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EDHEC-Risk Newsletter

March 13, 2014
Asset Management Research


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...

http://www.edhec-risk.com/edito/RISKArticleEdito.2014-03-06.2934


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...

http://news.edhec-risk.com/140312/nwl/latest_news/featured_analysis/RISKArticle.2013-09-20.1122


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...

http://news.edhec-risk.com/140312/nwl/latest_news/featured_analysis/RISKArticle.2013-09-20.2115


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...

http://news.edhec-risk.com/140312/nwl/latest_news/featured_analysis/RISKArticle.2014-03-03.2913


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...

http://news.edhec-risk.com/140312/nwl/features/RISKArticle.2014-03-10.5407


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...

http://news.edhec-risk.com/140312/nwl/Interview/RISKArticle.2014-03-12.1941


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...

http://news.edhec-risk.com/140312/nwl/latest_news/featured_analysis/RISKArticle.2014-02-13.3401


EDHEC PUBLICATIONS

Robust Risk Estimation and Hedging: A Reverse Stress Testing Approach

Yaacov 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...

http://news.edhec-risk.com/140312/nwl/edhec_publications/all_publications/RISKReview.2013-06-18.2012


A Binomial-Tree Model for Convertible Bond Pricing

Krasimir 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...
http://news.edhec-risk.com/140312/nwl/edhec_publications/all_publications/RISKReview.2013-10-25.4724


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...

http://news.edhec-risk.com/140312/nwl/about_us/news/RISKArticle.2013-10-16.0431


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...

http://news.edhec-risk.com/140312/nwl/about_us/news/RISKArticle.2014-03-11.5356


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...

http://news.edhec-risk.com/140312/nwl/about_us/news/RISKArticle.2014-01-29.5746


Events

Low Latency Trading and Comovement of Order Flow and Prices, Singapore
http://news.edhec-risk.com/140312/nwl/events/edhec_conferences/Event.2014-02-12.3597

Reserve Bank of Australia Conference 2014: Financial Flows and Infrastructure
Finance, Sydney
http://news.edhec-risk.com/140312/nwl/site_edhecrisk/public/events/other_events/Event.2013-12-12.3421

EDHEC-Risk Days Europe 2014, London
http://news.edhec-risk.com/140312/nwl/site_edhecrisk/public/events/edhec_conferences/europedays2014

3rd Annual Life Risk Management Meeting, Singapore
http://news.edhec-risk.com/140312/nwl/events/other_events/Event.2013-12-17.2754

67th CFA Institute Annual Conference, Seattle
http://news.edhec-risk.com/140312/nwl/site_edhecrisk/public/events/other_events/Event.2013-12-12.5125

CFA Institute/EDHEC-Risk Advances in Asset Allocation Seminar, London & New York
http://news.edhec-risk.com/140312/nwl/AIeducation/Alternative%20Investment%20Seminars/Advances_in_Asset_Allocation_Seminar_London_New-York_2014


Books

Perspectives on Energy Risk
http://news.edhec-risk.com/140312/nwl/edhec_publications/books/RISKBook.2014-03-05.5034
http://www.edhec-risk.com/AIeducation/Alternative%20Investment%20Seminars/Advances_in_Asset_Allocation_Seminar_London_New-York_2014


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