Showing papers by "EDHEC Business School published in 2010"

Performance-based vs socially supportive culture: A cross-national study of descriptive norms and entrepreneurship

Abstract: This paper is a cross-national study testing a framework relating cultural descriptive norms to entrepreneurship in a sample of 40 nations. Based on data from the Global Leadership and Organizational Behavior Effectiveness project, we identify two higher-order dimensions of culture – socially supportive culture (SSC) and performance-based culture (PBC) – and relate them to entrepreneurship rates and associated supply-side and demand-side variables available from the Global Entrepreneurship Monitor. Findings provide strong support for a social capital/SSC and supply-side variable explanation of entrepreneurship rate. PBC predicts demand-side variables, such as opportunity existence and the quality of formal institutions to support entrepreneurship.

The dynamic interplay of capability strengths and weaknesses: investigating the bases of temporary competitive advantage

Abstract: Foundational RBV work suggests that firms possess capabilities that represent strengths and others that represent weaknesses. In contrast, contemporary research has examined capability strengths while largely ignoring weaknesses. Addressing this oversight, we examine the direct and integrated effects of sets of capability strengths and capability weaknesses on competitive advantage and its empirical correlate—relative performance. Additionally, we explore how environmental and firm-specific factors influence change in these drivers of competitive advantage over time. Results suggest that weakness sets have a negative effect on relative performance, while strength sets have an increasingly positive effect. The integrative effects of strength and weakness sets affect relative performance in a complex manner. For example, while high strength/low weakness firms perform at high levels, firms integrating high strength with high weakness perform well, but experience considerably more variance in their realized outcomes. Lastly, we find that the strength and weakness sets change significantly over time in markets where competition is more intense, thereby undermining the durability of competitive advantage. Our theory and results indicate that achieving temporary advantage is more difficult than previously thought and that the erosion of advantage occurs routinely as a result of dynamic and interactive rivalry. Copyright © 2010 John Wiley & Sons, Ltd.

Improved Estimates of Higher-Order Comoments and Implications for Portfolio Selection

Abstract: In the presence of nonnormally distributed asset returns, optimal portfolio selection techniques require estimates for variance-covariance parameters, along with estimates for higher-order moments and comoments of the return distribution. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis. This article extends the existing literature, which has mostly focused on the covariance matrix, by introducing improved estimators for the coskewness and cokurtosis parameters. We find that the use of these enhanced estimates generates a significant improvement in investors' welfare. We also find that it is only when improved estimators are used that portfolio selection with higher-order moments dominates mean-variance analysis from an out-of-sample perspective. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals

Abstract: This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets With significant annualized alphas of 1014% and 1266% respectively, the momentum and term structure strategies appear profitable when implemented individually With an abnormal return of 2102%, a novel double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies This double-sort strategy can additionally be utilized as a portfolio diversification tool Interestingly, the abnormal performance of the double-sort portfolios cannot be explained by a lack of liquidity or data mining and is robust to transaction costs and to different specifications of the risk-return trade-off

Tactical allocation in commodity futures markets: Combining momentum and term structure signals

Abstract: This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14% and 12.66%, respectively, the momentum and term structure strategies appear profitable when implemented individually. With an abnormal return of 21.02%, our double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies. This double-sort strategy can additionally be utilized as a portfolio diversification tool. The abnormal performance of the combined portfolios cannot be explained by a lack of liquidity, data mining or transaction costs.

Keynes Meets Markowitz: The Trade-Off between Familiarity and Diversification

Abstract: We develop a model of portfolio choice to nest the views of Keynes - who advocates concentration in a few familiar assets - and Markowitz - who advocates diversification across assets. We rely on the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor’s "familiarity" toward assets. The model shows that when an investor is equally ambiguous about all assets, then the optimal portfolio corresponds to Markowitz’s fully diversified portfolio. In contrast, when an investor exhibits different degrees of familiarity across assets, the optimal portfolio depends on (i) the relative degree of ambiguity across assets, and (ii) the standard deviation of the estimate of expected return on each asset. If the standard deviation of the expected return estimate and the difference between the ambiguity about familiar and unfamiliar assets are low, then the optimal portfolio is composed of a mix of both familiar and unfamiliar assets; moreover, an increase in correlation between assets causes an investor to increase concentration in the assets with which they are familiar (flight to familiarity). Alternatively, if the standard deviation of the expected return estimate and the difference between the ambiguity of familiar and unfamiliar assets are high, then the optimal portfolio contains only the familiar asset(s) as Keynes would have advocated. In the extreme case in which the ambiguity about all assets and the standard deviation of the estimated mean are high, then no risky asset is held (non-participation). The model also has empirically testable implications for trading behavior: in response to a change in idiosyncratic volatility, the Keynesian portfolio always exhibits more trading than the Markowitz portfolio, while the opposite is true for a change in systematic volatility. In the equilibrium version of the model with heterogeneous investors who are familiar with different assets, we find that the risk premium of stocks depends on both systematic and idiosyncratic volatility, and that the equity risk premium is significantly higher than in the standard model without ambiguity.

