Ombretta Signori - Profile on Academia.edu (original) (raw)
Papers by Ombretta Signori
Bond market "conundrum": new factors to explain long-term interest rates ?
Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its ... more Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that former Fed Chairman Alan Greenspan described their behaviour as a "conundrum". Comparing long-term rates to their theoretical level based on fundamental valuation models, we show that the anomaly was on average 40 bps. Various explanations have been put forward for this, including investors' changed attitude to risk, and the rise in US Treasury purchases by different categories of buyers. We show that, while these variables could theoretically be responsible for the decline in bond risk premiums, they explain less than half of the anomaly when incorporated into a fundamental model of bond yields. However, their recent changing influence could justify their being used for a prospective analysis of bond yields.
Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds, 2010
This work shows how long-term investors can benefit from adding volatility as an asset class to t... more This work shows how long-term investors can benefit from adding volatility as an asset class to their portfolio. Two types of "structural" exposure -long implied volatility and long volatility risk premium -are now simple to implement. Implied volatility exposure can be used to significantly reduce the risk profile of the portfolio, and especially extreme risks. Adding a volatility risk premium investment is less appealing: it substantially increases returns for a given level of risk, but at the cost of higher extreme risks. However a combination of the two volatility strategies is very attractive, thanks to fairly effective reciprocal hedging during periods of market stress. It delivers enhanced absolute and risk-adjusted returns, with smaller extreme risks than a traditional portfolio. Over the long term, volatility strategies make it possible to build portfolios that are more efficient than a pure-bond or equity/bond investment.
We study the inflation hedging ability of individua l stocks. While the poor inflation hedging ab... more We study the inflation hedging ability of individua l stocks. While the poor inflation hedging ability of the aggregate stock market has long been documen ted, there is considerable heterogeneity in how individual stock returns covary with inflation. St ocks with good inflation-hedging abilities since 1990 have had higher returns, on average, than stoc ks with low inflation betas and tend to be drawn from the Oil and Gas and Technology sectors. Howev er, we show that the time variation of stock inflation betas is substantial. This makes it diff icult to construct portfolios of stocks that are go od inflation hedges out of sample. This is true for p tfolios constructed on past inflation betas, sect or portfolios, and portfolios constructed from high-pa ying dividend stocks.
The Journal of Portfolio Management, 2012
The exceptional rise in government deficits following the subprime crisis, the recent commodity p... more The exceptional rise in government deficits following the subprime crisis, the recent commodity price spikes and the increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. Using a vector-autoregressive model, this paper investigates the relationships between asset returns and inflation and the optimal strategic asset allocation for investors seeking to hedge inflation risk in two different types of macroeconomic regimes. In a volatile macroeconomic environment marked by countercyclical supply shocks, cash, inflationlinked bonds and precious metals play an essential role, while in a more stable environment ("Great Moderation") with procyclical demand shocks, cash and nominal bonds play the most significant role, followed by precious metals, real estate and equities. An ambitious investor in terms of required real returns should have a larger weighting in equities, real estate and precious metals.
Bond Market “Conundrum”: New Factors Explaining Long-term Interest Rates?
Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its ... more Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that Fed Chairman A. Greenspan described their behaviour as a “conundrum.” Comparing long term rates to their theoretical level based on fundamental valuation model, we show that the anomaly was in average 40 bp. Various explanations have been put forward: investors’ changed attitude toward risk, and the rise in US Treasury purchases by different categories of buyers. We show that, if these variables could theoretically be responsible for bond risk premium decline, by incorporating them in a fundamental model of bond rates, they can explain less than half of the anomaly. Their recent changing influence could nevertheless justify their use for prospective analysis of bond rates.
SSRN Electronic Journal, 2010
The unconventional monetary policies implemented in the wake of the subprime crisis and the recen... more The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment ("Great Moderation"), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities.
