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1 n 117 March-April 2012 ISSN euros revue-banque.fr Bankers, markets investors an academic and professional review special edhec risk Days europe london 2012 articles 7 Performance of socially responsible investment Funds against an efficient sri index: the impact of Benchmark choice when evaluating active managers Véronique Le Sourd, edhec-risk Institute 19 introducing a New Form of Volatility index: the cross-sectional Volatility index Felix GoLtz, edhec-risk Institute renata GuobuzaIte, edhec-risk Institute Lionel MarteLLInI, edhec business School and risk Institute Stoyan StoyanoV, edhec business School and risk Institute asia 29 the link between eurozone sovereign Debt and cds Prices dominic o Kane, edhec business School and risk Institute Focus on shedding light on Non-Financial risks a european survey François CoCqueMaS and Samuel Sender, edhec-risk Institute In partnership with association française de finance

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3 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 [email protected]. 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 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 : [email protected] CPPAP n 0613 T printer : SPEI (Pulnoy, France) Copyright deposit 1 st quarter Bankers, Markets & Investors 2 Bankers, Markets & Investors n 117 march-april 2012

4 Introduction InTRODuCTIOn TO THE SPECIAL BMI ISSuE On THE OCCASIOn OF THE EDHEC-RISK DAyS EuROPE In LOnDOn, MARCH 27-29, 2012 Following on from our previous editorial partnership with Bankers, Markets & Investors for the EDHEC-Risk Institutional Days 2010, we are delighted to be able to renew the partnership this year on the occasion of the EDHEC-Risk Days Europe conference in London. We hope that this will be a new opportunity to present academic research results that are of genuine interest and relevance to professionals. We would again like to thank our friends at Bankers, Markets & Investors, for their prompt and efficient interaction with our researchers, notably Elisabeth Coulomb, Editor of BM&I. The EDHEC-Risk Days Europe 2012 conference features three days of presentations and debates that will allow professionals to review major industry challenges, explore state-of-the-art investment techniques and benchmark practices to research advances. The Indexation and Passive Investment Conference is focusing on enhanced index and optimal benchmark construction and looking at new forms of indices and benchmarks. The Global Institutional Investment Conference is presenting the results of EDHEC-Risk research on key themes for institutional investors, including risk and regulation, Solvency II benchmarks, hybrid pension plans and inflation-linked corporate bond investing. The Alternative Investment Conference is an opportunity to discuss with investors and regulators whether the AIFM directive offers better protection for investors. EDHEC researchers will also present their latest research results on hedge funds and alternative investments. This special EDHEC-Risk Days Europe issue of BM&I features four articles which we consider to be of particular relevance to the broad financial community. The subject of risks and regulation in the European fund industry is addressed by Samuel Sender, Applied Research Manager, and François Cocquemas, Research Assistant, EDHEC- Risk Institute, in an article that is based on a survey of over 150 high-level professionals that was carried out as part of the Risk and Regulation in the European Fund Management Industry research chair at EDHEC-Risk Institute in partnership with CACEIS. Five broad regulatory themes are surveyed: transparency, information and governance; capital protection and financial responsibility of the industry; distribution; restitution; and the judicial powers of the investors. The major conclusion is that transparency, information and governance appears as the most important theme for respondents, even though it has arguably been neglected by recent regulatory initiatives. The question of the European debt crisis underlies the article by Dominic O Kane, Affiliate Professor at EDHEC Business School and Member of EDHEC-Risk Institute, on the link between Eurozone sovereign debt and credit default swap prices. The author performs a theoretical and empirical analysis of the relationship between the price of Eurozone sovereign-linked credit default swaps and the same sovereign bond markets during the Eurozone debt crisis of , thereby providing valuable insights into a crisis that has had profound consequences not only for the financial community but also for society at large. In their article on a new form of volatility index, the crosssectional volatility index, Felix Goltz, Renata Guobuzaite, Lionel Martellini and Stoyan Stoyanov, introduce an innovative