The Econometrics of Option Pricing

Abstract: Publisher Summary The stochastic discount factor methodology is the central tool in finance to price assets and provides a natural framework to integrate contributions in discrete and continuous time. Because most models are written in continuous time in option pricing, one has established the link between these models and the discrete time approaches trying to emphasize the fundamental unity underlying both methodologies. To capture the empirical features of the stock market returns, which is the main underlying empirically studied in the option pricing literature, models have gained in complexity from the standard geometric Brownian motion of the seminal Black and Scholes model. A main difficulty is the interplay of the latent variables, which are everywhere present in the models and the inherent complex nonlinearities of the pricing formulas. A major thread that underlies the survey is the interplay between preferences and option pricing. Even though the preference-free nature of the early formulas was often cited as a major advantage, it was not clear where this feature was coming from.

Disclosure by Politicians

Abstract: We collect data on the rules and practices of financial and conflict disclosure by politicians in 175 countries. Although two thirds of the countries have some disclosure laws, less than a third make disclosures available to the public. Disclosure is more extensive in richer and more democratic countries. Disclosure is correlated with lower perceived corruption when it is public, when it identifies sources of income and conflicts of interest, and when a country is a democracy.

Passive Hedge Fund Replication – Beyond the Linear Case

Abstract: In this paper we extend Hasanhodzic and Lo (2007) by assessing the out-of-sample performance of various non-linear and conditional hedge fund replication models. We find that going beyond the linear case does not necessarily enhance the replication power. On the other hand, we find that selecting factors on the basis on an economic analysis allows for a substantial improvement in out-of-sample replication quality, whatever the underlying form of the factor model. Overall, we confirm the findings in Hasanhodzic and Lo (2007)that the performance of the replicating strategies is systematically inferior to that of the actual hedge funds.

Health expenditure, longevity and growth

Abstract: This paper offers an integrated view of the relationships between health spending, medical innovation, health status, growth and welfare. Health spending triggers technological progress, which is a potential source of better outcomes in terms of longevity and quality of life, a direct source of growth for the bio-tech industries and an indirect source of growth through improved of human capital. The latter contributes to GDP per capita through two main channels: higher participation of the population in the labour force and higher labour productivity levels. In turn, income growth induces an increase in health expenditure, as richer countries tend to spend a higher share of their income on health. To analyse these interactions, the paper first focuses on demographic facts, disentangling the role of longevity and carrying out some 'thought experiments' on the indexation of active life on longevity. It then analyses the links between health care expenditures, technology and health status from a micro-level perspective. We investigate empirically the relation between GDP growth and health expenditures and develop a projection method to assess the size of total aggregate expenditures that could be channeled to the health sector up to 2050 for the US, Europe and Japan. We finally assess the potential impact of these health expenditures and better health status on potential growth and productivity.

Environmental Regulation and Competitiveness: Evidence from Romania

Abstract: According to the pollution haven hypotheses differences in environmental regulation affect trade flows and plant location. Specifically, environmental stringency should decrease exports and increase imports of 'dirty' goods. This paper estimates a gravity model to establish whether the implementation of more stringent regulations in Romania has indeed affected its competitiveness and decreased exports towards its European trading partners. Our findings do not provide empirical support to the pollution haven hypothesis, i.e. environmental stringency is not found to affect significantly total trade, or its components (pollution intensive trade and pollution intensive trade related to non-resource-based trade).

