EDHEC welcomes Edward Prescott, Nobel laureate, to its international conference on labor markets in Paris

The annual ADRES conference co-organised by EDHEC Business School and the Université du Maine took place last month at the Maison de la Chimie in Paris. This event, which aimed to underline the differences between the job markets in Europe and the United States, saw over 160 attendees from Europe, Africa and the US come to discover the latest scientific research in the area.

The research papers presented underlined notably the consequences of institutional differences (unemployment benefit, job market and real estate regulations...) on the employment situation on both sides of the Atlantic. These elements highlighted in particular the difficulties encountered in France by young people and senior workers.

Among the participants who came to present their research were Olivier Blanchard from MIT, Edward Prescott, Nobel laureate 2004 and Richard Rogerson, co-editor of the American Economic Review, from the University of Arizona and Robert Shimer, editor of the Journal of Political Economy, from the University of Chicago. Antoine Magnier, director of DARES, and Selma Mahfouz of the DGTPE presented the current French job market situation and its recent development following government reforms and conducted a round-table debate with researchers.

Arnaud Chéron, director of the EDHEC research program on the evaluation of employment and competition policy in France, presented a research document, co-written with François Langot and Jean-Olivier Hairault, on the comparative performances of the job market in France and the US. The weaker employment levels in France concerning young workers and workers over 55 are explained in part by the nature of French institutions, according to Chéron. Job protections and unemployment benefit systems and high minimum wages may not penalise the employment of the 25-54 year olds in France, but they do go a substantial way to explaining the employment difficulties encountered by young people; the under-employment of the over 55's is linked to the conditions for early retirement in France.

To learn more about this event, please go to the Internet website dedicated to the conference. All the presentation slides of the speakers are available for download.

[Link : Labor Market Outcomes : A Transatlantic Perspective]

Edward Prescott Interview
2004 Nobel Prize in Economics

*What have your advances in economic theory facilitated?

I have contributed along with many others to a number of important advances in economic theory. The use of these new theoretical tools in conjunction with measurement have and are advancing macroeconomics broadly defined. One set of theoretical advances are the extensions of the welfare theorems to richer environments.  One of my contributions is the finding that business cycle fluctuations arise as the optimal response to real shocks to the economy (Finn Kydland and my “Time to Build” paper). Finn and I in our “Rules rather than Discretion” paper found that policy is a game and that stabilization policy is misguided. There is no need to stabilize the economy and indeed such efforts will only impose costs on society.

More importantly in our “Time to Build” we developed methods for making theory quantitative by requiring model economies used to draw quantitative inference match reality on selected dimensions. We used many tools including recursive methods for the study of dynamic economies, in particular the tools developed in Bob Lucas’s and my paper “Investment under Uncertainty. 

Another theoretical advance that forced a change in economic thinking is in Bob Lucas’s and my paper “Equilibrium Search and Unemployment.” When the paper was written many economists conjectured that there are congestion externalities associated with search.  We found that this is not the case at least for the class of economies studied.  The invisible hand worked in these environments. 

Another theoretical advance in this category was introducing private information into economies and showing that again the invisible hand works. This is work with Rob Townsend in the early 1980s. The reason that others were finding market failures was that they did not consider a rich enough contract space.

A theoretical advance that has been little exploited is introducing clubs into classical general equilibrium theory though recently Robert M. Townsend and Edward S. Prescott (JPE) use this language to develop a theory of the firm. 

*In which areas is there still a lot of ground to cover?

Given the tax system and productivity we have good theory of living standards. We do not have a good theory of the consequences of policy for productivity.  But, we do know empirically that open countries are advanced industrial countries and closed countries are not. France served Europe well by voting against the proposed EU constitution. The EU is a great system and it is best to stay with a good system and not slip into a centralized system.

Better theory is needed as to why an economic union of economically sovereign states is a system that works so well. Here we need better theory of sovereign organizations and their interaction.

Another area of great importance is lifetime labor supply. We need this theory to evaluate alternative policies to finance consumption of people when they are old. Great progress is being made on this topic that is central for evaluating tax polices that affect retirement decisions as evidenced by the Rogerson and Wallenius paper at this conference. Before we had the tools to deal with non convexities, there was no progress.

*With regard to the French job market, what are the most urgent reforms to be made in your opinion?

