IPE EDHEC Research Insights Spring 2020
EDHEC-Risk Institute just published the latest special issue of the EDHEC Research Insights supplement to IPE.
We aim to provide European institutional investors with an academic research perspective on the most relevant issues in the industry today.
We first present the results of our latest EDHEC European ETF, Smart Beta and Factor Investing Survey. Analysis of the responses to our survey sheds light on several important questions regarding investor perceptions of ETFs. It also provides insights into the perceived benefits and challenges of smart beta and factor investing strategies. We find that take-up remains partial despite more than a decade of discussion in the industry, with the vast majority of adopters investing less than 20% of their portfolio in such approaches
In the second article, Professor Gianfranco Gianfrate discusses how the latest evidence about the magnitude of climate change risks demands faster and more decisive actions to mitigate the exposure of financial intermediaries and investors – and, as a consequence, of the real economy. There is a clear need to unleash financial engineering to manage climate risks. The role of financial markets and financial innovation as a mechanism to enforce climate policy and to accelerate the transition towards a low-carbon economy is still overlooked.
Our third article proposes a definition of value in Treasury bonds that allows for statistically significant and economically relevant predictions of cross-sectional excess returns. The value pricing factor exploits the differences between the market and theoretical values of Treasury bonds assessed using an economically justifiable Gaussian dynamic term structure model. A long-only version of the value strategy outperforms the market portfolio in terms of Sharpe ratio in 14 of the 15 three-year periods considered.
Access the full study Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets.
While factor investing and liability-driven investing relate to two separate strands of the academic literature, a strong case can be made for combining these approaches. Each of the three steps of a liability-driven investing process, namely the construction of a wellrewarded performance-seeking portfolio, the construction of a safe liability-hedging portfolio and an efficient allocation to these building blocks, can be better addressed by taking a factor perspective. Our fourth article can be regarded as a first step towards the introduction of a comprehensive investment framework blending liability-driven investing and factor investing.
Access the full study Factor Investing in Liability-Driven and Goal-Based Investment Solutions.
We introduce a method to create two interpretable liquidity measures, which we associate with market and funding liquidity. This involves creating two parsimonious linear combinations of the many liquidity proxies often used in the liquidity literature. Our construction does not require transaction-level data (such as volume or bid-offer spreads), but correlates well both with other measures that do, and with other liquidity proxies (liquidity as ‘noise’, liquidity as broker-dealer leverage) recently introduced in the literature.
Finally, we examine the question of cross-sectional momentum in the US sovereign bond market. We show that long-short duration-adjusted cross-sectional reversal strategies are significantly profitable over an extended range of lags and illustrate a possible application of this result in a long-only framework. We link the profitability to two factors: (i) the ability of the duration-adjustment procedure to single out winners and losers through their exposure to slope changes, and ii) the degree of mean-reversion of the slope.
Access the full study Factor Investing in Fixed-Income – Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets.
The latest issue of the EDHEC Research Insights supplement to IPE proposes the following articles:
- Results from the annual EDHEC European ETF, Smart Beta and Factor Investing Survey
- Climate change finance: the big picture
- Defining and exploiting value in US Treasury bonds
- Factor investing in liability-driven solutions
- Robust and interpretable liquidity proxies for market and funding liquidity
- Cross-sectional momentum in the US sovereign bond market
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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.