A New Look at Minimum Variance Investing

Abstract: Disappointed with the performance of market weighted benchmark portfolios yet skeptical about the merits of active portfolio management, investors in recent years turned to alternative index definitions. Minimum variance investing is one of these popular rule driven, i.e. new passive concepts. I show in this paper theoretically and empirically that the portfolio construction process behind minimum variance investing implicitly picks up risk-based pricing anomalies. In other words the minimum variance tends to hold low beta and low residual risk stocks. Long/short portfolios based on these characteristics have been associated in the empirical literature with risk-adjusted outperformance (alpha). This paper shows that 83% of the variation of the minimum variance portfolio excess returns (relative to a capitalization weighted alternative) can be attributed to the FAMA/FRENCH factors as well as to the returns on two characteristic anomaly portfolios. All regression coefficients (factor exposures) are highly significant, stable over the estimation period and correspond remarkably well with our economic intuition.

The Global Awareness Curriculum in International Business Programs: A Critical Perspective

Abstract: Designing educational sequences that enhance the cognitive, behavioral, and critical skills of a diverse learning community seeking global competencies, requires mindfulness of different international educational models, a tailored curriculum designed to build different types of awareness learning, and clarity in targeted outputs keeping in mind a range of potential occupations and life situations in which such skills will be used. This article outlines conceptual frameworks for global awareness sequences in international management programs, building on existing cross-cultural research, training literature, and comparative analysis of different higher education models. It updates global competence learning frameworks to include recent advances in cultural intelligence, critical reflexivity, and post-colonial perspectives on management education. It calls attention to changing student demographics as a catalyst for moderate curriculum reform, especially a rehabilitation of core global awareness knowledge ...

The Manchester Super Casino: Experience and Learning in a Cross-Sector Social Partnership

Abstract: The management of cross-sector social partnerships (CSSPs) among government, business, and not-for-profit entities can be complex and difficult. This article considers the importance of organizational experience and learning for the successful development of CSSPs. By analyzing the Manchester Super Casino, this research emphasizes the significant benefits of prior experience with CSSPs that enable partners to learn and develop relationships, skills, and capabilities over time, which then have positive influences on future performance. The result is a refined learning model of the CSSP process that includes key variables for CSSP success. As such, these findings provide a template for managing complex CSSPs from the perspective of the different partner organizations.

Predicting bankruptcy using neural networks and other classification methods: the influence of variable selection techniques on model accuracy

Abstract: We evaluate the prediction accuracy of models designed using different classification methods depending on the technique used to select variables, and we study the relationship between the structure of the models and their ability to correctly predict financial failure. We show that a neural network based model using a set of variables selected with a criterion that it is adapted to the network leads to better results than a set chosen with criteria used in the financial literature. We also show that the way in which a set of variables may represent the financial profiles of healthy companies plays a role in Type I error reduction.

A note on the dai–singleton canonical representation of affine term structure models*

Abstract: Dai and Singleton (2000) study a class of term structure models for interest rates that specify the short rate as an affine combination of the components of an N-dimensional affine diffusion process. Observable quantities in such models are invariant under regular affine transformations of the underlying diffusion process. In their canonical form, the models in Dai and Singleton (2000) are based on diffusion processes with diagonal diffusion matrices. This motivates the following question: Can the diffusion matrix of an affine diffusion process always be diagonalized by means of a regular affine transformation? We show that if the state space of the diffusion is of the form D = R-+(m) x RN-m for integers 0 = N - 1, there exists a regular affine transformation of D onto itself that diagonalizes the diffusion matrix. So in this case, the Dai-Singleton canonical representation is exhaustive. On the other hand, we provide examples of affine diffusion processes with state space R-+(2) x R-2 whose diffusion matrices cannot be diagonalized through regular affine transformation. This shows that for 2 <= m <= (N - 2), the assumption of diagonal diffusion matrices may impose unnecessary restrictions and result in an avoidable loss of generality.

Index-Exciting CAViaR: A New Empirical Time-Varying Risk Model

Abstract: Instead of assuming the distribution of return series, Engle and Manganelli (2004) propose a new Value-at-Risk (VaR) modeling approach, Conditional Autoregressive Value-at-Risk (CAViaR), to directly compute the quantile of an individual asset's returns which performs better in many cases than those that invert a return distribution. In this paper we explore more flexible CAViaR models that allow VaR prediction to depend upon a richer information set involving returns on an index. Specifically, we formulate a time-varying CAViaR model whose parameters vary according to the evolution of the index. The empirical evidence reported in this paper suggests that our time-varying CAViaR models can do a better job for VaR prediction when there are spillover effects from one market or market segment to other markets or market segments.