Cutting the effective tax rate that depresses labor supply is the most urgent reform.  Reform the pension system so that people save for retirement and are not paid to retire early.  The only system that makes sense is to have personal saving accounts. There should be a minimum required saving that gets annuitized upon retirement. With this policy people are guaranteed a minimum reasonable consumption level for as long as they live. Other good reforms are ones to make the French labor market more flexible so that workers move from where they are less to where they are more productive. My advice to the French people is to be like Denmark with their flexible labor market and low unemployment rate.

The biggest danger to Europe is that the EU will centralize its tax policy. Competition between member states to provide a better set of policies for their residents is good policy arrangement for all.

*What, for you, are the strong points of the French economy, if any?

France is in the EU, which is an arrangement that has increased productivity of the French economy from a little over half the U.S. level; in the 1899-38 period to the U.S. level 25 years after the signing of The Treaty of Rome in 1957. The French people are talented and if subject to competition, they will be as productive as any in the world. 

France has a 35 hour week and getting rid of it would help. My prediction is that France in time will reform its tax system including of its features that foster early retirement and the French economy will boom. 

Edward Prescott,
2004 Nobel Prize in Economics

PUBLICATIONS

• EDHEC Publications
• Academic Publications

EDHEC PUBLICATIONS

Hedge Fund Performance in 2007

In Hedge Fund Performance in 2007, Véronique Le Sourd, Senior Research Engineer with the EDHEC Risk and Asset Management Research Centre provides a strategy-by-strategy account of the performance of each hedge fund strategy included in the EDHEC Alternative Indexes. While all hedge fund strategies posted positive returns, a majority saw a slight fall-off in performance compared to 2006. Only five of the thirteen strategies obtained higher returns than in 2006: CTA Global, Emerging Markets, Equity Market Neutral, Global Macro, and Short Selling.

Le Sourd, V. (February 2008) "Hedge Fund Performance in 2007", EDHEC Risk and Asset Management Research Centre, EDHEC Publication. [More]

QIS4: significant improvements, but the main risk for life insurance is not taken into account in the standard formula

In its response to the CEIOPS consultation on the preliminary technical specifications for the fourth quantitative impact survey (QIS4), EDHEC argues that the main risk faced by life insurance companies is not taken into account in the standard formula. This risk is that following market (or other significant) losses, a wave of surrenders leaves shareholders bearing the entirety of losses. This is the phenomenon that led to such bankruptcies as that of Executive Life, where losses made public by rating agencies and the media triggered a wave of surrenders and bankruptcy-even though the losses alone were thought bearable for some time. In this paper, we argue that such a combined risk can be taken into account only in a scenario in which high levels of surrenders are combined with market losses, and that market losses alone merely added to surrenders alone may not suggest any need for shareholder capital.

Sender S. (February 2008) "QIS4: significant improvements, but the main risk for life insurance is not taken into account in the standard formula", EDHEC Risk and Asset Management Research Centre, EDHEC Position Paper. [More]

ACADEMIC PUBLICATIONS

List of EDHEC finance professors' FT Publications
At the start of the 2007-2008 academic year, EDHEC strengthened its team of finance professors with the arrival of René Garcia, Florencio López de Silanes, and Pierre Mella-Barral. With these new hires, EDHEC will have a team that has produced research of the highest international academic standards. EDHEC professors have among the best European track records for publications in the list of journals drawn up by the Financial Times as part of its well known rankings of business schools.

Journal of Finance

Detemple, R. Garcia, M. Rindisbacher (2003), "A Monte Carlo Method for Optimal Portfolios"
[Journal of Finance, 2003]

Schleifer A., F. Lopez-De-Silanes, R. La Porta, R. Vishny (1997), "Legal Determinants of External Finance"
[Journal of Finance, July 1997]

La Porta R., F. Lopez-De-Silanes, A. Schleifer (1999),
"Corporate Ownership Around the World"
[Journal of Finance, April 1999]

LaPorta R., F. Lopez-De-Silanes, A. Schleifer, R. Vishny (2000), "Agency Problems and Dividend Policies around the World"
[Journal of Finance, February 2000]

LaPorta R., F. Lopez-De-Silanes, A. Schleifer (2002),
"Government Ownership of Banks"
[Journal of Finance, February 2002]

LaPorta R., F. Lopez-De-Silanes, A. Schleifer, R. Vishny (2002), "Investor Protection and Corporate Valuations"
[Journal of Finance, June 2002]

LaPorta R., F. Lopez-De-Silanes, A. Schleifer (2006),
"What Works in Securities Laws?"
[Journal of Finance, February 2006]

