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1 n 118 may-june 2012 ISSN euros Bankers, markets investors an academic and professional review articles 4 the Great Divergence: French Equity Premium is Lower and Riskier than the US since WWI David LE BRIS, BEM Bordeaux Management School Sandrine TOBELEM FOLDVARI, AHL Research and Trading 14 is the KIID Sufficient to Associate Portfolios to Investor Profiles? Georges HÜBNER, HEC University of Liège, Maastricht University, Gambit Financial Solutions, EDHEC 23 momentum Investing over the Last Twenty Years in France, its Persistence and the Effects of the Financial Crisis Emilios C. GALARIOTIS, Audencia PRES LUNAM, Centre for Financial and Risk Management 30 On the Performance of Socially Responsible Investing: Further Evidence Homayoon SHALCHIAN, School of Commerce at Laurentian University Bouchra M ZALI, School of Business and Management at the University of Quebec (Montreal) Khalid EL BADRAOUI, ESC Rennes School of Business, CREM UMR CNRS 6211 Jean-Jacques LILTI, University of Rennes 1 and CREM UMR CNRS 6211 Focus on the Individual Investor Marie-Hélène BROIHANNE, Maxime MERLI, Patrick ROGER, LaRGE, EM Strasbourg Business School, University of Strasbourg In partnership with Association française de finance

2 Article submission : authors guideline Bankers, Markets & Investors aim is to make up-to-date scientific research in financial matters available to members of the profession. Articles can focus on all matters related to financial markets. Financial models can be applied to a wide range of subjects: financial assets evaluation, risk analysis, investment policies, microstructure and markets organisation. Applications to corporate finance, assets and liabilities management and strategy of financial intermediaries are welcome. Analysis of new products or contracts, which concern retail as well as corporate markets, new technical applications and new developments of financial markets can also be dealt with as far as their evaluation and usefulness are analysed. Articles submitted for publication will be read by a scientific committee of two competent experts. The committee will be particularly attentive to the explanations given on the concepts from an economic, financial and mathematical point of view. Any kind of illustrations and graphs are welcome. A significant part of the article will concentrate on the possible practical applications of the methods and concepts which are presented, and will insist on implications in related financial areas. Empirical studies should mention their sources of information, or else provide the data drawn upon in appended notes. Articles can be written exclusively in English, in straight forward correct language. Mathematical developments should be limited to essential notions, and originals aspects, if any, are to be detailed in a note. Reference to scientific literature shall also be limited to essential matters. The length of the articles should not exceed 20 pages (ideally 14 to 15 pages, including graphs and notes). Shorter articles are naturally welcome. Each article submitted has to include an abstract in English of less than 500 characters. The articles (.doc,.rtf,.txt, but no.pdf or.tex) have to be sent by to hauvette@. Strategic Committee Francis Candylaftis/Eurizon Capital, Bernard Dumas/Université de Lausanne, Thierry Foucault/HEC, René Karsenti/ICMA, Denis Kessler/Scor, André Lévy-Lang, Bertrand de Mazières/BEI, Théo Nijman/Université de Tilburg, Tom Steenkamp/ABP Investments, Mike Wright/Université de Nottingham Editorial Committee Editor : Jean-François Boulier/ Aviva Investors France Sanvi Avouyi-Dovi/Banque de France, Bruno Biais/Université Toulouse 1, Alain Chevalier/ESCP-EAP, Philippe Desbrières/IAE Dijon, Nicole EL KAROUI/École polytechnique, Antoine Frachot/Groupe des écoles nationales d économie et statistique (GENES), Edith Ginglinger/Université Paris-Dauphine, Ulrich Hege/HEC, Monique Jeanblanc/Université d Evry, Lionel Martellini/Edhec, Patrice Poncet/ Essec, Prof. Flavio PRESSACCO/Facolta di Economia di Udine, Nizar Touzi/École polytechnique Reading Committee Hervé ALEXANDRE/Université Paris-Dauphine, Franck BANCEL/ESCP Europe, Lorenzo BERGOMI/SG CIB, Bruno-Rolland BERNARD/LVMH, Éric de BODT/ESA Lille, Hubert de la BRUSLERIE/Université Paris I, Gérard CHARREAUX/IAE Dijon, Stéphane CRÉPEY/Université d Évry, Michel DIETSCH/IEP Strasbourg, Patrice Fontaine/Eurofidai, Jacques Hamon/CEREG-Université Paris-Dauphine, Hélène HARASTY/Lombard Odier Darier Hentsch & Cie, Maria-Laura HARTPENCE/HSBC AM, Hervé LE BIHAN/Banque de France, Frédéric LOBEZ/ESA Lille, Christophe MOUSSU/ESCP-EAP, Fabrice PANSARD/AMF, François QUITTARD-PINON/ISFA Université Lyon 1, Catherine Refait-Alexandre/CRESE-Université Franche-Comté, Patrick ROGER/Université Louis-Pasteur Strasbourg, Patrick ROUSSEAU/IAE Aix-en-Provence, Alain SCHATT/IAE Dijon, Éric SEVERIN/OSTL Lille 1, Jacques SIKORAV/BNP Paribas, Grégory TAILLARD/HSBC AM. 18 rue La Fayette Paris www. According to French Law (loi du 11 mars 1957 sur la propriété artistique et littéraire) no part of Bankers, Markets & Investors articles may be reproduced in any form or by any means without prior written permission of Revue Banque SARL. Managing Director : Valérie Ohannessian General Secretary : Élisabeth Coulomb Subediting : Alain de Seze (54 17) ; Christine Hauvette (54 10); Emmanuel Gonzalez (54 12) ; Alexandra Démétriadis (54 18) and DESK Subscription : NPAI - REVUE BANQUE 39 rue Marcelin Berthelot Drancy Cedex Tel. : Fax : revue-banque.abo@npai.fr CPPAP n 0613 T printer : SPEI (Pulnoy, France) Copyright deposit 2 nd quarter Bankers, Markets & Investors 2 Bankers, Markets & Investors n 118 may-june 2012

