Showing papers by "EDHEC Business School published in 2004"

Comprendre et mesurer la valeur du point de vue du consommateur

Abstract: Cet article propose une integration des travaux sur la valeur de consommation et un cadre conceptuel reposant sur la theorie fonctionnelle des attitudes dans lequel nous identifions six composantes de la valeur de consommation (utilitaire, connaissance, stimulation experientielle, lien social, expression de soi, spirituelle). Par ailleurs, nous proposons un modele integrateur expliquant la valeur globale (ratio entre benefices et sacrifices) par les composantes de la valeur de consommation. Une application au cinema en salle nous permet de valider la mesure des six composantes de la valeur de consommation, puis d'etudier leur influence sur la valeur globale. Trois composantes apparaissent dominantes : utilitaire (qualite du son et de l'image), stimulation experientielle et lien social; elles expliquent 32 % de la variance de la valeur globale. Enfin, nous observons que la satisfaction cumulee se distingue de la valeur globale, en termes de mesure et de champ de significations, la premiere ayant une nature...

Predictability in Hedge Fund Returns

Abstract: A significant amount of research has been devoted to the predictability of traditional asset classes, but little is known about the predictability of returns emanating from alternative vehicles, such as hedge funds. We attempt to fill this gap by documenting evidence of predictability in hedge fund returns. Using multifactor models for the return on nine hedge fund indexes, for which the factors were chosen to measure the many dimensions of financial risk, we found strong evidence of significant predictability in hedge fund returns. We also found that the benefits of tactical style allocation portfolios are potentially large. We obtained even more spectacular results for an equity-oriented portfolio that mixed traditional and alternative investment vehicles and for a debt-oriented portfolio that mixed traditional and alternative investment vehicles. These results do not seem to have been significantly affected by the presence of reasonably high transaction costs.

Determinants of Productivity Per Employee: An Empirical Estimation Using Panel Data

Abstract: Two different approaches are used in this article to study productivity per employee: the determinants of its growth rate in the 1990s are first examined, and then the determinants of its level, using a more structural approach. ICT are shown to have a positive and significant effect on both growth rates and levels of productivity. This result is consistent with that of Gust and Marquez (2002), although the sample of countries is larger and GMM are used. In both sections of the paper, the employment rate and productivity exhibit a significant negative relationship, arising from the concentration of employment on the most productive members of the workforce. Indicators of financial depth and price stability are found to be significant.

Evaluating the Fit of Sticky Price Models

Abstract: We examine the effects of introducing investment adjustment costs, variable capital utilization, indivisible labor, and material goods into a sticky price model subject to a cash-in-advance constraint. Combining these elements, the model overcomes the main criticisms traditionally addressed to this class of models. Under Watson (1993) goodness-of-fit criterion, the model does a very good job at replicating the dynamics of output, hours and investment. However, this framework dramatically fails at reproducing the spectrum of inflation. This unfortunate conclusion is robust to numerous alternative specifications.

The Breaks in per Capita Productivity Trends in a Number of Industrial Countries

Abstract: The purpose of this article is to study the trends in per capita productivity in several major industrialised countries. The analysis is first based on annual data over a long period spanning the entire 20th century for the United States, France and the United Kingdom. Productivity trends are then studied over a shorter period, using quarterly data, for the United States, France, the United Kingdom, Germany, Spain, Japan and the Netherlands. There are already a large number of studies of this kind, but they are too often focused on presenting average productivity growth rates for given periods chosen on an ad hoc basis. In this article, we use a robust statistical method to endogenously identify possible breaks in per capita productivity trends. This method, developed by Bai and Perron (1998), brings out the following salient features: – in the United States, per capita productivity growth accelerated following the trend break at the start of the 1920s, then slowed down at the end of the 1960s. This finding is in line with the “Big Wave” concept developed by Gordon (1999, 2002) to describe the trends in US productivity growth throughout the 20 th century. – French and UK productivity started catching up with that in the United States around the end of the Second World War. – Most of the countries under review recorded slower trend productivity growth in the first half of the 1970s. In the United States, this break occurred in 1966. This finding differs from that of other existing analyses, which point to 1974. – Trend productivity growth in Europe and Japan slowed in the 1990s, whereas US productivity gained momentum over the same period.