Mella-Barral P., W. Perreaudin (1997),
"Strategic Debt Service"
[Journal of Finance, June 1997]

Management Science

Detemple, R. Garcia, M. Rindisbacher (2005), "Asymptotic Properties of Monte Carlo Estimators of Derivatives"
[Management Science, November 2005]

Garcia R. , E. Renault, G. Tsafack (2007), "Proper Conditioning for Coherent VaR in Portfolio Management"
[Management Science, March 2007]

Briec W., K. Kerstens, O. Jokung (2007), "Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach"
[Management Science, January 2007]

Martellini L., B. Urošević (2006), "Static Mean-Variance Analysis with Uncertain Time Horizon"
[Management Science, June 2006]

Journal of Political Economy

LaPorta R., F. Lopez-De-Silanes, C. Pop-Eleches, A. Schleifer (2004), "Judicial Checks and Balances"
[Journal of Political Economy, 2004]

Journal of Financial Economics

LaPorta R., F. Lopez-De-Silanes, A. Schleifer, R. Vishny (2000), "Investor Protection and Corporate Governance"
[Journal of Financial Economics, October 2000]

Djankov S., R. LaPorta, F. Lopez-De-Silanes, A. Shleifer (2005), "The Law and Economics of Self-Dealing"
[Journal of Financial Economics, December 2005]

Review of Financial Studies

Cvitanic, J., Lazrak, A., Martellini, L., Zapatero, F. (2006), "Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts’ Recommendations"
[Review of Financial Studies, November 2006]

Mella-Barral P. (1999), "The dynamics of default and debt reorganization"
[Review of Financial Studies, 1999]

In this issue of Research Highlights, we present the EDHEC Risk Research Chairs.

"Asset-Liability Management and Institutional Investment Management" Research Chair
In partnership with BNP Paribas Asset Management
This research chair will be piloted by a joint BNP Paribas AM/EDHEC committee and will give rise to a major three-year research programme. The EDHEC Risk and Asset Management Research Centre’s research team, under the responsibility of the centre’s scientific director, Lionel Martellini, will examine dynamic allocation strategies in asset-liability management in order to formulate an integrated ALM model.
In line with EDHEC’s “Research for Business” philosophy, the results of the “Asset-Liability Management and Institutional Investment Management” research chair will be widely disseminated to finance professionals, notably through the EDHEC Risk and Asset Management Research Centre’s specialised website, www.edhec-risk.com, and at the conferences organised by EDHEC.
The results of the initial research project, relating to dynamic allocation strategies in ALM and illustrated by case studies on life insurance, retirement schemes and pension funds in Europe, will be presented at the EDHEC Institutional Days at the CNIT in Paris on June 12 and 13, 2008.

"MiFID & Best Execution" Research Chair
In partnership with CACEIS, NYSE Euronext and SunGard
The CACEIS, NYSE Euronext and SunGard "MiFID & Best Execution Research Chair" is under the scientific responsibility of Jean-René Giraud, Director of Development at the EDHEC Risk and Asset Management Research Centre and Research Associate in charge of the "Best Execution and Operational Performance" research programme.
The MiFID & Best Execution Research Chair is supported jointly by CACEIS, NYSE Euronext and SunGard over a three-year period enabling the EDHEC Risk and Asset Management Research Centre to implement a long-term research strategy in this field. The themes of MiFID and Best Execution are thought to be among the most significant industry challenges for the near future, justifying the need for academic research to be carried out to support industry developments.

"Regulation and Institutional Investment" Research Chair
In partnership with AXA Investment Managers
The EDHEC Risk and Asset Management Research Centre has created a research chair in "Regulation and Institutional Investment", in partnership with AXA Investment Managers (AXA IM), which is under the scientific responsibility of Noël Amenc, Director of the EDHEC Risk and Asset Management Research Centre, and Samuel Sender, Research Associate.
The interaction between regulation and institutional investment management is a key issue for European institutional investors, and the aim of the chair is to carry out a joint operation on a European scale to highlight the challenges for institutional investment management of regulatory developments.
The theme for the first year of this three-year programme will be "The influence of the institutional and regulatory framework on the financial management of pension funds in Europe."