3 Abstracts The Great Divergence: French Equity Premium is Lower and Riskier than the US since WWI 4 David LE BRIS, BEM Bordeaux Management School Sandrine Tobelem Foldvari, AHL Research and Trading In this paper, we compare the US and French risk premium computed on high quality data. We confirm that the US risk premium has been constantly higher. We also show that the US equity outperformance is even higher when we compute the price of risk. Indeed, the US equity risk has been lower than the French one since The two world wars do not seem to explain the risk premium difference, as the US continues to outperform the French equity market after We conclude that the particular case of the outperformance of the US equity cannot be directly extrapolated to other equity markets. Is the KIID Sufficient to Associate Portfolios to Investor Profiles? 14 Georges Hübner, HEC University of Liège, Maastricht University, Gambit Financial Solutions, EDHEC With the Key Investor Information Document (KID), the new UCITS IV framework brings a useful standardized and simplified scheme to explain the risk of mutual funds to non-professional investors. The Synthetic Risk and Reward Indicator (SRRI) methodology defines how to assess a volatility equivalent for each type of funds, and recognizes the specificities of various types of investment vehicles in the process. The SRRI rests upon two key principles: (i) risk-volatility mapping: the level of risk can be adequately translated by the volatility of returns; and (ii) reward to volatility: there must be a positive connection between the level of risk borne by the individual investor and the associated reward in terms of returns. We show that the SRRI methodology does not guarantee that these two principles are respected in practice. By forcing any type of risk to be translated into a volatility estimate, the approach overlooks investor s heterogeneity in the definition of risk. The SRRI synthetic approach is powerless to adequately reflect the trade-off between normal and extreme risks the way it is perceived by individual investors. It also ignores that fund returns are not necessarily only related to volatility. We show that the KID does not replace a proper investment profiling system. The analysis of investor profiles is a necessary complement to the KID in order to provide adequate advice to investors. We provide an approach, based on the linear-exponential utility function, that enables the financial advisor to address the heterogeneity of investors when defining the risk of an investment portfolio. Momentum Investing Over the Last Twenty Years in France, its Persistence and The Effects of the Financial Crisis 23 Emilios C. Galariotis, Audencia PRES LUNAM, Centre for Financial and Risk Management The paper investigates momentum investment strategies for the French Security Market during the most recent twenty years. The aims are to test whether such strategies perform persistently, i.e. they remain profitable today consistent with earlier literature, and if so, whether they are abnormal and if there has been an effect from the recent global financial crisis that has different characteristics compared to other crises in the sample. Sixteen trading strategies are investigated ranging from three to twelve months, and results show that momentum returns appear to be significant on a risk adjusted basis (both univariate and multivariate), and that momentum portfolios on average provide a good hedge for market risk. Nonetheless, considering the financial crisis, momentum profitability disappears or is even reversed (at which time it pays off to be a contrarian investor), showing a risk not captured by traditional asset pricing models. On the Performance of Socially Responsible Investing: Further Evidence 30 Homayoon Shalchian, School of Commerce at Laurentian University Bouchra M zali, School of Business and Management at the University of Quebec (Montreal) Khalid El Badraoui, ESC Rennes School of Business, CREM UMR CNRS 6211 Jean-Jacques Lilti, University of Rennes 1 and CREM UMR CNRS 6211 We examine the relation between corporate social performance and stock portfolios performances. Based on Kinder, Lydenberg and Domini social performance ratings, the study constructs and evaluates different sets of equity portfolios that differ in social performance. The high-ranked portfolios provide, in most cases, higher average returns than their low-ranked counterparts over the period. In addition, we observe that the relation social-financial performance depends also on the economic cycle and consequently, on the market performance. Socially responsible investments seem to be more popular during bearish market periods and less popular during bullish market periods. Finally, our results suggest that in some industries, the differences of performances are more significant than in others. In other words, the relation social-financial performance seems to be considerably affected by the nature of firms activities. Therefore, our empirical results suggest that industry is an important factor that should be taken in consideration in studies on the