EDHEC-Risk Concept Industry Analysis Featured Analysis Latest EDHEC-Risk Surveys Features Interviews Indexes and Benchmarking FTSE EDHEC-Risk Efficient Index Series FTSE EDHEC-Risk ERAFP SRI Index EDHEC-Risk Alternative Indexes EDHEC-Risk IEIF Commercial Property Indices Hedge Fund Index Research Equity Index Research Amundi ETF "Core-Satellite and ETF Investment" Research Chair EDHEC-Risk Institute Solvency II Benchmarks Index Regulation and Transparency ERI Scientific Beta Performance and Risk Reporting Hedge Fund Performance EuroPerformance/EDHEC-Risk Institute Style Ratings Performance Measurement for Traditional Investment CACEIS "New Frontiers in Risk Assessment and Performance Reporting" Research Chair Asset Allocation and Alternative Diversification Real Assets Meridiam Infrastructure/Campbell Lutyens "Infrastructure Equity Investment Management and Benchmarking" Research Chair Natixis "Investment and Governance Characteristics of Infrastructure Debt Instruments" Research Chair Newedge "Advanced Modelling for Alternative Investments" Research Chair CME Group "Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation" Strategic Research Project Asset Allocation and Derivative Instruments Volatility Research Eurex "The Benefits of Volatility Derivatives in Equity Portfolio Management" Strategic Research Project SGCIB "Structured Investment Strategies" Research ALM and Asset Allocation Solutions ALM and Private Wealth Management AXA Investment Managers "Regulation and Institutional Investment" Research Chair BNP Paribas Investment Partners "ALM and Institutional Investment Management" Research Chair Deutsche Bank "Asset-Liability Management Techniques for Sovereign Wealth Fund Management" Research Chair Lyxor "Risk Allocation Solutions" Research Chair Merrill Lynch Wealth Management "Risk Allocation Framework for Goal-Driven Investing Strategies" Research Chair Ontario Teachers' Pension Plan "Advanced Investment Solutions for Liability Hedging for Inflation Risk" Research Chair Rothschild & Cie "The Case for Inflation-Linked Corporate Bonds: Issuers' and Investors' Perspectives" Research Chair Russell Investments "Solvency II" Research Chair Non-Financial Risks, Regulation and Innovations Risk and Regulation in the European Fund Management Industry Index Regulation and Transparency Best Execution: MiFID and TCA Mitigating Hedge Funds Operational Risks FBF "Innovations and Regulations in Investment Banking" Research Chair EDHEC-Risk Publications All EDHEC-Risk Publications EDHEC-Risk Position Papers IPE EDHEC-Risk Institute Research Insights AsianInvestor EDHEC-Risk Institute Research Insights P&I EDHEC-Risk Institute Research for Institutional Money Management Books EDHEC-Risk Newsletter Events Events organised by EDHEC-Risk Institute EDHEC-Risk Days Asia 2014, Singapore, 3-4 July, 2014 Events involving EDHEC-Risk Institute's participation EDHEC-Risk Institute Presentation Research Programmes Research Chairs and Strategic Research Projects Partnership International Advisory Board Team EDHEC-Risk News EDHEC-Risk Newsletter EDHEC-Risk Press Releases EDHEC-Risk in the Press Careers EDHEC Risk Institute-Asia EDHEC Business School EDHEC-Risk Executive Education EDHEC-Risk Institute PhD in Finance Yale School of Management - EDHEC-Risk Institute Certificate in Risk and Investment Management Yale SOM-EDHEC-Risk Fixed-Income Investment Seminar, New Haven, 9-10 June, 2014 Yale SOM-EDHEC-Risk Fixed-Income Investment Seminar, London, 25-26 June, 2014 Investment Management Seminars CFA Institute/EDHEC-Risk Advances in Asset Allocation Seminar, London, 20-22 May, 2014 CFA Institute/EDHEC-Risk Advances in Asset Allocation Seminar, New York, 22-24 July, 2014 Contact EDHEC-Risk Executive Education Contact Us ERI Scientific Beta
    Risk Allocation and Smart Beta    

Risk allocation has gained increasing popularity amongst sophisticated investors, as is perhaps evidenced by the increasing number of papers, too numerous to be cited, recently published on the subject in the practitioner's literature, What the concept exactly means, however, arguably deserves some clarification. Indeed, various interpretations

exist for what is sometimes presented as a new investment paradigm and sometimes presented as a simple re-interpretation of standard portfolio construction techniques. To obtain a better understanding of the true meaning of risk factor allocation, it is useful to go back to the foundations of asset pricing theory. More...

