an academic and professionnal review special edhec risk institutional Days issue Lionel MARTELLINI and Vincent MILHAU, EDHEC Risk Institute

Transcription

1 n 109 November-December 2010 ISSN euros revue-banque.fr Bankers, markets investors an academic and professionnal review special edhec risk institutional Days issue At EDHEC Risk Institute, we are delighted to be introducing an editorial partnership with Bankers, Markets & Investors on the occasion of the EDHEC Risk Institutional Days 2010 in Monaco, and all the more so in that EDHEC Risk and Bankers, Markets & Investors share a common philosophy, namely distributing cutting-edge academic research in finance with a focus on practical applications and without compromising on the quality of the work presented. Continued on page 3 articles 6 towards the Design of improved Forms of target-date Funds Lionel MARTELLINI and Vincent MILHAU, EDHEC Risk Institute 26 Why Pension Funds should Favour rule-based strategies over Discretionary Ones Samuel SENDER, EDHEC Risk Institute 36 macroeconomic risk management for Oil stabilization Funds in Gcc countries Bernhard SCHERER, EDHEC Business School and London Quant Group 47 French corporate social responsibility: Which Dimension pays more? Laetitia DRUSCH, Mazars, France, and Abraham LIOUI, EDHEC Business School and Risk Institute FOcus On the state of Development of the european etf industry after a Decade: evidence from the Demand side Felix GOLTZ and Lin TANG, EDHEC Risk Institute Presse Séminaires Édition Librairie Internet 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@revue-banque.fr. 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, 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/iae Grenoble, Jacques hamon/cereg-université Paris-Dauphine, Hélène harasty/lombard Odier Darier Hentsch & Cie, Hervé le Bihan/Banque de France, Frédéric lobez/esa Lille, Christophe moussu/escp EAP, Fabrice pansard/ AMF, Pascal Quiry/BNP Paribas, François Quittard-pinon/ISFA Université Lyon 1, Catherine refait-alexandre/cadre, Patrick roger/université Louis-Pasteur Strasbourg, Patrick rousseau/iae Aix-en-Provence, Alain schatt/iae Dijon, Éric severin/iae Lille, Jacques sikorav/bnp Paribas. 18 rue La Fayette Paris Fax : 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 : Philippe Salomon (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 : revuebanque.abo@npai.fr CPPAP n 0613 T printer : SPEI (Pulnoy, France) Copyright deposit 4 th quarter Bankers, Markets & Investors 2 Bankers, Markets & Investors n 109 november-december 2010

