Bankers, markets investors

Bankers,
markets
investors
n° 118
may-June 2012
ISSN 2101-9304
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revue-banque.fr
an academic and professional review
art i c l e s
4 The Great Divergence: French Equity Premium is Lower and Riskier
than the US since WWI
David LE BRIS, BEM Bordeaux Management School
Sandrine TOBELEM FOLDVARI, AHL Research and Trading
14 Is the KIID Sufficient to Associate Portfolios to Investor Profiles?
Georges HÜBNER, HEC University of Liège, Maastricht University, Gambit Financial Solutions, EDHEC
23 Momentum Investing over the Last Twenty Years in France,
its Persistence and the Effects of the Financial Crisis
Emilios C. GALARIOTIS, Audencia PRES LUNAM, Centre for Financial and Risk Management
30 On the Performance of Socially Responsible Investing:
Further Evidence
Homayoon SHALCHIAN, School of Commerce at Laurentian University
Bouchra M’ZALI, School of Business and Management at the University of Quebec (Montreal)
Khalid EL BADRAOUI, ESC Rennes School of Business, CREM UMR CNRS 6211
Jean-Jacques LILTI, University of Rennes 1 and CREM UMR CNRS 6211
F o c u s o n ...
44 The Individual Investor
Marie-Hélène BROIHANNE, Maxime MERLI, Patrick ROGER, LaRGE, EM Strasbourg Business School,
University of Strasbourg
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Bankers, Markets & Investors n° 118 may-june 2012
© Bankers, Markets & Investors
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,
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Alain SCHATT/IAE Dijon, Éric SEVERIN/OSTL Lille 1, Jacques SIKORAV/BNP Paribas, Grégory TAILLARD/HSBC AM.
Abstracts
■■ The Great Divergence: French
Equity Premium is Lower and Riskier
than the US since WWI
4
David LE BRIS, BEM Bordeaux Management School
Sandrine Tobelem Foldvari, AHL Research and Trading
In this paper, we compare the US and French risk premium computed on high
quality data. We confirm that the US risk premium has been constantly higher.
We also show that the US equity outperformance is even higher when we compute the price of risk. Indeed, the US equity risk has been lower than the French
one since 1917. The two world wars do not seem to explain the risk premium
difference, as the US continues to outperform the French equity market after
1950. We conclude that the particular case of the outperformance of the US
equity cannot be directly extrapolated to other equity markets.
■■ Is the KIID Sufficient to Associate
Portfolios to Investor Profiles?
14
Georges Hübner, HEC University of Liège, Maastricht University, Gambit
Financial Solutions, EDHEC
With the Key Investor Information Document (KID), the new UCITS IV framework brings a useful standardized and simplified scheme to explain
the risk of mutual funds to non-professional investors. The Synthetic Risk
and Reward Indicator (SRRI) methodology defines how to assess a volatility equivalent for each type of funds, and recognizes the specificities of
various types of investment vehicles in the process. The SRRI rests upon
two key principles: (i) risk-volatility mapping: the level of risk can be adequately translated by the volatility of returns; and (ii) reward to volatility:
there must be a positive connection between the level of risk borne by the
individual investor and the associated reward in terms of returns. We show
that the SRRI methodology does not guarantee that these two principles
are respected in practice. By forcing any type of risk to be translated into a
volatility estimate, the approach overlooks investor’s heterogeneity in the
definition of risk. The SRRI synthetic approach is powerless to adequately
reflect the trade-off between normal and extreme risks the way it is perceived
by individual investors. It also ignores that fund returns are not necessarily
only related to volatility. We show that the KID does not replace a proper
investment profiling system. The analysis of investor profiles is a necessary
complement to the KID in order to provide adequate advice to investors.
We provide an approach, based on the linear-exponential utility function,
that enables the financial advisor to address the heterogeneity of investors
when defining the risk of an investment portfolio.
■■ Momentum Investing Over the
Last Twenty Years in France, its
Persistence and The Effects of the
Financial Crisis
23
Emilios C. Galariotis, Audencia PRES LUNAM, Centre for Financial and
Risk Management
The paper investigates momentum investment strategies for the French
Security Market during the most recent twenty years. The aims are to
test whether such strategies perform persistently, i.e. they remain profitable today consistent with earlier literature, and if so, whether they are
abnormal and if there has been an effect from the recent global financial
crisis that has different characteristics compared to other crises in the
sample. Sixteen trading strategies are investigated ranging from three
to twelve months, and results show that momentum returns appear to
be significant on a risk adjusted basis (both univariate and multivariate),
and that momentum portfolios on average provide a good hedge for
market risk. Nonetheless, considering the financial crisis, momentum
profitability disappears or is even reversed (at which time it pays off to
be a contrarian investor), showing a risk not captured by traditional asset pricing models.