New evidence on the market impact of convertible bond issues in the u. s.

Abstract: This study provides new evidence on the market impact of new issues of convertible bonds of U.S. listed firms. We examine on the market reaction surrounding the announcement dates and the issue dates of convertible bonds. The evidence suggests that firms experience negative abnormal returns around the announcement of new issues of convertible bonds. Abnormal returns are found to be a function of firm market value, price-to-book ratio, issue size, as well as the state of the overall market. Simulations using convertible arbitrage strategies suggests that investors could take advantage of these negative abnormal returns by going long on the firm's convertible bond and short on the firm's stock at the issue date.

Critiques du budget : une approche contingente

Abstract: Ces dernieres annees, la procedure budgetaire a fait l'objet de nombreuses critiques qui auraient meme conduit un certain nombre d'entreprises a aller " audela du budget " et a gerer sans budget. Pourtant, plusieurs etudes recentes montrent que le budget est loin d'etre mort dans la plupart des grandes entreprises. Ces constatations contradictoires militent pour une meilleure comprehension des critiques adressees au budget et pour une analyse approfondie des conditions dans lesquelles elles sont formulees. De nombreux travaux ont montre l'effet des variables de contingence sur les systemes et outils de controle. Il est donc raisonnable de penser que, en fonction de situations contingentes differentes, des critiques elles-memes differentes puissent etre exprimees. A partir d'une enquete par questionnaire, cette communication analyse, dans un premier temps, dans quelle mesure les entreprises cautionnent les critiques generalement adressees au budget et observe qu'il existe quatre types de critiques. Dans un second temps, les resultats montrent que le niveau d'incertitude influence fortement l'attitude globalement critique vis-a-vis du processus budgetaire. Les variables de taille, de cotation en bourse et de strategie expliquent certaines critiques specifiques.

Incomplete Market Dynamics in a Neoclassical Production Economy

Abstract: We investigate a neoclassical economy with heterogeneous agents, convex technologies and idiosyncratic production risk. Combined with precautionary savings, investment risk generates rich effects that do not arise in the presence of pure endowment risk. Under a finite horizon, multiple growth paths and endogenous fluctuations can exist even when agents are very patient. In infinite-horizon economies, multiple steady states may arise from the endogeneity of risk-taking and interest rates instead of the usual wealth effects. Depending on the economy's parameters, the local dynamics around a steady state are locally unique, totally unstable or locally undetermined, and the equilibrium path can be attracted to a limit cycle. The model generates closed-form expressions for the equilibrium dynamics and easily extends to a variety of environments, including heterogeneous capital types and multiple sectors.

Revisiting Core-Satellite Investing

Abstract: Tracking error is not necessarily bad. Good tracking error would be outperformance of a portfolio with respect to the benchmark. If they severely restrict the amounts invested in active strategies as a result of tight tracking error constraints, investors foreclose the opportunity for significant outperformance, especially during market downturns. A new methodology based on an optimal dynamic adjustment of the fractions invested in a passive core versus an active satellite portfolio allows investors to gain full access to good tracking error, while keeping bad tracking error below a given threshold. The method is a natural extension of constant-proportion portfolio insurance techniques.