   
 
Industry Analysis
Indexes and Benchmarking
Equity Volatility Indexing Products
Investors are willing to gain exposure to market volatility for a variety of reasons, such as diversifying equity risk, hedging an existing short volatility exposure, or simply taking directional bets. Over-the-counter (OTC) or exchange-traded volatility derivatives using volatility indices as underlyings to alleviate losses during market downturns are increasingly being relied on, based on the negative correlation between equity returns and volatility which has been well-documented in the academic literature.  More...
Infrastructure Investment
Efficient Benchmarks for Infrastructure Equity Investments
A recent research quandary with respect to infrastructure equity investment has also been a source of interrogation for final investors: while the economics of underlying infrastructure investment suggests a low and potentially attractive risk profile, the experience of investors and available research evidence have been different and rather mixed. This article, based on recent research we have conducted, attempts to explain why this has been the case and what new research and benchmarking efforts are necessary to create investment solutions that realign expectation and observed investment performance as well as to inform the regulatory debate in relation to institutional investing in long-term assets like infrastructure equity.  More...
EDHEC-Risk News
Portfolio Management
Professor Martellini interviewed by The Journal of Portfolio Management
In an interview for The Journal of Portfolio Management, Lionel Martellini, Scientific Director of EDHEC-Risk Institute and Professor of Finance at EDHEC Business School, expounded upon a recent invited editorial comment entitled “In Diversification we Trust”. In this short video, Professor Martellini cautions against the pitfalls of traditional mean-variance optimisation and explains that risk diversification is often mistaken for risk management whereas the latter entails another two dimensions, i.e. risk hedging and risk insurance.  More...
EDHEC-Risk Publications
Risk Management
Robust Risk Estimation and Hedging: A Reverse Stress Testing Approach
Yaacov Kopeliovich, Arcady Novosyolov, Daniel Satchkov, Barry Schachter This paper proposes a novel method for reverse stress testing. The process starts with a multivariate normal distribution and uses Principal Components Analysis (PCA) along with Gram-Schmidt orthogonalization to determine scenarios leading to a specified loss level. The approach is computationally efficient. The method includes the maximum likelihood scenario, maximizes (a definition of) representativeness of the scenarios chosen, and measures the plausibility of each scenario. More...
 
Interviews
   New insights into risk and performance that could lead to major improvements in investment reporting going forward - an interview with Philippe Bourgues  
   
  In this month's interview, we speak to Philippe Bourgues, Head of Operational Line – Front Office Solutions, CACEIS, about the research chair at EDHEC-Risk Institute on “New Frontiers in Risk Assessment and Performance Reporting,” and the new EDHEC-Risk Institute publication drawn from the research chair, entitled "Improved Risk Reporting with Factor-Based Diversification Measures." More...  
Features 
 
