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Subscribe by RSSBenchmarks: EDHEC-Risk Institute warns against the false promises of governance
Transparency key to informed decision-making and mitigating conflicts of interest
EDHEC-Risk Institute has issued a statement on the issue of financial benchmarks and the recent consultations by the International Organisation of Securities Commissions (IOSCO) and the European Securities and Markets Authority (ESMA)/European Banking Authority (EBA),
Investor Opinions on Corporate Bond Indices – Results from a call for reaction
Corporate bonds have long been considered a standard asset class, and with a market size of nearly $8 trillion in the United States alone,[1] they represent a significant amount of investment. As investors have growing concerns about the ability of European governments to solve the sovereign crisis and look for higher yields,
Asian volatility indices
The notion of model-free option-implied volatility was first implemented by CBOE in the construction of the celebrated VIX indicator, which is inferred from prices of index options written on the S&P 500 index.
Avoiding Sovereign Credit Risk Exposure in Equity Portfolios
The recent sovereign risk crisis made it clear that sovereign risk can drive stock markets. Stocks of companies which benefit from implicit guarantees provided by the government, such as banks and stocks of companies that benefit from public spending or from tax incentives may be affected by the news on sovereign risk conditions.
Assessing the Quality of Asian Stock Market Indices
EDHEC-Risk Institute has recently conducted a detailed analysis[1] on a set of popular stock market Asian indices, including indices from Japan (Nikkei 225, Topix 100), China (CSI 300, FTSE China 25), Hong Kong (Hang Seng),
Assessing Volatility Indicators: the Benefit of Local Equity Volatility Indices
Stock market volatility is an important input to asset allocation and risk management. With the increase in stock market uncertainty and the recent financial crises, there has been a growing interest in volatility indices as sentiment indicators but also in deploying volatility products based on volatility indices to alleviate losses during market downturns.
Does Theory justify fundamental weighted indices?
The popularity of fundamentals-based strategies as an alternative to traditional cap-weighting has been growing significantly among passive indexing investors. It refers to the construction of indices in which the constituents are weighted by non-capitalization measures as proxies for fundamental value.
Choose Your Betas
Systematic equity strategies that try to improve performance compared to cap-weighted reference indices have received considerable attention recently (see this Financial Times article). However, commercially available advanced beta strategies are pre packaged offerings that often provide little justification of how their methodological components are chosen.
The Benefits of Volatility Options in Equity Portfolio Management
In this post, we discuss the benefits of using VSTOXX options in portfolio diversifications. March 2010 witnessed the introduction of option contracts on the VSTOXX index, which provided investors with more flexibility for trading European volatility.
The Benefits of Volatility Futures in Equity Portfolio Management
A number of studies suggest that volatility and equity returns tend to move in opposite directions (i.e. they are strongly negatively correlated) which allows for significant diversification benefits from adding a long volatility position to equity portfolios.
Issues with volatility ETNs
Volatility exchange-traded notes (ETNs) provide an easy access for investors to constant maturity VIX futures portfolios which, in turn, provide a long exposure to equity market volatility as measured by the VIX index.
Evaluating Backtests of Fundamentals-based equity indexation strategies
Fundamentals-based strategies have gained significant interest from academics and practitioners as an alternative index investing over the past decade. It refers to the construction of indices in which the securities are weighted by non-capitalization measures as proxies for fundamental value.
Measuring credit risk within corporate bond index construction
How to measure default risk of in individual issuer or within a corporate bond index in a reliable way should be one of the first consideration when investors decide to buy and sell bonds. However, one
Investing in Inflation-Linked Bonds without the Sovereign Risk?
In a survey of institutional investors and members of corporate finance departments, EDHEC-Risk Institute sought reactions to the key conclusions of a study entitled “Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks”,
Diversifying the Diversifiers
Ever since the cap weighting has been proved to be inefficient (in terms of mean variance efficiency), several alternative weighting schemes have been proposed. These strategies differ from each other in the assumptions they make and the objectives they aim to achieve.
Skewness as an asset class
Reducing losses in market downturns has been a hot topic in the finance industry since the 2008 financial crisis. It has been empirically demonstrated that volatility is negatively correlated with stock index returns,
Introducing a New Form of Volatility Index: the Cross-Sectional Volatility Index
Recent market turmoil, as well as the presence of ever stricter regulatory constraints has led investors and asset managers to monitor with increased scrutiny the volatility and downside risk of their equity holdings.
Factor based equity indices
There has been research analysing the common return drivers within broad equity universes for quite some time. Chen, Roll and Ross (1986) and Fama and French (1993) find that asset returns could be attributed to a few underlying explicit factors such as macroeconomic factors or firm attributes / style factors.
Benefits of Target Volatility Strategies for Long-term Investors
From an academic standpoint, it has been early recognised that structured products are natural investment vehicles for institutional investors. From a pragmatic standpoint and taking a pension fund example,
How systematic and transparent are standard equity indices?
For an index to be entirely systematic and transparent, it is usually required that the index ground rules contain all construction details which are followed by the index so that the process is completely replicable.
Downside risk measures: Relative importance of mean and volatility modeling
Two popular donwside risk measures suggested in the academic literature and used by practitioners are value-at-risk (VaR) and conditional value-at-risk (CVaR). VaR at a given tail probability represents a threshold loss violated with the corresponding tail probability while CVaR at a given tail probability measures the average loss larger than the corresponding VaR.
Indices and benchmarks have a central role in the investment process
The choice of indices is a determining element in the investment process. It is also the first step. Prior to portfolio construction, investors conduct asset allocation studies to decide on the asset mix.
An integrated approach to sovereign wealth risk management
Research work conducted at EDHEC-Risk Institute within the Deutsche Bank research chair on asset-liability management (ALM) techniques for sovereign wealth fund (SWF) management makes the case for a careful identification of risk factors and appropriate risk management strategies.
Structured investment strategies: A response to investment conundrum
Insurance companies and pension funds have traditionally played an important role as providers of long-term risk capital and, in a world of deleveraging credit institutions, are crucially needed to finance economic development.
Financial Investors and Commodity Markets
A number of policy-makers have blamed the decade-long rise in commodity prices and recent market volatility on the growing influence of financial investors and called for new regulation restricting their participation in commodity markets.
Hedging equity risk with a volatility index
The negative correlation between VIX and stock returns has been well documented in empirical research (see Dumas et al (1998) and Whaley (2000)). Whaley (2000) shows that if VIX falls by 1%, the S&P 100 will rise by 0.47% but when VIX rises by 1%,
What’s the problem with bond indices?
The recent EDHEC-Risk European Index Survey, collecting views of 104 European professional investors, reveals that only around half of current fixed-income investors are satisfied with bond indices (50.9%
Estimation of volatility models
Although there is no consensus about the forecasting properties of GARCH-type models, there is ample empirical evidence that they can successfully explain the in-sample dynamics of the volatility of financial time series.
Is commodity trading to blame for price volatility?
French President Nicolas Sarkozy stated at the opening of the June G20 agricultural meeting that “the financialisation of agriculture markets… is a contributory factor in price volatility”. However,
Volatility, a new era for indexing
First introduced in 1993 (Whaley 1993), volatility indices have attracted more investors’ attention (Whaley 2009). Equity volatility indices are designed to track the aggregate volatility of the equity market.