Understanding the Impact of Weights Constraints in Portfolio Theory

In this article, we analyze the impact of weights constraints in portfolio theory using the seminal work of Jagannathan and Ma (2003). They show that solving the global minimum variance portfolio problem with some constraints on weights is equivalent to use a shrinkage estimate of the covariance matrix. These results may be easily extended to mean variance and tangency portfolios. From a financial point of view, the shrinkage estimate of the covariance matrix may be interpreted as an implied covariance matrix of the portfolio manager. Using the universe of the DJ Eurostoxx 50, we study the impact of weights constraints on the global minimum variance portfolio and the tangency portfolio. We illustrate how imposing lower and upper bounds on weights modify some properties of the empirical covariance matrix. Finally, we draw some conclusions in the light of recent developments in the asset management industry.global minimum variance portfolio, Markowitz optimization, tangency portfolio, Lagrange coefficients, shrinkage methods, covariance matrix

Managing sovereign credit risk in bond portfolios

With the recent development of the European debt crisis, traditional index bond management has been severely called into question. We focus here on the risk issues raised by the classical market-capitalization weighting scheme. We propose an approach to properly measure sovereign credit risk in a fixed-income portfolio. For that, we assume that CDS spreads follow a SABR process and we derive a sovereign credit risk measure based on CDS spreads and duration of portfolio bonds. We then consider two alternative weighting methods which are fundamental indexation and risk-based indexation. Fundamental indexation is based on GDP indexation whereas risk-based indexation uses a risk budgeting approach based on our sovereign credit risk measure. We then compare all these methods in terms of risk, diversification and performance. We show that the risk budgeting approach is the most appropriate scheme to manage sovereign credit risk in bond portfolios and gives very appealing results with respect to active management of bond portfolios.sovereign credit risk, credit spread, convex risk measure, sabr model, CDS, bond indices, fundamental indexation, risk-based indexation, risk budgeting

Risk Management Lessons from Madoff Fraud

In December 2008, as the nancial and economic crisis continued on its devastating course, a new scandal erupted. After the 1998's failure of Long-Term Capital Management, Madoff's fraud once again discredits the hedge funds industry. This scandal is however of a dierent kind. Indeed, Madoff's rm is not a standard hedge fund but a developed Ponzi scheme. By explaining Madoff's system and exploring the reasons for its collapse, this paper draws risk management lessons from this fraud, especially for operational risk management. Present day risk management processes have partially failed to prevent the Madoff scandal. This paper presents the issues for risk capital requirements raised by the collapse of the Madoff scheme. Implications for due diligence processes, including the use of quantitative replication to assess the credibility of the performance of a hedge fund, are also considered. Finally, consideration is given to the regulatory and standardizing approaches of the hedge fund industry as a response to frauds similar to that of Madoff.Madoff fraud, Ponzi scheme, operational risk, due diligence, supervision, hedge funds, bull spread strategy, split strike conversion

How corporate tax impact decisions in merger and acquisition deals. The phenomenon of "profit shifting"

Using data on mergers and acquisitions, this paper aims at evaluating the impact of corporate tax on the type of M&A deals. The results suggest the existence of a negative relationship between the corporate tax rate charged in the target’s country and the probability of having a merger/acquisition corresponding to 100% of the target company. Suggesting that cross-border deals, where the target’s country is characterized by lower tax rates, may result in profitability gains for the acquiring company. Moreover, benefits and implications of a harmonized corporate tax base are presented as a possibility for hedging against “profit shifting” practices resulting in a reduction of cross-border M&A deals

Using Student Voice to Identify Promising Practices in Social Emotional Learning

This qualitative study used responses to a large-scale survey on school experiences to identify schools where the students themselves reported above average scores on constructs of social emotional learning. The study looked at schools where the students reported above average results for several years in an attempt to answer the following questions: 1.What are the policies and practices of these schools specifically related to providing social emotional supports to students? 2.How do leaders in these schools describe their approach to providing social emotional support for their students? How do leaders assess their own perspectives, attitudes, decision-making and actions toward diverse student populations? To what do they attribute their schools\u27 higher than average SEL scores? 3.What does an analysis of student responses in these schools show in terms of social emotional support provided by their schools? What do students report of their experience? The study looked at schools where students reported above average positive responses to survey questions on four social emotional learning (SEL) constructs for 4 years. Of the 10 schools that qualified, four agreed to participate. In order to examine the policies and practices of these schools, the researcher analyzed public documents from each school and conducted 21 semi-structured interviews with teachers and school leaders. The findings show that the administrators and teachers at the schools supported students\u27 social emotional development by leveraging resources and acknowledging the need to promote equity. They incorporated SEL into the school culture through ongoing professional development, school wide practices, and intentional instruction in the competencies