EDHEC-Risk Newsletter
December 16, 2017 Asset Management Research
 
 
Events
 
Books


EDITORIAL

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. More...


INDUSTRY ANALYSIS

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. There are two theoretical explanations – the leverage effect and volatility feedback effect. More...

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. More...

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...


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...


INTERVIEW

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...


RESEARCH NEWS

Another Reason to be Cautious on Hedge Fund Databases: The Delisting Bias Measuring hedge fund performance is a very difficult and challenging task, not only because of the very specific nature of alternative strategies and their risk factors, but also because of the way they report their performance to databases. Contrary to traditional mutual funds, hedge funds are generally not allowed to advertise their performance, although this is slowly changing with the introduction of the JOBS Act in the United States which allows small hedge funds to advertise. Thus, listing their funds in the various hedge fund databases (HFR, TASS, CISDM, etc.) is the most common way to get assets and recognition from investors. However, hedge fund databases are notoriously flawed with some well-known biases (survivorship, backfill, etc.). More...


EDHEC PUBLICATIONS

Robust Risk Estimation and Hedging: A Reverse Stress Testing ApproachYaacov Kopeliovich, Arcady Novosyolov, Daniel Satchkov, Barry Schachter. Traditional risk modeling using Value-at-Risk (VaR) is widely viewed as ill equipped for dealing with tail risks. As a result, scenario-based portfolio stress testing is increasingly being promoted as central to the risk management process. A recent innovation in portfolio stress testing endorsed by regulators, called reverse stress testing, is intended to identify economic scenarios that will threaten a financial firm’s viability, but do so without injecting the manager’s cognitive biases into stress scenario specification. More...

A Binomial-Tree Model for Convertible Bond PricingKrasimir Milanov, Ognyan Kounchev, Frank J. Fabozzi, Young Shin Kim, Svetlozar T. Rachev. In this article, the authors derive 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. The authors show that their model converges in continuous time to the Ayache–Forsyth–Vetzal convertible bond valuation model introduced in 2003. More...


EDHEC-RISK NEWS

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...

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...

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...