EDHEC Publications
What Drives Robo-Advice?
2021
The promise of robo-advisory firms is to provide low cost access to diversified portfolios built in accordance with the academic literature on normative portfolio choice. Authors investigate the latter claim. How much normative advice does robo-advice contain? For this purpose they web-scrap portfolio recommendations for 151200 investor types (input combinations from an online questionnaire) for one of the largest US robo-advisors. Results show that the type of investment goal and the length of time horizon are dominating inputs with significant influence on recommended equity...
Investor Experience and Portfolio Choice: Regulatory Costs from MiFID II
2021
MiFID II forces banks and wealth managers to ask clients for their investment knowledge and experience. The implied regulatory view is that less experience should result in less risk taking. While this is neither shared in theoretical nor in empirical finance, it becomes a source of legal risk for asset managers and banks. How do banks react? What are the welfare implications? So far this question was impossible to answer. The relevant data have not been available as they are not shared by banks. The authors circumvene this problem by using publicly available portfolio recommendations from...
Covid-19 and Smart-Beta
2021
Authors investigate the role of sectors on the performance of smart-beta products during the COVID-19 crisis. Cross sectional differences in excess returns (versus a market capitalized portfolio) are driven by strong exposures to a historically unique COVID-19 related industry rotation, rather than to long term structural causes.
The EDHEC European ETF, Smart Beta and Factor Investing Survey 2020
2020
The latest edition of the EDHEC European ETF, Smart Beta and Factor Investing Survey was conducted as part of the "ETF, Indexing and Smart Beta Investment Strategies" research chair at EDHEC-Risk Institute, in partnership with Amundi. With this survey, we aim to provide insights into investor perceptions of exchange-traded funds (ETFs) and of smart beta and factor investing strategies, building on the analysis of this year’s responses and relating them to past results of our annual survey. In 2020, the survey results show a slowdown in the use of smart beta and factor...
The EDHEC European ETF, Smart Beta and Factor Investing Survey 2019
2019
EDHEC-Risk Institute conducted its 12th survey of European investment professionals about the usage and perceptions of ETFs, smart beta and factor investing, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current European investor practices and perceptions on ETF, smart beta and factor investing strategies, as well as future plans in these domains. By comparing our results to those of our previous surveys, over more than a decade, we aim to shed some light on trends within the ETF market...
EDHEC European ETF and Smart Beta and Factor Investing Survey 2018
2018
EDHEC-Risk Institute conducted its 11th survey of European investment professionals about the usage and perceptions of ETFs and smart beta and factor investing, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current European investor practices and perceptions on ETF and smart beta and factor investing strategies, as well as future plans in these domains. By comparing our results to those of our previous surveys, conducted for over a decade, we aim to shed some light on trends within the...
Smart Equity Investing: Implementing Risk Optimisation Techniques on Strategic Beta Portfolios
2018
We examine the performance of risk-optimisation techniques on equity style portfolios. To form these portfolios, also called Strategic Beta factors by practitioners and data providers, we group stocks based on size, value and momentum characteristics through either independent or dependent sorting. Overall, performing risk-oriented strategies on style portfolios constructed with a dependent sort deliver greater abnormal returns. On average, we observe these strategies to significantly outperform 42% of the risk-oriented ETFs listed on US exchanges, compared to 31% when the risk-oriented...
EDHEC Survey On Equity Factor Investing
2017
In the past few years, equity factor investing has become increasingly popular among institutional investors and their managers.At the start, and following the work of Ang et al., one of the motivations for smart equity factor investing was to replace active managers who were considered costly with indices representative of a choice of factors that were well rewarded over the long term. Since then, factor investing has corresponded to numerous practices and motivations: • Modifying the factor exposure of a core active or passive cap-weighted portfolio (factor overlay); • De-risking the...
Maximising an Equity Portfolio Excess Growth Rate: A New Form of Smart Beta Strategy?
2017
It has been argued that the simple act of resetting portfolio weights back to the original weights can be a source of additional performance. This additional performance is known as the rebalancing premium and a detailed analysis (see for example Fernholz (2002)) suggests that the portfolio excess growth rate, defined as the difference between the portfolio expected growth rate and the weighted-average expected growth rate of the assets in the portfolio, is an important component of the rebalancing premium. In this context, one might wonder whether maximising a portfolio excess growth rate in...