"Structured Products and Derivatives" Research Chair
In partnership with the Fédération Bancaire Française
The Fédération Bancaire Française (FBF) "Structured Products and Derivatives" Research Chair is under the scientific responsibility of Lionel Martellini, Scientific Director of the EDHEC Risk and Asset Management Research Centre.
The objective of the FBF Structured Products and Derivatives Research Chair is to examine structured products with regard to clients' specific requirements.
The research chair focus on three research projects:

• The optimal design of structured products.
• Structured products and derivatives in active/passive management.
• Structured products and derivatives on underlying instruments that are illiquid or lack liquidity.

The FBF (French Banking Federation) support the research chair over a five year period. This research chair, which was awarded to EDHEC, was one of five high-level research chairs in the field of corporate and investment banking offered by the FBF to increase the competitiveness of the French financial market.

RESEARCH CENTRE

News

EDHEC publication cited by the Bank of Japan
The Bank of Japan published on December 26 the English version of a research paper originally released in July 2007 and entitled Hedge Fund Investments: Risk Management Perspectives.
Hedge funds in Japan have recently been attracting more capital from institutional investors, including financial institutions. This paper highlights the relevant risk management issues for hedge fund investments.
Among the cited references, we note the presence of the position paper by Hilary Till : EDHEC Comments on the Amaranth Case: Early Lessons from the Debacle.

US SEC Commissioner Paul Atkins interviewed by EDHEC about the subprime crisis.
In an interview published in the EDHEC Risk and Asset Management Research Centre's monthly newsletter, US SEC Commissioner Paul Atkins has affirmed that hedge funds are likely to be an important part of the solution to the subprime crisis.
[More : Full version of the interview]

Cooperation between EDHEC and the Paris School of Economics
As part of an academic cooperation accord, EDHEC and PSE have created a Law and Economics chair under the leadership of EDHEC’s Florencio López de Silanes. Signed initially in June 2006, the accord creates a programme of support for young economics researchers. It will allow doctoral students to work as research assistants at the EDHEC Economics Research Centre all while writing their dissertations as students in the PSE doctoral programme Analyse et Politiques Economiques. This cooperation comes as part of the effort made by the two partners to back the production of economics and public policy research that meets the most stringent international standards.

EVENTS

EDHEC Institutional Days 2008
12-13 June 2008 - CNIT Paris La Défense
In 2008, EDHEC will be merging two of its most important conferences into a single event. The EDHEC Asset Management Days, which had been taking place in Geneva up until now, have been integrated into a new edition of the EDHEC Institutional Days, which will now be held every year in Paris in June.
This new joint event will capitalise on the previous success of both events, with the most recent editions having attracted in total more than 1,500 institutional investors, asset managers and private bankers. By merging the two events, EDHEC’s intention is to establish in Paris the most important European conference for institutional investment management.
[More]

O'Kane Credit Risk Seminar: Pricing and Risk-Managing Credit Derivatives
15-16 May 2008 - The Dorchester, London
This intensive seminar equips participants with a thorough appreciation of credit derivatives and their uses, and imparts the practical knowledge required to implement state-of-the-art pricing and risk management models for these products.
[More]

European Financial Management Symposium
17-19 April 2008 - EDHEC Business School, Nice - France
The Symposium, jointly organised by the EFM Association and EDHEC Business School, will focus on all aspects of risk and asset management. Topics will include asset allocation, risk and performance measurement, alternative investments, risk management and portfolio optimization.
[More]

In the Media...

Stéphane Gregoir, director of the EDHEC Economics Research Centre, responded to questions from the weekly L’Expansion about the single labour contract.

For three weeks, EDHEC contributed to a series of articles in the daily La Tribune on private banking.

Funds Europe published the last in a series of articles by Noël Amenc and Lionel Martellini on risk management techniques in asset management.

All EDHEC citations are available in the EDHEC Press Review.

Prizes, awards, and appointments...

Two new appointments at EDHEC
EDHEC is pleased to announce the hiring of Vahagn Movsesyan as a research engineer in its research programme on corporate governance and of Tristan-Pierre Maury as a senior research engineer in its economics research centre. Vahagn has a doctorate in management and economics (2006) from the Scuola Superiore Sant’Anna in Pisa. His specialty is corporate governance and regulatory competition. Tristan-Pierre studied applied mathematics and macroeconomics and in 2001 defended his doctoral dissertation on the theories of endogenous growth at the Université de Paris – Nanterrre.

New Ph.D. at EDHEC
We are pleased to announce that Marie-Catherine Mars, professor in the department of people, markets and humanities has recently received her Ph.D. The thesis subject was : “The role of the Servicescape on consumers’ evaluations, perceived value and loyalty”.