relation between social and financial performance. focus on The Individual Investor 44 Marie-Hélène Broihanne, Maxime Merli and Patrick Roger, LaRGE, EM Strasbourg Business School, University of Strasbourg Standard financial theory does not distinguish categories of investors, in terms of optimal portfolios or trading strategies. Obviously there is a gap between individual investors and mutual funds because the investment problem is quite different, due to constraints, market imperfections and behavioral biases. In this paper we focus on individual investor s portfolios and trading behavior. We compare what is predicted by portfolio choice theory to what really happens on financial markets. We then develop some of the alternative theories explaining the behavior of individual investors. bankers, markets & investors n 118 may-june

4 THE GREAT DIVERGENCE: FRENCH EQUITY PREMIUM IS LOWER AND RISKIER THAN THE US SINCE WWI The Great Divergence: FRENCH EQUITY PREMIUM IS LOWER AND RISKIER THAN THE US SINCE WWI DAVID LE BRIS* Assistantprofessor, BEM Bordeaux Management School SANDRINE TOBELEM FOLDVARI** Senior Quantitative Analyst AHL Research and Trading For the study of long term stock price behaviour, most authors focus on the biggest stock market in the world: the US market. Cowles (1939) conducts a thorough study of the long term US capital market behaviour and recreates reliable return time series from This landmark study is followed by the work of Schwert (1990) and especially the work of Siegel (1994) who evaluates the evolution of US stock prices since One of Siegel major results is to prove that the equity premium remains remarkably stable over the long run (and equal to a Siegel s constant of about 5% in geometric mean). Table 1 below gives a snapshot of the different US equity risk premium computed in the main studies found in the literature (to which we have added our own measurements for the French and US equity risk premium). All those studies on the US equity premium converge towards to the Siegel s constant. However, the US studies suffer from a potential bias as identified by Brown et al. (1995). Indeed, the US economy is one of the most successful over the long run, and extrapolating results obtained for the US market on other markets may prove fallacious. Accordingly, several studies investigate other markets. Dimson and Marsh (2001) reconstitute a monthly UK index over the period ( ). In their book, Dimson et al. (2002) collect total stock returns for 17 countries since 1900 (yearly revised, see Dimson et al., 2010). According to these authors, huge differences exist among total real returns across countries (between 2.90% for Belgium and 7.10% for Australia). A major shortfall in those studies however, is the quality of the data used. Indeed, the equity return is computed as a compilation of indices built ad hoc which do not effectively represent the return of an investment in stocks (see Le Bris and Hautcoeur, 2010). In this paper, we consider high quality data for the French equity returns that have been recently made available on a monthly basis since 1854 (Le Bris and * david.lebris@gmail.com ** sandrine.foldvari@gmail.com Hautcoeur, 2010). We can therefore reliably compare the US equity return (as computed by Cowles-S&P data, see Appendix A) and the French equity return performances. It is indeed interesting to be able to compare reliably the performances of the US market and another developed market that experienced a radically different situation during the 20 th century. Compare to the Russian or German markets, the French market has survived better the two world wars. However, France has still suffered dire economic consequences of the conflicts and implemented interventionist and socialist policies, whereas the US has been left relatively unscathed. The respective share of the US and French markets in the world equity market has followed an inverse path. The US market share (which remained the first market capitalization during the whole 20 th century) has doubled from 1900 to 2000 (from 22% to 46%), whereas the French market share has been divided by two (8% in 1900 against 4% in 2000), sliding from the third to the fourth position (Dimson et al., 2002). Thus, the French case is a good candidate to help balancing the results found for the US equity market. Using several performance measures, we investigate the differences of the long term equity premium in the US and French markets. Our paper provides three findings to the existing literature. We first bring reliable evidence to confirm the US survival bias: the US equity premium is consistently higher than the French one. Secondly, we measure that the French premium is also more unstable over time (i.e. riskier). As a result the higher US performance increases if we take account for the level of risk associated with the equity premium. Thirdly, this better remuneration of risk in the US was not observed before 1917 when the two countries were economically more similar, but remains strong after The paper is organized as follows: we first present the US and French monthly time series used for our study. Then, we describe the distinct four periods we consider to analyse US and French equity performances from 1870 to Thirdly, we present our results. A last section concludes. 4 Bankers, Markets & Investors nº 118 may-june 2012

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