The Econometrics of Option Pricing

Abstract: In this survey, we review econometric models for conducting statistical inference on option price data. We limit our review to European options on a stock index as well as to statistical methods which have been specifically developped for options. Emphasis is put on the synthesis of the various models used in the literature. We start with discrete-time models based on the unifying principle of stochastic discount factor. We cover multinomial trees as well as risk neutral valuation in a conditionally log-normal setting. Extensions to mixtures of log-normals lead to stochastic volatility models, including models with leverage effect. We characterize implications of such models for volatility smiles and show that they are fully similar to the ones derived from continuous-time stochastic volatility models. We then review usual continuous-time models, in particular affine jump-diffusion models or models with several nonlinear factors, as well as extensions with Levy processes or long memory in volatility. We analyze in this context implicit state methods, both parametric (maximum likelihood) and semiparametric (method of moments). We conclude with a review of nonparametric methods which are used to extract pricing probability measures: canonical, implied binomial trees, and seminonparametric approaches (kernels, neural networks and splines). Extraction of preferences based on these measures are also discussed. Dans ce survol, nous passons en revue les modeles econometriques adaptes a l'inference statistique sur donnees de prix d'options. Nous nous limitons aux options de type europeen sur un indice de marche d'actions. Seules sont explicitees les techniques d'inference statistique qui ont connu des developpements specifiques pour les donnees de prix d'options. L'accent est mis sur la modelisation. On commence par une synthese des modeles en temps discret a partir du principe unificateur de facteur d'actualisation stochastique. Ceci nous permet de couvrir tant les modeles d'arbres multinomiaux que la valorisation risque neutre dans un contexte de log-normalite conditionnelle. L'extension aux melanges de lois log-normales conduit aux modeles de volatilite stochastique, y compris les modeles avec effet de levier. Nos caracterisons les implications en termes de sourire de volatilite et montrons qu'elles sont pleinement similaires a celles d'un modele de volatilite stochastique en temps continu. Nous passons ensuite aux modeles usuels en temps continu, notamment les modeles de diffusion avec sauts ou avec plusieurs facteurs non-lineaires, ainsi que les extensions avec processus de Levy ou memoire longue dans la volatilite. Nous abordons dans ce contexte les methodes avec etats implicites, a la fois parametriques (maximum de vraisemblance) ou semiparametriques (methode des moments). Enfin, nous passons en revue les methodes nonparametriques qui permettent d'extraire directement les mesures de probabilite d'evaluation : canoniques, arbres binomiaux impliques et approches semi-nonparametriques (noyaux, reseaux de neurones et splines). Les implications en termes d'extraction des preferences sont aussi discutees.

A Survey of the Literature on Hedge Fund Performance

Abstract: The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. The explanation for this complexity lies in the particular features of alternative funds. Hedge funds invest in a heterogeneous range of financial assets and cover a wide range of strategies that have different risk and return profiles. Even though the current studies on hedge fund performance appear to be confusing, due to conflicting conclusions and criticism of the methods employed in previous papers, they contribute to an improvement in the knowledge of alternative funds, and leading approaches are confirmed. The aim of this paper is to highlight some specific characteristics of hedge funds and their implications in terms of performance measurement. The most recent innovative contributions are reported.

Une étude comparative des systèmes proxémiques français et tunisiens

Abstract: S'il existe desormais une litterature relativement consistante sur les reactions cognitives, affectives et comportementales face a la foule dans un contexte commercial, peu de travaux ont integre les differences culturelles dans l'explication de ces reactions, ce qui semble pourtant crucial dans le cadre de l'internationalisation croissante des distributeurs. Deux etudes realisees en periode de grande affluence dans deux hypermarches, l'un en France et l'autre en Tunisie, permettent de mieux comprendre les specificites culturelles des systemes proxemiques et des reactions a la foule.

Taking a Close Look at the European Fund of Hedge Funds Industry: Comparing and Contrasting Industry Practices and Academic Recommendations

Abstract: Given the increasing importance of funds of hedge funds in the development of the hedge fund industry and the cost-intensive nature of multi-manager structures, investors are questioning whether FoHF add value to an extent that justifies the extra layer of fees induced by their activity. To answer these questions from a European perspective, Edhec Risk and Asset Management Research Centre carried out a survey of the practices of European hedge fund multi-managers. This survey focused on examining the following three dimensions that are commonly perceived as the main sources of added value by multi-managers, namely fund selection, asset allocation and portfolio construction, and reporting and investor information. The authors report the results of this survey and shed some light on the causes of the gap between practitioner and academic perceptions with regard to the approach followed by hedge fund multi-managers. They conclude that the institutionalization of hedge funds, and the move from absolute performance to diversification benefits, cannot simply be understood as a change in scale and client objectives, but more as a profound modification of investor requirements impacting several dimensions of the industry.

