EDHEC Business School

About: EDHEC Business School is a education organization based out in Roubaix, France. It is known for research contribution in the topics: Portfolio & Capital asset pricing model. The organization has 294 authors who have published 1749 publications receiving 42687 citations. The organization is also known as: Ecole des Hautes Etudes Commerciales du Nord & EDHEC Business School.

Online Appendix for Ambiguity Attitudes About Investments: Evidence from the Field

Abstract: The full-text version of this paper can be found at: https://ssrn.com/abstract=3331243, https://ssrn.com/abstract=3336513, and https://ssrn.com/abstract=3336776. Using an incentivized survey and a representative sample of investors, we elicit ambiguity attitudes toward a familiar company stock, a local stock index, a foreign stock index, and a crypto currency. We separately estimate ambiguity aversion (ambiguity preferences) and perceived ambiguity levels (perceptions about ambiguity), while controlling for unknown likelihood beliefs. We show that ambiguity aversion is highly correlated across different assets and can be summarized by a single underlying factor. By contrast, individuals’ perceived ambiguity levels differ depending on the type of asset and cannot be summarized by a single underlying factor. Perceived ambiguity is mitigated by financial literacy and education, while the preference component is correlated with risk aversion. Perceived ambiguity proves to be related to actual investment choices, validating our measure. Finally, our results imply that policies enhancing financial literacy and knowledge of financial markets can help stimulate equity market participation and reduce inequality, as these reduce peoples’ perceived levels of ambiguity about financial assets.

CLIMAFIN handbook: pricing forward-looking climate risks under uncertainty

Abstract: Aligning finance to sustainability requires methodologies to price forward-looking climate risks and opportunities in financial contracts and in investors' portfolios. Traditional approaches to financial pricing models cannot incorporate the nature of climate risk (i.e. deep uncertainty, non-linearity and endogeneity), and of financial risks (interconnectedness and complexity). To fill this gap, we developed a transparent, science-based framework to assess and price climate financial risks under uncertainty, the CLIMAFIN tool. It embeds climate scenarios adjusted financial pricing models (for equity holdings, sovereign and corporate bonds), climate scenarios conditioned risk metrics (such as the Climate Spread and the Climate Value-at-Risk). These allow us to introduce forward-looking climate risk scenarios in the valuation of counterparty risk, in the probability of default and largest losses on investors' portfolios. This handbook is intended to support investors in the assessment of forward-looking climate risks in their portfolios and in the identification of portfolios' risk management strategies, and financial supervisors in the analysis of risk exposures that could have implications for systemic risk and in the design of prudential measures to mitigate such risk.

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.

Climate Transition Risk, Climate Sentiments, and Financial Stability in a Stock-Flow Consistent Approach

Abstract: Aligning investments to the climate and sustainability targets requires the introduction of stable climate-aligned policies. In this regard, a global Carbon Tax (CT) and a revision of the microprudential banking framework via a Green Supporting Factor (GSF) have been advocated. However, our understanding of the conditions under which a GSF or a CT could contribute to scale up new green investments, or introduce new sources of risk for financial stability, is poor. In addition, the banking sector’s reaction to the policy announcements i.e. the climate sentiments via a revision of the lending conditions, have not been considered yet. Nevertheless, they could significantly affect the policies’ outcomes, credit supply and conditions, and financial stability at the bank and systemic level. We contribute to fill this knowledge gap by developing a Stock-Flow Consistent behavioral model of a high income country that embeds a non-linear adaptive function of banking sector’s climate sentiments. With the model, we assess the impact of the introduction of a GSF and a CT on the greening of the real economy and on the credit market conditions. We analyze the risk transmission channels from the credit market to the economy via loans contracts, and of the reinforcing feedback effects that could drive cascading macro-financial shocks. Our results suggest that the GSF could contribute to scale up green investments only in short term, while introducing potential trade-offs on financial stability. To foster the low-carbon transition while preventing unintended effects on firms non-performing loans and households’ budget, the introduction of a CT should be complemented with welfare measures. Finally, climate sentiments could be a game changer for the low-carbon transition by increasing investments’ alignment and preventing the risk of stranded assets.