3 Editorial Introduction to the special BMI issue on the occasion of the EDHEC Risk Institutional Days in Monaco, December 8-9, 2010 At EDHEC Risk Institute we are delighted to be introducing an editorial partnership with Bankers, Markets & Investors on the occasion of the EDHEC Risk Institutional Days 2010 in Monaco, and all the more so in that EDHEC Risk and Bankers, Markets & Investors share a common philosophy, namely distributing cutting-edge academic research in finance with a focus on practical applications and without compromising on the quality of the work presented. Our particular thanks for this special issue go to Jean- François Boulier, Editorial Committee President. EDHEC Risk Institutional Days 2010 will feature an indexation and passive investment conference focusing on new forms of indices and benchmarks; a global institutional investment conference presenting the results of EDHEC Risk research on themes of major interest to institutional investors; two innovative seminars: the advanced portfolio construction seminar and the private wealth management seminar; and the PhD forum, where EDHEC Risk Institute PhD in Finance students will give presentations on their specialised research topics. In the first of our articles in this special EDHEC Risk Institutional Days issue, Lionel Martellini, Scientific Director, and Vincent Milhau, Research Engineer, EDHEC Risk Institute, drawing from the research chair on dynamic allocation models and new forms of target date funds supported by UFG-LFP, address concerns that target date funds, which aim at providing investors with one-stop solutions to their life-cycle investment needs, have been sub-optimal in proposing a deterministic decrease in equity allocation over the life of the fund. The EDHEC Risk researchers suggest that a parsimonious set of life-cycle investment benchmarks can be designed which could serve as relatively accurate proxies for a whole range of retail investors optimal long-term investment strategies. In a survey of the asset-liability management practices of European pension funds, supported by AXA Investment Managers as part of the Regulation and Institutional Investment research chair at EDHEC Risk Institute, Samuel Sender, Applied Research Manager, draws attention to weaknesses in the risk management practices of pension funds only a minority, for example, manage accounting risk and sponsor risk. We recommend that pension funds favour rule-based strategies over discretionary ones, because rule-based strategies are compatible with economic capital and prudential risk-based regulations. The emergence of sovereign wealth funds as a major financial force was particularly noticeable during the financial crisis. In his paper, Bernd Scherer, Professor of Finance at EDHEC Business School, looks at macroeconomic risk management for oil stabilisation funds in Gulf Cooperation Council countries, a subject that is being studied at EDHEC Risk Institute as part of the Deutsche Bank research chair on Asset-Liability Management Techniques for Sovereign Wealth Fund Management. Professor Scherer s recommendation is that investment guidelines for oil stabilisation funds should stress the necessity to invest in assets with negative correlation to oil price movements to protect the total wealth of an oil exporting economy. As a result, Professor Scherer s paper considers that the optimal allocation for a sovereign oil fund can be quite different to that of a traditional institutional investor. The paper by Felix Goltz, Head of Applied Research, and Lin Tang, Research Assistant, EDHEC Risk Institute, analyses the current state of exchange-traded fund (ETF) usage based on a survey of European professional ETF users. We find that the ETF industry is in a phase of increasing maturity as ETF users are now making intense use of such instruments across a range of asset classes and taking advantage of advanced trading mechanisms and more complex forms of ETFs. Despite this increase in maturity, ETF users are still demanding more product development and most intend to increase their exposure to ETFs in the future. This research was supported by the Amundi ETF Core-Satellite and ETF Investment research chair. Finally, Abraham Lioui, Professor of Finance, EDHEC Business School, and Laetitia Drusch examine corporate social responsibility (CSR) in France to assess the impact of CSR on corporate financial performance. Their empirical evidence confirms previous findings arguing that stock market rewards for CSR are hardly observable at the aggregate level. Looking at CSR dimension by dimension, however, provides some encouraging results as to the reward by the market of such activity. We wish you an enjoyable and informative read of this special issue of Bankers, Markets & Investors and hope that you will continue to follow the research published by Bankers, Markets & Investors and the research produced by EDHEC Risk Institute in the months and years to come. Noël AmeNc Professor of Finance, EDHEC Business School, and Director, EDHEC Risk Institute bankers, markets & investors n 109 november-december