Portfolio Investment with the Exact Tax Basis via Nonlinear Programming

Abstract: Computing the optimal portfolio policy of an investor facing capital gains tax is a challenging problem: because the tax to be paid depends on the price at which the security was purchased (the tax basis), the optimal policy is path dependent and the size of the problem grows exponentially with the number of time periods. A popular approach to address this problem is to approximate the exact tax basis by the weighted average purchase price. Our contribution is threefold. First, we show that the structure of the problem has several attractive features that can be exploited to determine the optimal portfolio policy using the exact tax basis via nonlinear programming. Second, we characterize the optimal portfolio policy in the presence of capital-gains tax when using the exact tax basis. Third, we show that the certainty equivalent loss from using the average tax basis instead of the exact basis is very small: it is typically less than 1% for problems with up to ten periods, and this result is robust to the choice of parameter values and to the presence of transaction costs, dividends, intermediate consumption, labor income, tax reset provision at death, and wash-sale constraints.

How to Forecast Long-Run Volatility: Regime Switching and the Estimation of Multifractal Processes

Abstract: We propose a discrete-time stochastic volatility model in which regime switching serves three purposes. First, changes in regimes capture low-frequency variations. Second, they specify intermediate-frequency dynamics usually assigned to smooth autoregressive transitions. Finally, high-frequency switches generate substantial outliers. Thus a single mechanism captures three features that are typically viewed as distinct in the literature. Maximum-likelihood estimation is developed and performs well in finite samples. Using exchange rates, we estimate a version of the process with four parameters and more than a thousand states. The multifractal outperforms GARCH, MS-GARCH, and FIGARCH in- and out-of-sample. Considerable gains in forecasting accuracy are obtained at horizons of 10 to 50 days.

Culture's Role in Entrepreneurship: Self-Employment Out of Dissatisfaction

Abstract: This research investigation addresses why somecountries have more entrepreneurs than others. To investigate determinants ofentrepreneurship, data points are included from several countries and differentperiods of time between 1974 and 1994. The bivariate relationship between levelof entrepreneurship and a number of economic factors, cultural traits, anddissatisfaction variables are examined. Regressions are conducted on time-series data using various economic anddissatisfaction variables as independent variables to predict level ofentrepreneurship in several country clusters. Past research is reviewed on thelevel of entrepreneurship at the aggregated societal level. Findings indicate that the factors determining level of entrepreneurship arecomplex, but the basic finding is that dissatisfaction with society and life ingeneral determines level of entrepreneurship in a country. Further, thecultures of relatively poor countries can be characterized by large powerdistance and low individualism and often by strong uncertainty avoidance, atleast in Western countries. This in conjunction with relatively highdissatisfaction with society and life give rise to a high incidence ofsmall-scale self-employment. When countries develop, dissatisfaction declinesand so do levels of entrepreneurship. In industrialized countries, informationtechnology and differentiation of markets create diseconomies of scale andinvite new, innovative entrepreneurship. At the same time, a high level ofsatisfaction with life in these societies may slow down the drive towardentrepreneurship. (JSD)

Volatility Comovement: A Multifrequency Approach

Abstract: We implement a multifrequency volatility decomposition of three exchange rates and show that components with similar durations are strongly correlated across series. This motivates a bivariate extension of the Markov-Switching Multifractal (MSM) introduced in Calvet and Fisher (2001, 2004). Bivariate MSM is a stochastic volatility model with a closed-form likelihood. Estimation can proceed by ML for state spaces of moderate size, and by simulated likelihood via a particle filter in high-dimensional cases. We estimate the model and confirm its main assumptions in likelihood ratio tests. Bivariate MSM compares favorably to a standard multivariate GARCH both in- and out-of-sample. We extend the model to multivariate settings with a potentially large number of assets by proposing a parsimonious multifrequency factor structure.