Factoring Characteristics into Returns: A Clinical Approach to Fama-French Portfolio Decomposition
2017
This paper thoroughly analyses competing construction methods for factoring characteristics into returns. We show the importance of ensuring a proper diversification of the factor's portfolio constituents for producing relevant and unbiased risk factors or benchmark portfolios. This is an important issue to be solved for asset pricing and performance models defined as a function of characteristics. As a practical case, the paper works on the design of size and value spread portfolios à la Fama-French. This quasi-clinical investigation examines three methodological choices that have an impact...
The EDHEC European ETF And Smart Beta Survey 2016
2017
The 10th EDHEC European ETF and Smart Beta Survey is a comprehensive survey of 211 European ETF and smart beta investors, conducted as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”, which provides a detailed account of European investor perceptions and practices in the domain of ETFs and smart beta strategies.
A Note on the Valuation of Asset Management Firms
2017
Market capitalisation relative to assets under management is a metric often used to value asset management firms. The dividend discount model of HUBERMAN (2004) implies that cross-sectional variations in this metric are explained by cross-sectional differences in operating margins, yet that does not accord with the evidence from our data set.
Smart Beta Replication Costs
2017
This paper provides an explicit estimate of the costs applied to a range of smart beta strategies and analyses the impact of different implementation rules or stock universes. The objective is to assess transaction costs of smart beta strategies in order to contrast the gross returns of such strategies shown in backtests with estimates of net returns that are actually available to investors when considering transaction costs.
Measuring Volatility Pumping Benefits in Equity Markets
2017
It has been argued that portfolio rebalancing, defined as the simple act of resetting portfolio weights back to their original weights, can be a source of additional performance. This additional performance is known as the rebalancing premium, also sometimes referred to as the volatility pumping effect or diversification bonus because volatility and diversification turn out to be key components of the rebalancing premium. The purpose of this paper is to provide a thorough numerical and empirical analysis of the volatility pumping effect in equity markets and to examine the conditions under...
Multi-Dimensional Risk And Performance Analysis For Equity Portfolios
2016
This paper explores a novel approach to address the challenge raised by the standard investment practice of treating attributes as factors, with respect to how to perform a consistent risk and performance analysis for equity portfolios across multiple dimensions that incorporate micro attributes. The study suggests a new dynamic meaningful approach, which consists in treating attributes of stocks as instrumental variables to estimate betas with respect to risk factors for explaining notably the cross-section of expected returns.
Investor Perceptions About Smart Beta ETFs
2016
For the third year running, in view of the considerable development in new forms of indices, as well as the increasing attention smart beta ETFs have received in the media in the recent years, part of the EDHEC European ETF Survey 2015 was dedicated to investment professionals’ practices and use of products tracking smart beta indices and on the importance of risk factors in alternative equity beta strategies. The present document is a focus on investor perceptions about smart beta ETFs, as reported by the survey.
What Do Measures Of Real-Time Corporate Sales Tell Us About Earnings Surprises And Post-Announcement Returns?
2016
We develop real-time proxies of retail corporate sales from multiple sources, including ~50 million mobile devices. These measures contain information from both the earnings quarter (“within quarter”) and the period between that quarter’s end and the earnings announcement date (“post quarter”). Our within-quarter measure is powerful in explaining quarterly sales growth, revenue surprises and earnings surprises, generating average excess announcement returns of 3.4%. However, surprisingly, our post-quarter measure is negatively related to announcement returns, and positively to post-...
Ten Misconceptions about Smart Beta: Analysing common claims on performance drivers, investability issues and strategy design choices
2016
That a new investment approach be debated should not be surprising. Such debate should be expected to further the understanding of potential benefits as well as risks and possible pitfalls of the new approach. In the area of Smart Beta investing however, an intense debate has also produced a certain number of beliefs which are accepted as conventional wisdom and impede progress towards the adoption of approaches that could add more value for end investors. The objective of this paper is to provide perspective on these beliefs by examining conceptual considerations and empirical evidence.
Portfolio Choice with Model Misspecification: A Foundation for Alpha and Beta Portfolios
2016
In this paper, our objective is to provide a rigorous foundation for alpha and beta portfolio strategies. In particular, we characterize the properties of these strategies when there is model misspecification in either the alpha component or the beta component of returns and show how to mitigate the effect of model misspecification for portfolio choice. The APT is ideal for this analysis because it allows for alphas, while still imposing no arbitrage. Our first contribution is to extend the interpretation of the APT to show that it can capture not just small pricing errors that are...
