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We are pleased to inform you that all of the EDHEC Risk and Asset Management Research Centre's working papers and publications on traditional investment management topics are freely accessible on the following page of our website:
http://www.edhec-risk.com/edhec_publications/all_publications
In order to assist you in choosing the papers, we have included a selection of the publications below, together with a brief summary and a link towards the web page.
We hope that these papers will be of interest to you.
Rating the Ratings: A Critical Analysis of Fund Rating Systems
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Fund ratings are a widely used tool for fund promoters and fund subscribers. They serve to evaluate fund performance on a risk and return basis in an easily understandable way, and allow the performance of different funds to be compared. In this context, the quality and the robustness of the ratings is a critical subject for both investment management firms and investors. Though the predictive capability of fund ratings has not been proved, numerous studies performed on US mutual funds have concluded that fund subscribers are widely influenced by fund ratings in making their choice.
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Reactions to the EDHEC Study "Assessing the Quality of Stock Market Indices"
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This document summarises the results of the study, which assessed the quality of well-known stock market indices and concluded that investors need to be more careful when using benchmarks for either asset allocation or performance measurement. In particular, the study argued that stock market indices are neither neutral choices of risk factors nor efficient portfolios. The study also proposed a number of pragmatic remedies for the shortcomings of stock market indices. The document then outlines the reactions that were received from the European asset managers and investors surveyed by EDHEC for their opinions on the findings of the research.
Low-Cost Momentum Strategies
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The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs.
Hide-and-Seek in the Market: Placing and Detecting Hidden Orders
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This paper investigates why traders hide their orders and how other traders respond to hidden depth. Using a logit model, the authors provide empirical findings suggesting that traders use hidden orders to manage both exposure risk and picking off risk. Using probit models, they show that hidden depth increases order aggressiveness. The authors' interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detect hidden volume at the best opposite quote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is detected suggests either that they do not associate hidden orders with informed trading or that the risk of trading with an informed trader is widely offset by the opportunity for depth improvement. A revisited version of this paper was published in the Review of Finance (formerly European Finance Review).
The Value Premium and Time-Varying Unsystematic Risk
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Recent research has discussed the possible role of unsystematic risk in explaining equity returns. Simultaneously, but somehow independently, numerous other studies have documented the failure of the static and conditional capital asset pricing models to explain the differences in returns between value and growth stocks. This paper examines the post-1963 value premium by employing a model that captures the time-varying total risk of the value-minus-growth portfolios.
Approximating Independent Loss Distributions with an Adjusted Binomial Distribution
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The author describes an approximation methodology for constructing independent loss distributions based on adjusting the binomial distribution. This method can handle both homogeneous and heterogeneous loss portfolios. He finds that this simple algorithm provides an excellent fit to the exact distribution for a broad range of correlations and portfolio credit quality.
Response to CESR public consultation on Best Execution under MiFID
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In response to the CESR's public consultation on best execution under MiFID, EDHEC strongly defend the idea that the analysis of the total net proceeds of financial transactions represent the most important factor for assessing execution quality. But this analysis also represents the most significant conceptual and technical challenge the industry will face in order to consistently monitor execution quality, and therefore allow best execution to become a tangible and measurable objective for investment firms.
MiFID: the (in)famous European Directive?
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This study, while recognising that the directive allows the conditions in which investment companies can operate on the regulated markets or over-the-counter to be harmonised, warns of the eventual adverse effects relating to the obligation of transparency for systematic "internalisers" and the obligation of "best execution". It finds, in the case of the obligation imposed on systematic "internalisers" to maintain a public spread of prices, that it is prejudicial for this restriction to be removed for the least liquid securities. This provision will lead, in a certain number of cases, (small-caps on markets that are centrally organised at present), to a deterioration in the pre-trade transparency that is currently provided to investors.
Momentum Profits and Time-Varying Unsystematic Risk
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This article considers whether the widely documented momentum profits are a compensation for time-varying unsystematic risk as described by the family of autoregressive conditionally heteroscedastic models. The motivation for estimating a GJR-GARCH(1,1)-M model stems from the fact that, since losers have a higher probability than winners to disclose bad news, one cannot assume a symmetric response of volatility to good and bad news.
Performance Measurement for Traditional Investment
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This paper presents the state of the art of performance measurement in the area of traditional investment, from a simple evaluation of portfolio return to the more sophisticated techniques including risk in its various acceptations. It also describes models that take a step away from modern portfolio theory and allow a consideration of cases beyond mean-variance theory.