Investment Management after the Global Financial Crisis

Abstract: The investment industry was severely affected by the global financial crisis of 2007–2009, and changes will have to occur. In this monograph, investment industry players, observers, recruiters, and academics are asked to offer their opinions and ideas about what they think the most profound changes are going to be.

Hedge Fund Transparency: Where Do We Stand?

Abstract: Unlike mutual funds, hedge funds are reluctant to provide detailed information on their investment portfolios. Since hedge funds may use niche investment strategies in narrow market segments, fund managers portend that thorough disclosure of their portfolio holdings—which are important to assessing future returns—would crowd out their trades, thus decreasing opportunities to generate outsized returns. However, incomplete disclosure can have some undesirable side effects. It might encourage hedge fund managers to take positions that are riskier than provided for by the manager’s mandate. Investors even risk fraudulent behavior, since the action of hedge fund management may be detected only when a fund has failed.This article presents the results of a comprehensive survey of hedge fund managers and investors on current hedge fund reporting practices. The authors find that the quality of hedge fund reporting is considered an important investment criterion. In analyzing the spectrum of opinions, the authors identify critical points of conflict between investors and managers.They find that investors are especially dissatisfied with the quality of information on liquidity and operational risk exposure. The survey also reveals that inappropriate performance measures are prevalent.

Portfolio Choice for Oil-Based Sovereign Wealth Funds

Abstract: For the purpose of this chapter we define Sovereign Wealth Funds (SWF) as sovereign investment vehicles (returns enter the governments fiscal budget) with high foreign asset exposure, nonstandard liabilities and long (intergenerational) time horizon.1 In this chapter we focus on SWFs sourced by oil revenue as the currently most important (biggest) fraction of this class of new investors as can be seen from Table 9.1.

Risk Control Through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation

Abstract: Asset managers generally focus on diversification or returns prediction to create added value in portfolios of exchange-traded funds (ETFs). This article draws on dynamic risk-budgeting techniques to emphasize the importance of risk management when decisions to allocate to ETFs are made. Absolute return funds, in which the low-risk profiles of government-bond ETFs and conditional allocations to riskier equity ETFs can be combined to obtain portfolios that—beyond the natural diversification between stocks and bonds—provide upside potential while protecting investors from downside risk, are an initial application of ETFs to allocation decisions. A second application is risk control of tactical strategies. Dynamic risk budgeting is used to provide risk-controlled exposure—taking the manager’s forecasts as a given—to an asset class. This article shows that, even if the manager is an excellent forecaster, this approach yields intra-horizon and end-of-horizon risk-control benefits considerably greater than those of standard tactical asset allocation.

Spillover Effects of Counter-Cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales

Abstract: In this article the author looks at the impact of the ban on broad market indices in the U.S. and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policy makers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these indices and to assess the potential spillover effects of a counter-cyclical regulation affecting only one segment of the financial market. He examines the ban on a broad range of market and strategy risk factors and shows that while the ban may be responsible for a substantial increase in market volatility, its impact on higher moments of index returns is not systematic (skewness and kurtosis of the return distribution of only a few indices were affected) or robust (using some robust measures of higher moments makes the impact of the ban disappear).

Global financial crisis, liquidity pressure in stock markets and efficiency of central bank interventions

Abstract: In this article, we investigate the hypothesis of efficiency of central bank intervention policies within the current global financial crisis. We firstly discuss the major existing interventions of central banks around the world to improve liquidity, restore investor confidence and avoid a global credit crunch. We then evaluate the short-term efficiency of these policies in the context of the UK, the US and the French financial markets using different modelling techniques. On the one hand, the impulse response functions in a Structural Vector Autoregressive (SVAR) model are used to apprehend stock market reactions to central bank policies. On the other hand, since these reactions are likely to be of an asymmetric and nonlinear nature, a two-regime Smooth Transition Regression-Generalized Autoregressive Conditional Heteroscedasticity (STR-GARCH) model is estimated to explore the complexity and nonlinear responses of stock markets to exogenous shifts in monetary policy shocks. As expected, our findings show...