Academic Research - March 31, 2015

CFA Institute Research Foundation James R. Vertin Award - an interview with Frank J. Fabozzi

In this month's interview, we speak with Frank J. Fabozzi, Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute, who was recently awarded the James R. Vertin Award by the CFA Institute Research Foundation. The award recognised Frank Fabozzi's achievement in producing a relevant and valuable body of research that has contributed to the investment profession. He joins a distinguished group of prior recipients of the award, including Nobel prize recipients William Sharpe and Robert Shiller, and highly regarded investment experts Roger Ibbotson and Andrew Lo.

Frank J. Fabozzi

Could you give us your reaction to being awarded the James R. Vertin Award?

Frank J. Fabozzi: I was surprised, honored, and humbled to be the 2015 recipient of James R. Vertin award given by the CFA Institute. Prior winners include two Nobel laureates in economic science, several likely-to-be Nobel laureates, and a who’s who list of prominent practitioners. What I regret is that I am not able to share the award with my coauthors on books and articles that allowed me to be a candidate for the award, and the contributors to my edited books who helped make those works industry reference books. I am particularly pleased to be on the same list as the late Peter Bernstein, the 2000 recipient of this award, with whom I co-edited the Journal of Portfolio Management for more than 25 years.

You joined EDHEC Business School as Professor of Finance in 2011. What motivated your choice of EDHEC?

Frank J. Fabozzi: Prior to joining the faculty of EDHEC Business School in 2011, I held various professorial positions in the Yale School of Management since 1993. Teaching at Yale was a wonderful experience – top-notch colleagues and extremely bright graduate students. However, the four-hour commute from my residence in eastern Pennsylvania to New Haven, Connecticut for 18 years took a toll on my body and took time from my family. I had planned to expand my consulting and writing activities rather than take an academic position. I mentioned my planned departure from Yale to a good friend, Professor Lionel Martellini. Within a few days, he and Professor Noël Amenc contacted me about the possibility of joining EDHEC’s faculty where my responsibilities would be to supervise doctoral dissertations, assist in the development of various aspects of the doctoral program, and develop various types of joint programs with leading U.S. academic institutions. Having been a long-time follower of the policy-oriented research publications of EDHEC faculty posted on its web site and published in high-quality academic journals, it was an easy decision for me.

You are advisor for doctoral dissertations in the PhD in Finance at EDHEC-Risk institute, which subjects are you currently supervising? What experience have you gained from this responsibility?

Frank J. Fabozzi: I have supervised topics in several areas of finance: risk management and its regulatory implications; financial econometric modeling of the term structure of interest rates and volatility; equity portfolio management; hedge fund performance, selection and style allocation; credit risk modeling, and; credit default swaps. What makes the supervision of dissertations particularly interesting is that EDHEC doctoral students typically have considerable practical experience in the area in which they are writing their papers. For example, doctoral students I have supervised include a regulator, a successful hedge fund manager, a risk manager, a quantitative analyst, and a credit analyst. Given their experience, the resulting papers take into account the implementation issues associated with moving from theory to practice.

What are your current research goals?

Frank J. Fabozzi: One of the appealing aspects of being employed by a research-oriented university that focuses on implementation issues and policy implications in the financial markets is the flexibility it allows in setting one’s research agenda. My current research goals are to complete several papers that I have been working on for the past few years on factor investing in multi-asset portfolios, performance evaluation, alternative return distribution modeling and its implications for portfolio construction, and robust portfolio optimization. There are several books that I hope to complete over the next 12 months on various topics: portfolio management (Wiley), robust equity portfolio optimization (Wiley), property derivatives (Oxford University Press), capital markets: 5th edition (MIT Press), and entrepreneurial finance (MIT Press).

You are a master in fixed-income analysis, investment management, and structured finance. What skills do you think have been important to your success?