The Determinants of the Time to Efficiency in Options Markets: A Survival Analysis Approach

Abstract: This paper examines the determinants of the time it takes for an index options market to be brought back to efficiency after put-call parity deviations, using intraday transactions data from the French CAC 40 index options over the August 2000 - July 2001 period. We address this issue through survival analysis which allows us to characterize how differences in market conditions influence the expected time before the market reaches the no-arbitrage relationship. We find that moneyness, maturity, trading volume as well as trade imbalances in call and put options, and volatility are important in understanding why some arbitrage opportunities disappear faster than others. After controlling for differences in the trading environnement, we find evidence of a negative relationship between the existence of ETFs on the index and the time to efficiency.

Asymptotic Distribution Expansions in Option Pricing

Abstract: This article extends an option pricing model and studies the properties of implied probability distribution functions (PDFs) recovered from American interest rate futures options. The model relaxes the restricting assumption of lognormally distributed returns accommodating a wide variety of implied PDFs shapes. Non-normal skewness and kurtosis are found to contribute significantly to estimating more precise implied densities. The model achieves good in-sample accuracy, similar to that achieved by alternative approaches. The recovered implied PDFs are, finally, found to be closer to a median PDF estimated using a number of alternative techniques.

L'évaluation des performances dans les entreprises françaises : une étude empirique

Abstract: Traditionnellement les systemes d'evaluation des performances s'interessaient en priorite aux resultats financiers. Les criteres de concurrence ont toutefois oblige les entreprises a changer leur facon d'apprehender la performance. Les mesures financieres traditionnelles sont en effet incompatibles avec les strategies de creation de valeur pour le client L'objectif de notre recherche est d'etudier les systemes d'evaluation des performances utilises par les entreprises francaises en mesurant l'influence de la taille de l'organisation, l'incertitude percue de l'environnement, la strategie et les indicateurs non financiers sur leur architecture'.

Managerial Discernment: An Examination in the Case of Employee Appraisal

Abstract: We present a preliminary investigation of the concept of managerial discernment Discernment provides managers with a structured process invoking both the rationality and the spirituality of the decision-maker in order to improve decision quality First we introduce the core concepts, using Ignatian discernment as a basis Second, we illustrate managerial discernment using an actual case of employee appraisal, combined with a simulation based on the information obtained from the case Finally, we discuss the implications, both in the context of appraisal and more generally organizational settings

Revealing The Parameter of Risk-Aversion From Option Prices When Markets Are Incomplete: Theory and Evidence.

Abstract: A standing assumption in the literature concerning the estimation of the parameter of relative risk aversion from option prices is that a representative investor exists. This thus assumes that markets are complete. We suggest a new methodology in order to extract the parameter of risk aversion from option prices when markets are possibly incomplete. Our estimates of the parameter of relative risk aversion ranges from 1.6 to 3.1. When it is time varying and only Calls are used, the parameter of risk aversion is shown to vary pro-cyclically with the market while the pricing kernel varies counter-cyclically. When estimated using only Puts, the parameter of risk aversion is show to vary counter-cyclically with respect to the market while the pricing kernel vary pro-cyclically. As a consequence, separating Calls from Puts help understand that the so-called Pricing Kernel Puzzle may not be a puzzle. Finally, since we took all the moneyness range available each day, the reasonable values obtained for the parameter of relative risk aversion show that puts in general, and deep-out of the money Puts in particular, are not mispriced. Market incompleteness provides a relevant explanation of their price behavior.

Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence ¤

Abstract: We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers’ expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator’s market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.

Hedge Fund Indices: Investable, Non-Investable and Strategy Benchmarks

Abstract: In the hedge fund universe, where it is frequently said that performance is extracted from managers, reflecting active asset management, the implementation of hedge fund indices may be surprising, because the notion of index is commonly associated with the notion of passive management. The aim of this study is to revisit the issue of hedge fund strategy benchmarks, and answer the following question: can investors in the alternative arena measure the relative return of hedge funds? In other words, can investable and/or non-investable hedge fund indices provide investors with useful tools for performance measurement?