Asset-Liability Management Decisions in Private Banking
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Working from the observation that the contribution of asset-liability management techniques developed for institutional investors is not yet familiar within private banking, this study shows the expected benefits of a transposition of that kind. Asset-liability management represents a genuine means of adding value to private banking that has not been sufficiently explored to date. Within the framework of private financial management offerings, personal wealth managers tend to confine their clients to mandates that are only differentiated through their level of volatility, without the client's personal wealth constraints and objectives being genuinely taken into account in order to determine the overall strategic asset allocation. In that sense, private wealth management is not sufficiently different from the management of a diversified or profiled mutual fund.
Momentum Profits and Non-Normality Risks
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This paper examines the role of non-normality risks in explaining the momentum puzzle of equity returns. It shows that momentum returns are not normally distributed. About 70 basis points of the annual momentum profits can be attributed to systematic skewness risk. This finding is pervasive across nine strategies and is reinforced when time dependencies in abnormal returns and risks are explicitly modeled. The analysis also reveals that the market and skewness risks of momentum portfolios evolve over the business cycle in a manner that is consistent with market timing and risk aversion.
CP20: Significant improvements in the Solvency II framework but grave incoherencies remain: EDHEC response to Consultation Paper n° 20
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This position paper contains EDHEC's answer to CP20, a consultation process initiated by CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) on the "Advice to the European Commission in the Framework of the Solvency II Project on Pillar I Issues".
EDHEC European ETF Survey 2006
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This survey is an in-depth study on the use of ETFs (Exchange-Traded Funds) by European investors. The results of the survey show that following rapid growth, ETFs are being widely used by European institutional investors, private bankers and asset managers.
Transaction Cost Analysis in Europe: Current and Best Practices
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This report, commissioned by HSBC Investment Bank, reviews the conditions in which buy-side firms (traditional and alternative) are currently monitoring transaction costs and investigates the various issues related to transaction cost analysis in the context of the Markets in Financial Instruments Directive due to be enforced in November 2007 which contains an important provision related to Best Execution.
The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies
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This study reveals the contradictions inherent in the current Solvency II and IFRS provisions for insurance companies. The report shows notably that the numerous provisions proposed by the IFRS are at odds with the good risk management practices put forward by Solvency II. While IFRS and Solvency II should lead to a genuine evolution in the management of insurance companies, by empowering them with respect to their risks (identification, measurement and management), one is forced to observe today that the standards implemented often oppose their initial objectives: the adoption of modern asset management and ALM techniques with a view to reducing the exposure to risks is considerably penalised by the IFRS treatment by leading to additional purely accounting volatility, without any connection to the economic reality.
QIS 2: Modelling that is at odds with the prudential objectives of Solvency II
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In this position paper, EDHEC regrets the approach chosen by the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) for the European Commission as proposed in the QIS 2 (Quantitative Impact Study 2), which does not favour optimal management of the risks of European insurance companies. In light of the changing face of risks and how they are perceived, the existing prudential rules are totally inadequate and the European Commission has established a vast project to overhaul the methods used for calculating the solvency of insurance companies.
Assessing the Quality of Stock Market Indices: Requirements for Asset Allocation and Performance Measurement
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The results of this Af2i/EDHEC study clearly show that most market indices used as a reference by investors are neither efficient nor stable in terms of style and sector exposure. This inefficiency and instability is a source of underperformance and poor risk management and results in a failure by investors to optimise the risk-return trade-off of their portfolios. Af2i and EDHEC offer solutions to these difficulties and recommend, in particular, that investors favour the construction of benchmarks based on geographic zones using combinations of style or sector indices and that they use a "completeness core portfolio" approach in order to ensure that their asset allocation is more stable.
Derivatives Strategies for Bond Portfolios
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This paper examines how standard exchange-traded fixed-income derivatives (futures and options on futures contracts) can be included in a sound risk and asset management process so as to improve risk and return performance characteristics of managed portfolios. The results show that the non-linear character of the returns on protective option strategies offers appealing risk reduction properties in the pure asset management context. Consequently, such strategies should optimally receive a significant allocation, especially when investors are concerned with minimising extreme risks.
Risk Measurement of Investments in the Satellite Ring of a Core-Satellite Portfolio: Traditional versus Alternative Approaches
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This paper provides a risk framework for fiduciaries considering using a core-satellite approach to investing. While the article mainly covers the additional risk measurement techniques, which are needed when investing in hedge funds, its recommendations are also relevant for other investments that have default, devaluation, and/or liquidity risks associated with them. While the article's focus is on quantitative techniques, the author notes that a fiduciary must also understand the economic basis for each investment's returns.
Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts' Recommendations
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In this paper, the authors derive a closed-form solution for the optimal portfolio of a non-myopic utility maximizer who has incomplete information about the "alphas", or abnormal returns of risky securities. They show that the hedging component induced by learning about the expected return can be a substantial part of our demand. A revisited version of this paper was published in the Winter 2006 issue of the Review of Financial Studies.
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