Frank J. Fabozzi: I was very fortunate to be able to get into the fixed income and structured finance areas when it was rare to find any academics who found these markets of interest. The principal research conducted in the fixed-income area in the 1970s and early 1980s dealt primarily with term structure modeling of interest rates rather than what we might view today as fixed-income research. In fact, a paper I wrote on the creation of structured products in the late 1970s where I used the term “left-hand financing” was rejected by a prominent academic journal because it was “inconsistent with the capital asset pricing model”. The reason I became interested in fixed-income was purely by luck. At one of the colleges where I taught there was a guest speaker, Eugene H. Rotberg, former V.P. and Treasurer of the World Bank. After his speech on fixed-income securities and investing, I researched the finance literature. There was clearly little work done which I believe was for several reasons: academics did not find the fixed-income market sexy like equities or options, there were very few (if any) databases on bond pricing to conduct academic research, and, at the time, there was little trading in the fixed-income market (that is, the strategy was primarily buy-and-hold).

My research led me to the coauthoring with Gifford Fong of what I believe was the first book on quantitative fixed-income portfolio management (1985) and the first handbook on the topic (1983). The exposure provided by these works led to considerable consulting work since the mid 1980s for the major investment banking firms where I did advising on trading desks, consulting for their institutional clients, and assisting structurers in the creation of new products. In those engagements, I learned a great deal more than I could have ever learned by reading academic journals. In fact, a criticism of reviewers retained by the publishers of my textbooks is that I failed to cite the relevant literature when I made some statements about fixed-income and structured finance markets. The problem was that the literature was years behind what was going on in the various sectors of the fixed-income market. My body of work also caught the attention of a few prominent individuals from sell-side firms who expressed an interest in my joining the board of a complex of funds for an asset management firm specializing in fixed income that they planned to start in 1987. I did join the board of that firm, Blackstone Financial Management, later to become Blackrock Financial Management, now the largest asset management firm in the world. From my board activities I learned a great deal about the implementation of fixed-income strategies, as well as being advised on the latest developments in the product and regulatory areas.

Do you have any advice for young researchers?

Frank J. Fabozzi: Rather than discuss the skillset that is needed to do research, let me confine my response to the decision that a young researcher must make as to where to conduct research. In finance there are opportunities to conduct research in academia, for sell-side firms, and for buy-side firms. Working in academia provides flexibility in selecting one’s research agenda. Working in industry offers much less flexibility in selecting research topics but does provide greater financial support and resources. Innovative and potentially profitable strategies developed in academia and published in a prestigious academic journal can lead to promotions from an assistant professorship to an endowed professorship, along with some increase in compensation. The research may provide a blueprint for readers of the paper to exploit those opportunities. The same research findings for a buy-side or sell-side firm may result in sufficient compensation that over time will provide the means for endowing a university professorship in one’s name!

Young researchers who are contemplating academia as the venue to conduct research must understand that universities expect faculty to publish in the top academic journals in finance in order to be retained, promoted, and eventually be awarded tenure. There are specialty areas within finance where research may have considerable appeal for practitioners and regulators but be of limited interest to the editors and reviewers of leading finance journals. So for those whose area of interest is not in mainstream topics, academia can be a frustrating environment but can be financially rewarding in industry. Moreover, competition is keen for space in academic journals and the experiences with reviewers can be extremely frustrating.

About Frank J. Fabozzi

Frank J. Fabozzi is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. He is responsible for doctoral dissertations in finance and coordinates and lectures in the Yale School of Management-EDHEC Risk Institute Certificate in Risk and Investment Management. He is a visiting fellow at Princeton University’s Department of Operations Research and Financial Engineering.

Prior to joining EDHEC, Frank held various professorial positions in finance at Yale University’s School of Management from 1993 to 2011 and from 1986 to 1992 was a visiting professor of finance at MIT’s Sloan School of Management. In 2002, he was inducted into the Fixed Income Analysts Society’s Hall of Fame and is the 2007 recipient of the CFA Institute’s C. Stewart Sheppard Award. In addition to his position as editor of the Journal of Portfolio Management, Frank is an associate editor or advisory board member of the Journal of Fixed Income, the Journal of Structured Finance, Quantitative Methods, Journal of Asset Management, Review of Futures Markets, Journal of Mathematical Finance, and Theoretical Economic Letters.

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