Estimating Implied Pdfs from American Options on Futures: A New Semi-Parametric Approach

Abstract: This article develops a new methodology for estimating the risk neutral density implied by American type futures options. The methodology employed uses an Edgeworth series expansion parameterization for the probability distribution of asset returns. Data from the crude oil market are used to test a number of hypotheses. It is found that the market consensus can be accurately reflected in the recovered densities. The risk neutral densities are also found to differ significantly from a single lognormal distribution. In addition, they prove to be more robust than risk neutral densities recovered with a model, which assumes a mixture of two lognormal distributions.

Valuing Exotic Derivatives with Jump Diffusions: The Case of Basket Options

Abstract: Exotic options are complicated derivatives instruments whose structure does not allow, in general, for closed-form analytic solutions, thus, making their pricing and hedging a difficult task. To overcome additional complexity such products are, as a rule, priced within a Black-Scholes framework, assuming that the underlying asset follows a Geometric Brownian Motion (GBM) stochastic process. This paper develops a more realistic framework for the pricing of exotic derivatives; and derives closed-form analytic solutions for the pricing and hedging of basket options. We relax the simplistic assumption of the GBM, by introducing the Bernoulli Jump Diffusion process (BJD) and approximate the terminal distribution of the underlying asset with a log-normal distribution. Potential extension of the model with the use of the Edgeworth Series Expansion (ESE) is also discussed. Monte Carlo simulation confirms the validity of the proposed BJD model.

General Equilibrium Pricing of CPI's Derivatives

Abstract: We examine the issue of pricing futures and option contracts written on the Consumer Price Index (CPI), the change of which is a measure of inflation affecting the economy. Traditional approaches postulate an exogenous process for the price level and then derive CPI derivatives prices by standard arbitrage arguments. By contrast, we build the general equilibrium of a continuous time monetary economy that is affected by both real and nominal shocks. The price level and thus the inflation rate are found endogenously and solutions for the prices of CPI derivatives are obtained, which are in closed form in a specialized version of the economy.

Quels facteurs de performance pour quels types d'équipe ? L'avis des managers

Abstract: Ce papier montre que les facteurs de performance des equipes percus comme les plus importants par les managers sont la clarte des objectifs, les relations de confiance au sein de l'equipe et les competences des membres et du leader. L'etude montre egalement que ces perceptions sont influencees par le type d'equipe.

Improving the Market Model: The 4-State Model Alternative

Abstract: The present paper conducts an empirical study by examining the Market Model and the three versions of the 4-State Model (translated, rotated and un-rotated) in a mean-beta framework. Using daily returns from the CAC 40 Index's assets, we find that the explanatory power of the 4-State Model is greater than the one of the Market Model and this effect is improved by rotation. A reduction in the non-systematic risk is also observed when switching from Market Model to 4-State Models. Surprisingly, the betas are more stable when using any version of the 4- State Model. This could have a strong impact on portfolio diversification and call widely held opinion into question.

The Relation between Return and Volatility in the Commodity Markets

Abstract: The relationship between stock market returns and volatilities has been extensively investigated in the academic literature. In this paper the relationship between Commodity Returns and volatility is investigated for the first time. We shared the feeling that the relationship between return and volatility in the commodity markets is the inverse of that observed in the stock markets. If that hypothesis proves to be true and if commodity markets returns are negatively correlated with the returns of traditional financial assets, the introduction of commodities in investment portfolios would result in the diversification of the volatility exposure. This will allow Fund Managers to hedge investment portfolios with commodities, thus avoiding the use of more complicated instruments, such as options. We carry out the exploratory tests of Black [1976], to test the hypothesis with the unconditional variance, as well as the tests of Nelson [1991], Zakoian [1990] and Glosten, Jagannathan, and Runkle [1993], to test the hypothesis on the conditional variance. The estimation of the models yields statistically significant asymmetric terms only for the conditional variance and the initial hypothesis that the conditional variance responds asymmetrically to past information is not rejected.