measure of volatility that possesses the advantages over currently available measures of being observable at any frequency, model free, and available for every region, sector and style of global equity markets, without the need to resort to any auxiliary option market. The positive outcome of this research is that the cross-sectional volatility index is closely related to other volatility measures where and when such measures are available, and that it can be used as a reliable proxy for volatility when such measures are not available. Véronique Le Sourd, Senior Research Engineer, EDHEC- Risk Institute, looks at performance measurement for Socially Responsible Investment (SRI) funds, both by reproducing prior studies, but for a more recent period with additional funds, and by analysing how the use of an efficient index, namely the ERAFP SRI Index, as a benchmark can improve the performance measurement of SRI funds. The weak relative performance of actively managed SRI funds compared to an efficient SRI index shows that the question of the active management valueadded compared to index investing is also relevant in SRI investments, which had originally been portrayed as being purely alpha-oriented through their security selection. In the end, SRI investments are also concerned with the question of improved management of risk and thus of the beta component of portfolio performance. While SRI and quantitative financial analysis rely on different skill sets and types of analysis, they are not opposed. They can be combined for investors to better incorporate both extrafinancial and purely financial aspects of investment. We hope that you will enjoy these articles and find them of use in your professional activities. We look forward to continuing our quest with Bankers, Markets & Investors to provide state-of-the-art academic research results that can be used by professionals to improve practices in the industry. n Noël AmeNc Professor of Finance, EDHEC Business School, and Director, EDHEC-Risk Institute bankers, markets & investors n 117 march-april

5 Abstracts n Performance of Socially Responsible Investment Funds against an Efficient SRI Index: The Impact of Benchmark Choice when Evaluating Active Managers Véronique Le Sourd, EDHEC-Risk Institute This paper conducts a performance measurement of Socially Responsible (SRI) funds and assesses the impact of changing the reference from a standard SRI index to an efficient SRI index. While usual SRI indices simply weight SRI-screened stocks by market cap, or sustainability scores, efficient SRI indices apply an optimal weighting scheme to the SRI screened universe. The analysis of fund performance shows that an efficient SRI index raises the bar for actively-managed SRI funds. While about 60% of funds have a positive information ratio when compared to the cap-weighted EuroStoxx Sustainability Index, only about 25% of funds have a positive information ratio with respect to the Efficient SRI Index. It is also interesting to note that the median information ratio across funds is slightly positive (0.05) when using the standard SRI index, but clearly negative (-0.22) when using the Efficient SRI index. Given that such efficient SRI indices are also easy to replicate at low cost, they constitute investable alternatives to actively managed funds. n Introducing a New Form of Volatility Index: the Cross-Sectional Volatility Index Felix Goltz, EDHEC-Risk Institute, Renata Guobuzaite, EDHEC-Risk Institute, Lionel Martellini, EDHEC Business School and Risk Institute, Stoyan Stoyanov, EDHEC Business School and Risk Institute Asia We introduce a new form of volatility index, the cross-sectional volatility index. Through formal central limit arguments, we show that the cross-sectional dispersion of stock returns can be regarded as an efficient estimator for the average idiosyncratic volatility of stocks within the universe under consideration. Amongst the key advantages of the cross-sectional volatility measure over currently available measures are its observability at any frequency, its model-free nature, and its availability for every region, sector and style of the world equity markets, without the need to resort to any auxiliary option market. We also provide some interpretation of the cross-sectional volatility index as a proxy for aggregate economic uncertainty, which suggests that the cross-sectional volatility index should be intimately related to optionbased implied volatility measures. We confirm this intuition by reporting a high correlation level between the VIX index and the corresponding crosssectional volatility index based on the S&P500 universe. We also find the high correlation between the two volatility measures to be robust with respect to changes in sample period, changes in market conditions, and changes in the region under