The EDHEC European ETF Survey 2015
2016
The EDHEC European ETF Survey 2015, which surveyed 180 European ETF investors about their usage and perceptions of ETFs, sheds new light on drivers of investor demand for ETFs and evaluation challenges for investors. EDHEC-Risk Institute has conducted a regular ETF survey since 2006, thus providing a detailed account of the perceptions and practices of European investors in ETFs and trends over the past decade.
Term Structure Analysis Of Option Implied Volatility In The Brazilian Market Using A Continuous-Time GARCH Model
2016
This paper aims at predicting the volatility term structure of a given asset. The model is based on the GARCH modelling of the asset's volatility, from which the term structure is derived. We not only test if the model is able to predict future levels of volatility, but also if it can accommodate the term structure response to volatility shocks.
On the Correct Evaluation of Cost of Capital for Project Valuation
2015
This paper fills a very important gap in the literature with a straightforward methodology that generalises the classic Modigliani and Miller results and provides correct values for the expected return on equity and for the weighted average cost of capital (WACC). After some confusing debate in the literature, we show that these correct values make the three main project valuation approaches (WACC, flow to equity and adjusted present value) match perfectly.
Is Smart Beta Just Monkey Business? An Analysis Of Factor Exposures, Upside-Down Strategies And Rebalancing Effects
2015
“Monkey portfolio” proponents argue that all smart beta strategies generate positive value and small-cap exposure, which fully explains their outperformance. They also claim that similar results are obtained by any random portfolio strategy, including the inverse of such strategies. We analyse these claims using test portfolios which follow commonly-employed methodologies for explicit factor-tilted indices. Our results directly invalidate all of these claims.
The Limitations Of Factor Investing: Impact Of The Volkswagen Scandal On Concentrated Versus Diversified Factor Indices
2015
Volkswagen has been caught up in one of the most notorious scandals in corporate history by installing cheat software to reduce emissions during testing. The news broke on the eve of Friday, 18 September 2015 and the stock markets heavily penalised Volkswagen AG and other automobile stocks, including suppliers, on Monday, 21 September 2015.
Stock Market Dispersion, the Business Cycle and Expected Factor Returns
2015
This paper provides evidence using data from the G7 countries suggesting that return dispersion may serve as an economic state variable in that it reliably predicts time-variation in economic activity, market returns, the value and momentum premia and market volatility. A relatively high return dispersion predicts a deterioration in business conditions, a higher value premium, a smaller momentum premium and lower market returns. The evidence is robust to alternative specifications of return dispersion and is not driven by US data. Return dispersion conveys incremental information relative to...
Active Allocation To Smart Factor Indices
2015
This paper provides a formal empirical analysis of the benefits of strategic and tactical allocation to multiple equity smart factor indices in a context where relative risk with respect to the cap-weighted indices needs to be explicitly controlled for. The focus of this paper is to provide a quantitative assessment of the benefits expected from the three sources of added-value (which come from time-varying strategic, time-varying tactical or time-varying core-satellite allocation decisions) in the design of equity benchmarks with superior risk and return characteristics.
Investor Interest In And Requirements For Smart Beta ETFs
2015
Exchange-traded funds (ETFs) are perhaps one of the greatest financial innovations of recent years. Unlike conventional index funds, ETF units trade on stock exchanges at market-determined prices, thereby combining the advantages of mutual funds and common stocks. Most of them represent passive instruments designed to track the performance of a financial index as closely as possible. Recently, the standard practice of using a capitalisation-weighting scheme for the construction of indices has been the target of harsh criticism. Nowadays, growing demand for indices as investment vehicles has...
The EDHEC European ETF Survey 2014
2015
EDHEC Risk Institute conducted its 8th survey of European investment professionals about the usage and perceptions of ETFs at the end of 2014. The aim of this study is to analyse the usage of exchange-traded funds (ETFs) in investment management and to give a detailed account of the current perceptions and practices of European investors in ETFs.
Alternative Equity Beta Investing: A Survey
2015
Alternative equity beta investing has attracted increased attention within the industry recently. Though products in this segment currently represent only a fraction of overall assets, there has been tremendous growth recently in terms of both assets under management and new product development. In this context, EDHEC-Risk recently carried out a survey among a representative sample of investment professionals to identify their views and uses of alternative equity beta.
Accounting For Geographic Exposure In Performance And Risk Reporting For Equity Portfolios
2015
A standard practice in reporting geographic exposure of equity portfolios is to report breakdown of portfolio constituents by country or region, which are assigned to a stock based on its place of listing, incorporation or headquarters. However, the practice is questionable in the context of a globalised marketplace where a company's operations are usually not restricted to any single country (or region).
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About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