4 Abstracts Towards the Design of Improved Forms of Target-Date Funds 6 Lionel MARTELLINI and Vincent MILHAU, EDHEC Risk Institute In an attempt to address the concern over financially illiterate individuals being increasingly responsible for investment decisions related to retirement risk, the financial industry has started to design dedicated mutual fund products known as target date funds. These funds, which aim at providing investors with one-stop solutions to their life-cycle investment needs, typically propose a deterministic decrease of equity allocation until a date called the target date of the fund. This approach, however, has been found inconsistent with the prescriptions of standard life-cycle investment models (Viceira and Field, 2007). In this paper,we characterize in closed-form the optimal time- and state-dependent allocation strategy for a long-term investor preparing for retirement in the presence of interest rate and inflation risks and a mean-reverting equity risk premium. We confirm that existing target-date fund products are the wrong answer to the right question, and the opportunity cost involved in purely deterministic life-cycle strategies is found to be substantial for reasonable parameter values. Perhaps surprisingly, we also find that even reasonably fine partitions of the set of investors and market conditions, only marginally more complex than current partitions solely based on time-horizon, allow for substantial welfare gains compared to existing target-date fund strategies. Our results have important practical implications since they suggest that a parsimonious set of life-cycle investment benchmarks can be designed, which could serve as relatively accurate proxies for a whole range of retail investors optimal long- term investment strategies. Why Pension Funds Should Favour Rule-Based Strategies over Discretionary Ones 26 Samuel SENDER, EDHEC Risk Institute This article is based on a survey of pension funds, their advisers, regulators, and fund managers representing assets under management of around 3 trillion. Asset and liability management (ALM) is a dual challenge: liabilities must be covered and performance must be generated. In addition, pension funds must respect their minimum funding ratios by insuring risk away. The survey suggests that pension funds make insufficient use of relevant techniques and prefer discretionary methods to rule-based ones, even though discretionary decisions involve the risk of delays. The lack of risk-adjusted performance measurement may lead to sub-optimal decisions being taken again and again. Macroeconomic Risk Management for Oil Stabilization Funds in GCC Countries 36 Bernhard SCHERER, EDHEC Business School and London Quant Group The existence of oil stabilization funds as the largest category of sovereign wealth funds relies on oil prices as a main source of macroeconomic risks for oil exporting countries. Given the often contingent spending policies of oil stabilization funds (accumulate wealth when oil prices are rising and spending wealth to support the local economy when GDP is shrinking) it is important to understand the magnitude and importance of oil price shocks relative to other sources of macroeconomic risks. Using the Bernanke and SIMS approach we establish oil price innovations as short and long term the most important economic drivers of local GDP for Gulf Cooperation Council countries (GCC). Investment guidelines for oil stabilization funds should therefore stress the necessity to invest into assets with negative correlation to oil price movements to protect the total wealth of an oil exporting economy. Using a Bayesian VAR we project the impact of different oil price scenarios on local GDP and hence the likely growth of oil stabilization funds. Under the pessimistic scenario (40% drop in oil prices from their 2009 level and 5% drop in global GDP over 2 years) a short 2 year contraction of about 10% per annum (in nominal USD terms) of Sovereign Wealth Fund (SWF) assets is anticipated. In 2011 SWF growth is likely to be back to pre crisis levels. Under a more optimistic scenario (10% drop in oil prices over two years) SWF will experience a two year period of zero growth with strong growth thereafter. French Corporate Social Responsibility: Which Dimension pays More? 47 Laetitia DRUSCH, Mazars, France, and Abraham LIOUI, EDHEC Business School and Risk Institute We use a sample of 148 events related to corporate social responsibility (CSR) to assess the impact of CSR on corporate financial performance. There is considerable heterogeneity in market reaction to different dimensions of CSR. Not all dimensions offer a positive reward; some yield a negative and even statistically significant impact on the firms stock returns. One main conclusion of this study is that Socially Responsible Investment is not an excuse for passive management. There is still room for timing and stock picking within the Socially Responsible universe of stocks. focus on... The State of Development of the European ETF Industry after a Decade: Evidence from the Demand Side 57 Felix GOLTZ and Lin TANG, EDHEC Risk Institute The European market for exchange-traded funds (ETFs) has experienced tremendous growth in the past decade. This paper analyses the current state of ETF usage based on a survey of 192 European professional ETF users. We find that the ETF industry is in a phase of increasing maturity as ETF users are now making intense use of such instruments across a range of asset classes and take advantage of advanced trading mechanisms and more complex forms of ETFs. As further signs of increased maturity, ETF users have clear views of the ETF types they prefer and have started using ETFs as a tool to gather information about asset markets in addition to using them as an investment tool. Despite this increase in maturity, ETF users are still demanding more product development and most intend to increase their exposure to ETFs in the future. 4 bankers, markets & investors n 109 november-december 2010

5 Bankers, Markets & Investors TARIFS ABONNEMENTS OFFRE SPÉCIALE EID 2010 Je choisis l abonnement à BANKERS, MARKETS & INVESTORS coché ci-dessous : -50 % 1 AN : 6 n os + accès online France (TTC) Étranger Quantité Total Institutionnel (adresse professionnelle) 615, , Individuel (adresse privée) 310, , TOTAL (TVA : 2,10 % incluse sur le tarif France) Société... Nom... Prénom... Fonction... Service... Adresse... Code postal/ville...pays... Code TVA (pour les pays de la CEE)... Téléphone...Télécopie... (indispensable)... En application de la loi du 6 janvier 1978, les informations ci-dessus sont indispensables au traitement de votre commande et sont communiquées aux destinataires aptes à les traiter. Elles peuvent donner lieu à l exercice du droit d accès et de rectification auprès de Revue Banque. Vous pouvez vous opposer à ce que vos nom et adresse soient cédés ultérieurement en le demandant par écrit au secrétariat général de Revue Banque. BANKERS, MARKETS & INVESTORS Cahier de recherche financière appliquée 150,00 le numéro à retourner au SERVICE ABONNEMENTS REVUE BANQUE NPAI 39 rue Marcelin Berthelot DRANCY CEDEX Tél.: Fax : revuebanque.abo@npai.fr règlement à l ordre de La Revue Banque par chèque par carte bancaire n (sauf American express et Diner s Club) Date limite de validité : Le règlement sur l étranger est à joindre impérativement à la commande et doit être effectué en euros, par chèque payable en France, net de frais. Pour les virements bancaires et CCP, nous consulter. SIGNATURE Avec votre abonnement vous accédez gratuitement aux archives en ligne A de BMI sur le site Presse Séminaires Édition Librairie Internet