Improved Risk Reporting with Factor-Based Diversification Measures
This paper analyses various measures of portfolio diversification, and explores the implication in terms of advanced risk reporting techniques. We use the minimal linear torsion approach (Meucci et al. (2013)) to turn correlated constituents into uncorrelated factors, and focus on the effective number of (uncorrelated) bets (ENB), the entropy of the distribution of risk factor contribution to portfolio risk, as a meaningful measure of the degree of diversification in a portfolio. In an attempt to assess whether a relationship exists between the degree of diversification of a portfolio and its performance in various market conditions, we empirically analyse the diversification of various equity indices and pension fund policy portfolios. We find strong evidence of a significantly positive time-series and cross-sectional relationship between the ENB risk diversification measure and performance in bear markets. More...
Industry Analysis
Behavioural Finance
Value or Growth: The Genes of Investment Style
In addition to their ancestry, individuals also inherit financial genes, which have a significant and long-lasting effect on their approach to investing throughout their careers. A significant portion (30%) of the variation in risk taking of individuals is explained by their genetic makeup. This “financial DNA” is an important factor alongside characteristics such as education, age, gender or level of wealth. Recent studies have shed new light on the value/growth debate by virtue of the nature versus nurture debate.  More...
Asset Management
The Tobin tax – legal obstacles making matters worse?
The proposed Financial Transaction Tax (FTT) that is being driven by 11 countries in the EU, and is widely referred to as the “Tobin Tax” or “Robin Hood” tax, has been ruled illegal by the European Union’s own lawyers. But, rather than aborting the tax, this could lead to something much worse. The legal service of the European Council that represents member states has pointed out that a central aspect of the plan would exceed member states’ tax powers under international law, would infringe on the rights of member states that had not agreed to the tax, and could breach competition rules. More...
Risk and Asset Management Research
EDHEC-Risk Institute Research Insights - IPE Supplement Winter 2014
The winter 2014 edition of EDHEC-Risk Institute’s Research Insights supplement in co-operation with Investment & Pensions Europe addresses what we consider to be some of the key topics of importance for institutional investors today. Our first article, drawn from the Russell Investments research chair at EDHEC-Risk Institute on Solvency II, looks at the treatment of bond investment within the framework of the Solvency II Directive.  More...
EDHEC-Risk News
Alternative Investments
Paper on hedge fund flows by EDHEC-Risk Institute PhD in Finance graduate, Gideon Ozik, accepted by the Journal of Finance and Quantitative Analysis
The paper, co-authored with Professor Ronnie Sadka of Boston College, provides an assessment of the potential profits associated with trading based on inside information about hedge-fund investor flows. Focusing on share-restricted funds, it finds that funds with recent outflow underperform funds with recent inflow, especially for the group of funds with high personal investment of fund insiders and low corporate governance.  More...
High Frequency Trading
EDHEC Professor, Ekkehart Boehmer, makes keynote address at the 26th Australasian Finance & Banking Conference
Ekkehart Boehmer, Professor of Finance at EDHEC Business School and member of EDHEC-Risk Institute, was invited to make a keynote address on the subject of High Frequency Trading at the 26th Australasian Finance & Banking Conference held in Sydney on 17-19 December last. The conference, organised by the Institute of Global Finance and School of Banking & Finance at the Australian School of Business, UNSW, is the most prestigious finance conference in the Asia-Pacific region.  More...
Appointments
EDHEC professor Noël Amenc appointed to ESMA’s Consultative Working Group for Financial Innovation
We are honoured to announce that Noël Amenc, Professor of Finance at EDHEC Business School and Director of EDHEC-Risk Institute, has been invited to join industry stakeholders on the European Securities and Markets Authority's Consultative Working Group for Financial Innovation, alongside eighteen fellow members. The Consultative Working Group was established by ESMA in order to advise and provide expertise to its Financial Innovation Standing Committee in the field of financial innovation and related market and product developments that impact both retail and institutional investors.  More...
Asset Management Education
PhD in Finance Asian chapter 2014 electives unveiled
Finance professionals participating in the EDHEC-Risk Institute PhD in Finance programme will have access to a wide choice of electives in 2013 and 2014, during which some of the world’s leading specialists will present their latest research advances in specific fields from "Private Equity","Microstructure" and "Empirical Option Pricing" to "Long-Run Risks in Asset Prices" and "Advances in Modelling and Data Science".  More...
EDHEC-Risk Publications
Financial Modelling
A Binomial-Tree Model for Convertible Bond Pricing
Krasimir Milanov, Ognyan Kounchev, Frank J. Fabozzi, Young Shin Kim, Svetlozar T. Rachev This article derives a binary tree–based model for convertible bond valuation subject to credit risk modeling. The model, which belongs to the framework known as equity to credit risk, is based on the so-called reduced-form (constant intensity of default model for the underlying) and so-called synthesis (variable intensity of default model for the underlying) credit risk models.  More...
Asset Pricing
Asset Prices with Heterogeneity in Preferences and Beliefs
Harjoat S. Bhamra, Raman Uppal This paper studies asset prices in a dynamic, continuous-time, general-equilibrium endowment economy where agents have power utility and differ with respect to both beliefs and their preference parameters for time discount and risk aversion. It solves in closed form for the following quantities: optimal consumption and portfolio policies of individual agents; the riskless interest rate and market price of risk; the stock price, equity risk premium, and volatility of stock returns; and, the term structure of interest rates. More...
Volatility
The Relevance of Country- and Sector-specific Model-free Volatility Indicators
Lixia Loh, Lionel Martellini, Stoyan Stoyanov 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).  More...
Performance
Size Rotation in the US Equity Market
Keith L. Miller, Chee Ooi, Hong Li, Daniel Giamouridis This paper develops a hybrid model that relies on the nonlinear classification Decision Tree (DT) approach but also on multivariate predictive regressions to aid implement a size rotation strategy in the U.S. equity markets. Our investment prediction is derived with a two-stage algorithm. In the first stage we use a decision tree to determine whether large-cap or small-cap stocks will outperform in the subsequent quarter. In the second stage we use a multiple linear regression model to predict whether large-cap stocks will outperform or underperform small-cap stocks over the next quarter. A version of this paper was published in the Winter 2013 issue of the Journal of Portfolio Management. More...

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