios, and is profitable over a wider range of look-back and investment periods. They argue that the explanation for this finding is related to the mean reverting properties of the yield-curve slope.
A Financially Justifiable and Practically Implementable Approach to Coherent Stress Testing A Financially Justifiable and Practically Implementable Approach to Coherent Stress Testing
Author presents an approach to stress testing that is both practically implementable and solidly rooted in well-established financial theory. He presents his results in a Bayesian-net context, but the approach can be extended to different settings. He shows i) how the consistency and continuity conditions are satisfied; ii) how the result of a scenario can be consistently cascaded from a small number of macrofinancial variables to the constituents of a granular portfolio; and iii) how an approximate but robust estimate of the likelihood of a given scenario can be estimated. This is particularly important for regulatory and capital-adequacy applications.
Future-Proof Your Climate Strategy by Gianfranco Gianfrate Future-Proof Your Climate Strategy, with Gianfranco Gianfrate
With global weather becoming more extreme, the threat that climate change poses for companies is no longer theoretical. Businesses are working to protect their assets and supply chains from increasingly severe hurricanes, heat waves, fires, and droughts. More and more companies are figuring such “climate risk” into their calculations, and investors are paying close attention. But there is a related threat that many have not fully taken in: carbon risk - the impact of climate-change policies on a company's strategy and returns. As global warming worsens, companies can expect tougher government measures that will extract a growing price for their carbon emissions.
Towards a Paradigm Change in Investment Retirement Solutions: A Possible Answer to the Pension Crisis? - with Daniel Mantilla, Assistant Professor of Finance, Universidad de Los Andes and Research Associate at EDHEC-Risk Institute. During a keynote speech, he explained the best solutions for pensions and optimisation of portfolios at the IDB's PLAC network and AIOS international seminar in April 2019.
Yale School of Management – EDHEC-Risk Certificate in Risk and Investment Management – with Lionel Martellini, Professor of Finance at EDHEC Business School. He explains, together with Yale's team, the context and the content of the certificate which is aimed at people wishing to really dive deeply into issues of modern investment risk and factors that are crucial to building portfolios. Investment management is currently experiencing a series of profound changes referred to as the industrial revolution.
Towards a paradigm change in investment retirement solutions: A possible answer to the pension crisis? - with Daniel Mantilla Yale School of Management – EDHEC-Risk Certificate in Risk and Investment Management – with Lionel Martellini
Learn more in video by subscribing to our YouTube channel.
EDHEC Climate Finance Conference EDHEC Climate Finance Conference #ECFC to take place on December 17, 2019 at the Palais Brongniart in Paris
Given the widespread recognition of climate change risks as perhaps the most fundamental long-term risks for asset managers and asset owners, EDHEC-Risk Institute is committed to launching a number of research and outreach initiatives to help improve our understanding of climate change finance. During this one day conference mixing academic talks and panel discussions, our experts will discuss several issues of increasing importance, including the efficiency of the market pricing of climatic risks, climate risk assessment and disclosure for corporations and their impact on credit analysis, the financial management decisions affected by climate risks and policies, the design of investment strategies to hedge climate risks and liabilities, as well as the impact of green quantitative easing policies by central banks.
Paper Flexicure retirement solutions – A part of the Answer to the Pension Crisis "Flexicure" Retirement Solutions: A Part of the Answer to the Pensions Crisis ? - EDHEC-Risk Institute Research Article in the Journal of Portfolio Management
In this article, authors Lionel Martellini, Vincent Milhau and John Mulvey propose to apply the principle of goal-based investing to the design of a new generation of flexicure retirement investment strategies, which aim at offering the best of both worlds between insurance products and asset management products.
Endurance Sport - Leaving Yourself Behind Endurance Sport: Leaving Yourself Behind
Alongside his academic activities, Lionel Martellini is passionate about sport and a regular participant in high-level endurance events. He finished the Nice Ironman in 2015, and more recently the Swissman 2019, which started in 22 June in Ancona in Switzerland. The Swissman is an extremely demanding triathlon that follows the Ironman format and is well-known for the scenic beauty and exceptional difficulties it offers the limited number of participants, including over 5,500 metres of positive elevation over the whole of the course.
How can business school students benefit from applied research in finance How can Business School Students Benefit from Applied Research in Finance?
Fiona Huang and Giovanni Zaccardi, both Master in Management, Financial Economics international students, took part in a hands-on research experience through the new "Innovations in Investment Management" elective, offering them a two-month placement in the school's renowned research lab, EDHEC-Risk Institute and exposed them to different facets of investment management. Here, they tell us about their experience.
Campus around the world
Yale SOM – EDHEC-Risk Multi Asset Investment Products and Solutions Seminar, New Haven
Les Cercles de l'Agefi, Nice
Big Call: Fixed Income, London
CFA Institute European Investment Conference, Madrid
EDHEC Climate Finance Conference, Paris
Press Review
EDHEC-Risk Institute has been cited widely in the business and industry press. A selection of articles may be found below.
"The New Quant Billions Are Hiding in the Bond Market", Bloomberg (09/07/2019)
"Amundi/EDHEC studies explore fixed income smart beta", ETF Strategy (03/07/2019)
"EDHEC-Risk Institute Papers Present A Complete Analysis Of The Two Most Populard Fixed Income Factors: Value and Momentum", Mondovisione (26/06/2019)
"Monetary Easing At A Crossroads – Dangerous Feedback Loop?", Value Walk (21/06/2019)
"EDHEC-Risk Institute Says Duration-Timing Strategies Can Work", Traders Magazine (24/05/2019)
"The future of retirement is already here", Cuffelinks (22/05/2019)
"EDHEC-Risk Institute launches factor investing in bond markets research programme", ETF Stream (21/05/2019)
"Index companies to feel the chill of fund managers' price war", Financial Times (20/05/2019)
"Factor investing in bonds should focus on two additional factors", Money Management (17/05/2019)
"Factor Investing In Fixed-Income: EDHEC-Risk Institute Paper Shows That It Is Possible To Build Duration-Timing Strategies That Are Economically Superior to Bearing Unconditional Duration Risk", Mondovisione (08/05/2019)
"Financial Climate Change – And the Risks are with You!", Kiwi Investor (08/05/2019)
"The Need for Flexicure Retirement Solutions", Actuarial Post
"Can retirement bonds prevent a pensions crisis?", Mallow Street (07/05/2019)
Stay tuned for more research, outreach, education and industry partnership developments on investment solutions for institutions or individuals
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About EDHEC-Risk Institute:

Part of EDHEC Business School and established in 2001, EDHEC-Risk Institute has become the premier academic centre for industry-relevant financial research. In partnership with large financial institutions, its team of permanent professors, engineers, and support staff, and research associates and affiliate professors, implements seven research programmes and six research, industrial partnerships and private research projects focusing on asset allocation and risk management. Additionally, it has developed an ambitious portfolio of research and educational initiatives in the domain of investment solutions for institutional and individual investors. As part of its "Make an Impact" signature, EDHEC-Risk plays a noted role in furthering applied financial research and systematically highlighting its practical uses.

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