■■ On the Performance of Socially
Responsible Investing: Further
Evidence
30
Homayoon Shalchian, School of Commerce at Laurentian University
Bouchra M’zali, School of Business and Management at the University of
Quebec (Montreal)
Khalid El Badraoui, ESC Rennes School of Business, CREM UMR CNRS 6211
Jean-Jacques Lilti, University of Rennes 1 and CREM UMR CNRS 6211
We examine the relation between corporate social performance and
stock portfolios performances. Based on Kinder, Lydenberg and Domini
social performance ratings, the study constructs and evaluates different
sets of equity portfolios that differ in social performance. The high-ranked portfolios provide, in most cases, higher average returns than their
low-ranked counterparts over the 1995-2006 period. In addition, we observe that the relation social-financial performance depends also on the
economic cycle and consequently, on the market performance. Socially
responsible investments seem to be more popular during bearish market periods and less popular during bullish market periods. Finally, our
results suggest that in some industries, the differences of performances
are more significant than in others. In other words, the relation social-financial performance seems to be considerably affected by the nature of
firms’ activities. Therefore, our empirical results suggest that industry is
an important factor that should be taken in consideration in studies on
the relation between social and financial performance.
■ ■focus
on…
The Individual Investor
44
Marie-Hélène Broihanne, Maxime Merli and Patrick Roger, LaRGE, EM
Strasbourg Business School, University of Strasbourg
Standard financial theory does not distinguish categories of investors,
in terms of optimal portfolios or trading strategies. Obviously there
is a gap between individual investors and mutual funds because the
investment problem is quite different, due to constraints, market imperfections and behavioral biases. In this paper we focus on individual
investor’s portfolios and trading behavior. We compare what is predicted
by portfolio choice theory to what really happens on financial markets.
We then develop some of the alternative theories explaining the behavior of individual investors.
bankers, markets & investors n° 118 may-june 2012
3
THE GREAT DIVERGENCE: FRENCH EQUITY PREMIUM IS LOWER AND RISKIER THAN THE US SINCE WWI
The Great Divergence:
FRENCH EQUITY PREMIUM IS LOWER
AND RISKIER THAN THE US SINCE WWI
F
DAVID LE
BRIS*
Assistantprofessor,
BEM Bordeaux
Management
School
SANDRINE
TOBELEM
FOLDVARI**
Senior
Quantitative
Analyst
AHL Research
and Trading
or the study of long term stock price behaviour,
most authors focus on the biggest stock market in
the world: the US market. Cowles (1939) conducts
a thorough study of the long term US capital market
behaviour and recreates reliable return time series from
1871. This landmark study is followed by the work of
Schwert (1990) and especially the work of Siegel (1994)
who evaluates the evolution of US stock prices since
1802. One of Siegel major results is to prove that the
equity premium remains remarkably stable over the
long run (and equal to a “Siegel’s constant” of about
5% in geometric mean).
Table 1 below gives a snapshot of the different US equity
risk premium computed in the main studies found in the
literature (to which we have added our own measurements
for the French and US equity risk premium). All those
studies on the US equity premium converge towards to
the Siegel’s constant.
However, the US studies suffer from a potential bias
as identified by Brown et al. (1995). Indeed, the US economy is one of the most successful over the long run,
and extrapolating results obtained for the US market
on other markets may prove fallacious.
Accordingly, several studies investigate other markets. Dimson and Marsh (2001) reconstitute a monthly
UK index over the period (1950-2000). In their book,
Dimson et al. (2002) collect total stock returns for 17
countries since 1900 (yearly revised, see Dimson et al.,
2010). According to these authors, huge differences
exist among total real returns across countries (between
2.90% for Belgium and 7.10% for Australia). A major
shortfall in those studies however, is the quality of
the data used. Indeed, the equity return is computed
as a compilation of indices built ad hoc which do not
effectively represent the return of an investment in
stocks (see Le Bris and Hautcoeur, 2010).
In this paper, we consider high quality data for the
French equity returns that have been recently made
available on a monthly basis since 1854 (Le Bris and
* [email protected]
** [email protected]
4
LeBris_Article.indd Sec1:4
Hautcoeur, 2010). We can therefore reliably compare
the US equity return (as computed by Cowles-S&P
data, see Appendix A) and the French equity return
performances.
It is indeed interesting to be able to compare reliably
the performances of the US market and another developed market that experienced a radically different situation during the 20th century. Compare to the Russian
or German markets, the French market has survived
better the two world wars. However, France has still
suffered dire economic consequences of the conflicts
and implemented interventionist and socialist policies,
whereas the US has been left relatively unscathed. The
respective share of the US and French markets in the
world equity market has followed an inverse path. The
US market share (which remained the first market
capitalization during the whole 20th century) has doubled from 1900 to 2000 (from 22% to 46%), whereas
the French market share has been divided by two (8%
in 1900 against 4% in 2000), sliding from the third to
the fourth position (Dimson et al., 2002). Thus, the
French case is a good candidate to help balancing the
results found for the US equity market.
Using several performance measures, we investigate
the differences of the long term equity premium in the
US and French markets. Our paper provides three findings to the existing literature. We first bring reliable
evidence to confirm the US survival bias: the US equity
premium is consistently higher than the French one.
Secondly, we measure that the French premium is also
more unstable over time (i.e. riskier). As a result the
higher US performance increases if we take account for
the level of risk associated with the equity premium.
Thirdly, this better remuneration of risk in the US was
not observed before 1917 when the two countries were
economically more similar, but remains strong after
1950. The paper is organized as follows: we first present the US and French monthly time series used for
our study. Then, we describe the distinct four periods
we consider to analyse US and French equity performances from 1870 to 2007. Thirdly, we present our
results. A last section concludes.
Bankers, Markets & Investors nº 118 may-june 2012
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