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.

Investor Sophistication and Portfolio Dynamics

Abstract: We develop a simple dynamic general-equilibrium framework that can jointly rationalize many empirically observed features of household portfolios, investment returns, and wealth dynamics. The model differs from traditional models only along a single, natural dimension: households differ in their confidence about the return processes for risky assets. Less-confident households (but with unbiased beliefs) overinvest in safe assets, hold underdiversified portfolios concentrated in familiar assets, are trend chasers, and earn lower absolute and risk-adjusted investment returns. More confident households hold riskier positions and exhibit superior market-timing abilities. Despite Bayesian learning, this investment behavior persists for long periods, thereby exacerbating wealth inequality.

Finance, governments, and trade

Abstract: We study how financial transactions may respond to exogenous variation in trade opportunities not only directly, but also through policy channels. In more open economies, governments may find it more difficult to fund and enforce public policies that substitute private financial transactions, and more appealing to deregulate financial markets. We propose a simple theoretical model of such policy-mediated relationships between trade and financial development. Empirically, we document in a country panel dataset that, before the 2007–2008 crisis, financial market volumes were robustly and negatively related to the share of government consumption in GDP in regressions that also include indicators of financial regulation and trade openness, and we seek support for a causal interpretation of this result in instrumental variable specifications.

Transaction Costs, Trading Volume and Momentum Strategies

Abstract: This article considers the relationship between trading volumes, transaction costs, and the profitability of momentum strategies using data from the U.K. The authors demonstrate that round-trip transactions costs for selling loser firms are about double those for buying winners, and in particular, the costs of selling low-volume losers is more than twice that for selling low-volume winners. By contrast, there are only modest differences between the costs of buying winners and losers, irrespective of their volume levels. Yet the authors observe that, even in net terms, momentum strategies based on low-volume stocks are more profitable than those using high-volume stocks. It is also noted that important differences between transaction costs are measured using quoted versus effective spreads. Altogether, the findings should sound a word of caution for any study attempting to evaluate the impact of transaction costs on momentum profitability, that such costs are very heterogeneous across firms and trade types, implying that they require careful calculation.

The Case for Long-Short Commodity Investing

Abstract: The article presents strong evidence in favor of long-short (as opposed to long-only) commodity investments. We show that long-short fully-collateralized commodity portfolios based on momentum, term structure or hedging pressure present higher Sharpe ratios, lower volatility and lower correlation with the S&P500 index than long-only commodity portfolios. Besides long-short hedging pressure portfolios serve as partial hedge against extreme equity risk as they present decreasing correlations with the S&P500 index in periods of heightened equity volatility. This is good news to equity investors: it is precisely when the volatility of equity markets is high that the benefits of diversification are most appreciated. In contrast, the conditional correlation between the S&P500 and long-only commodity indices substantially rises with the S&P500 volatility, suggesting that the risk diversification of long-only commodity portfolios prevails less when needed most.

The role of commodities in strategic asset allocation

Abstract: We shed new light on the role of commodities in asset allocation for investors with and without liabilities who (a) believe that asset returns are time varying and predictable (b) have short and long term horizons and (c) have access, in addition to a standard passive commodity portfolio, to commodity portfolios based on equal weights, momentum and the basis. We document significant benefits, in- and out-of-sample, from investing in factor-based commodity portfolios. We also confirm and extend the evidence on the negative role of commodity investments based on commonly used commodity benchmarks for investors with long horizons and liabilities.