consideration. Overall, these results suggest that the cross-sectional volatility index is closely related to other volatility measures where and when such measures are available, and that it can be used as a reliable proxy for volatility when such measures are not available. n The Link between Eurozone Sovereign Debt and CDS Prices Dominic O Kane, EDHEC Business School and Risk Institute We perform a theoretical and empirical analysis of the relationship between the price of Eurozone sovereign-linked credit default swaps (CDS) and the same sovereign bond markets during the Eurozone debt crisis of We first present a simple model which establishes the no-arbitrage relationship between CDS and bond yield spreads. We then test this relationship empirically and explain why the market may deviate from it. This includes the different currencies of denomination of market-standard CDS and their deliverable obligations. We also examine whether changes in CDS spreads cause changes in bond spreads, and vice-versa, in a Granger sense. The hypothesis of cointegration between CDS and bond spreads for most Eurozone sovereigns is rejected and we suggest that this may be due to the currency effect. We do find evidence for a Granger causal relationship with a one day lag from CDS to bonds for Greece and Spain, the reverse relationship for France and Italy and a feedback relationship for Ireland and Portugal. n FoCuS o N Shedding Light on Non-Financial Risks, A European Survey François Cocquemas and Samuel Sender, Edhec-Risk Institute This study is based on a survey of 163 high-level professionals from the European fund industry. The major conclusion is that transparency, information and governance, even though it has arguably been neglected by recent regulatory initiatives, is the most important regulatory theme for professionals (it is top priority for 61% of respondents). The financial responsibility of the industry comes second (40% of respondents). In the latter theme, respondents agree that greater responsibility should be given to asset managers (67% agree), while responsibilities of depositaries should be clarified (75% agree). ESPACE CARRIÈRE et EMPLOI Pour évoluer au cœur de la banque et de la finance DÉCOUVREZ la nouvelle rubrique sur revue-banque.fr 6 bankers, markets & investors n 117 march-april 2012

6 September-October 2010 ISSN euros revue-banque.fr Alexis GUYOT, Euromed Management Abraham LIOUI, EDHEC Business School and EDHEC Risk Institute Samir ABDERRAzEk SRAIRI, king Saud University Anton GRAnIk, Reims Management School Philippe ROzIn, Université de nanterre and IAE de Lille Edith GInGLInGER, Université Paris-Dauphine William MEGGInSOn, University of Oklahoma Presse Séminaires Édition Librairie Internet In partnership with association française de finance Bankers, Markets & Investors ABONNEMENTS 2012 Je choisis l abonnement à BANKERS, MARKETS & INVESTORS coché ci-dessous : DÉCOUVERTE 1 MOIS : 1 n o + accès online France (TTC) Étranger Quantité Total Offre réservée non renouvelable 70,00 75, AN : 6 n os + accès online France (TTC) Étranger Quantité Total Institutionnel (adresse professionnelle) 615,00 640, Individuel (adresse privée) 310,00 330, ANS : 12 n os + accès online France (TTC) Étranger Quantité Total Institutionnel (adresse professionnelle) 960,00 990, Individuel (adresse privée) 490,00 525, TOTAL (TVA : 2,10 % incluse sur le tarif France) BANKERS, MARKETS & INVESTORS Cahier de recherche financière appliquée 150,00 le numéro n 108 Bankers, markets investors an academic and professionnal review articles 4 the impact of Ownership structure and control mechanisms on transaction costs: an empirical study of Firms listed on the euronext Paris stock exchange for the Period between 2004 and the impact of the 2008 short sale Ban on stock returns 31 efficiency of the saudi Banking sector: a Data envelopment analysis approach 47 Financial News and Volatility of Underlying securities in the Pharmaceutical sector Société... FOcUs ON 56 the evidence On Privatization around the World 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. à retourner au SERVICE ABONNEMENTS REVUE BANQUE NPAI 39 rue Marcelin Berthelot DRANCY CEDEX Tél.: Fax : [email protected] Règlement à l ordre de La Revue Banque par chèque par carte bancaire* n Date limite de validité : _ / _ Notez les 3 derniers chiffres du cryptogramme visuel (au verso de votre carte) : _ * Sauf American Express et Diner s Club. 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. DATE et SIGNATURE BMI12 Vos abonnements se poursuivent on line sur revue-banque.fr Feuilletage, accès illimité aux archives de Bankers, Markets & Investors À SAVOIR > Bénéficiez du CIR (Crédit d Impôt Recherche) pour financer votre abonnement. Nos contenus indispensables à la recherche et au développement ouvrent droit au CIR. + d infos sur revue-banque.fr