The Journal of Portfolio Management, 2010
This paper examines the advantages of incorporating strategic exposure to equity volatility into ... more This paper examines the advantages of incorporating strategic exposure to equity volatility into the investment-opportunity set of a long-term equity investor. We consider two standard volatility investments: implied volatility and volatility risk premium strategies. To calibrate and assess the risk/return profile of the portfolio, we present an analytical framework offering pragmatic solutions for long-term investors seeking exposure to volatility. The benefit of volatility exposure for a conventional portfolio is shown through a mean / modified Valueat-Risk portfolio optimization. Pure volatility investment makes it possible to partially hedge downside equity risk, thus reducing the risk profile of the portfolio. Investing in the volatility risk premium substantially increases returns for a given level of risk. A well calibrated combination of the two strategies enhances the absolute and risk-adjusted returns of the portfolio.
Research in International Business and Finance, 2013
Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hed... more Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hedge. This paper examines the optimal strategic asset allocation for a Brazilian investor seeking to hedge inflation risk at different horizons, ranging from one to 30 years. Using a vector-autoregressive specification to model intertemporal dependency across variables, we measure the inflation hedging properties of domestic and foreign investments and carry out a portfolio optimisation. Our results show that foreign currencies complement traditional assets very efficiently when hedging a portfolio against inflation: around 70% of the portfolio should be dedicated to domestic assets (equities, inflation-linked (IL) bonds and nominal bonds), whereas 30% should be invested in foreign currencies, especially the US dollar and the euro.
Journal of Banking & Finance, 2012
Pension fund returns can be decomposed into different sources, including market movements, asset ... more Pension fund returns can be decomposed into different sources, including market movements, asset allocation policy, and active portfolio management. We use a unique database covering the asset allocations of US defined-benefit pension funds for the period 1990-2008, and we test the role of each factor in explaining their returns. Our results shed new light on pension funds' sources of performance. While the previous literature emphasized that policy allocation accounts for the bulk of returns, leaving little room for active management, we show that taking explicit account of market movement can change the results significantly. Although active management plays a minor role in global asset allocation, its role is predominant in explaining returns to individual asset classes, whether traditional or alternative. This paper rehabilitates the contribution of active management as a source of performance for pension funds, at least at the asset class level.
European Financial Management, 2009
The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has c... more The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has changed significantly. In this paper, we study the dynamics of conditional volatilities and correlations for three asset classes, IL bonds, nominal bonds and equities, in the United States and Europe. Using a DCC-MVGARCH for the period 1997-2007, we highlight the change that took place in 2003. Although IL bonds once had definite diversification power, they are now highly correlated with nominal bonds and have reached similar volatility levels. As a result, the two asset classes are practically substitutable. This seems to be due to more stable inflation expectations and to a more liquid IL bond market. Although diversification was a valuable reason for introducing IL bonds in a global portfolio before 2003, this is no longer the case. Dynamic portfolio optimization using our estimates of conditional correlations and volatilities clearly demonstrates that the optimal weight of IL bonds in a portfolio decreased sharply in 2003 in favor of nominal bonds and equities.
Hedging Inflation Risk in a Developing Economy
SSRN Electronic Journal, 2011
... 2 Amundi (Crédit Agricole and Société Générale Asset Management), 90 bd Pasteur, 75015 Paris,... more ... 2 Amundi (Crédit Agricole and Société Générale Asset Management), 90 bd Pasteur, 75015 Paris, France * Comments can be sent to marie.briere@amundi.com, or ombretta.signori@amundi. com. ... This phenomenon is known as the pass through effect (Belaish (2003), Ca'Zorzi ...
Inflation and Individual Equities
We study the inflation hedging ability of individual stocks. While the poor inflation hedging abi... more We study the inflation hedging ability of individual stocks. While the poor inflation hedging ability of the aggregate stock market has long been documented, there is considerable heterogeneity in how individual stock returns covary with inflation. Stocks with good inflation-hedging abilities since 1990 have had higher returns, on average, than stocks with low inflation betas and tend to be drawn from the Oil and Gas and Technology sectors. However, we show that there is substantial time variation of stock inflation betas. This makes it difficult to construct portfolios of stocks that are good inflation hedges out of sample. This is true for portfolios constructed on past inflation betas, sector portfolios, and portfolios constructed from high-paying dividend stocks.<br><br>Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at <a href="http://www.nber.org/papers/&...
Bond market "conundrum": new factors to explain long-term interest rates ?
Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its ... more Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that former Fed Chairman Alan Greenspan described their behaviour as a "conundrum". Comparing long-term rates to their theoretical level based on fundamental valuation models, we show that the anomaly was on average 40 bps. Various explanations have been put forward for this, including investors' changed attitude to risk, and the rise in US Treasury purchases by different categories of buyers. We show that, while these variables could theoretically be responsible for the decline in bond risk premiums, they explain less than half of the anomaly when incorporated into a fundamental model of bond yields. However, their recent changing influence could justify their being used for a prospective analysis of bond yields.
Interest Rate Models, Asset Allocation and Quantitative Techniques for Central Banks and Sovereign Wealth Funds, 2010
This work shows how long-term investors can benefit from adding volatility as an asset class to t... more This work shows how long-term investors can benefit from adding volatility as an asset class to their portfolio. Two types of "structural" exposure -long implied volatility and long volatility risk premium -are now simple to implement. Implied volatility exposure can be used to significantly reduce the risk profile of the portfolio, and especially extreme risks. Adding a volatility risk premium investment is less appealing: it substantially increases returns for a given level of risk, but at the cost of higher extreme risks. However a combination of the two volatility strategies is very attractive, thanks to fairly effective reciprocal hedging during periods of market stress. It delivers enhanced absolute and risk-adjusted returns, with smaller extreme risks than a traditional portfolio. Over the long term, volatility strategies make it possible to build portfolios that are more efficient than a pure-bond or equity/bond investment.
We study the inflation hedging ability of individua l stocks. While the poor inflation hedging ab... more We study the inflation hedging ability of individua l stocks. While the poor inflation hedging ability of the aggregate stock market has long been documen ted, there is considerable heterogeneity in how individual stock returns covary with inflation. St ocks with good inflation-hedging abilities since 1990 have had higher returns, on average, than stoc ks with low inflation betas and tend to be drawn from the Oil and Gas and Technology sectors. Howev er, we show that the time variation of stock inflation betas is substantial. This makes it diff icult to construct portfolios of stocks that are go od inflation hedges out of sample. This is true for p tfolios constructed on past inflation betas, sect or portfolios, and portfolios constructed from high-pa ying dividend stocks.
The Journal of Portfolio Management, 2012
The exceptional rise in government deficits following the subprime crisis, the recent commodity p... more The exceptional rise in government deficits following the subprime crisis, the recent commodity price spikes and the increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. Using a vector-autoregressive model, this paper investigates the relationships between asset returns and inflation and the optimal strategic asset allocation for investors seeking to hedge inflation risk in two different types of macroeconomic regimes. In a volatile macroeconomic environment marked by countercyclical supply shocks, cash, inflationlinked bonds and precious metals play an essential role, while in a more stable environment ("Great Moderation") with procyclical demand shocks, cash and nominal bonds play the most significant role, followed by precious metals, real estate and equities. An ambitious investor in terms of required real returns should have a larger weighting in equities, real estate and precious metals.
Bond Market “Conundrum”: New Factors Explaining Long-term Interest Rates?
Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its ... more Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that Fed Chairman A. Greenspan described their behaviour as a “conundrum.” Comparing long term rates to their theoretical level based on fundamental valuation model, we show that the anomaly was in average 40 bp. Various explanations have been put forward: investors’ changed attitude toward risk, and the rise in US Treasury purchases by different categories of buyers. We show that, if these variables could theoretically be responsible for bond risk premium decline, by incorporating them in a fundamental model of bond rates, they can explain less than half of the anomaly. Their recent changing influence could nevertheless justify their use for prospective analysis of bond rates.
SSRN Electronic Journal, 2010
The unconventional monetary policies implemented in the wake of the subprime crisis and the recen... more The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment ("Great Moderation"), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities.
The Journal of Portfolio Management, 2010
This paper examines the advantages of incorporating strategic exposure to equity volatility into ... more This paper examines the advantages of incorporating strategic exposure to equity volatility into the investment-opportunity set of a long-term equity investor. We consider two standard volatility investments: implied volatility and volatility risk premium strategies. To calibrate and assess the risk/return profile of the portfolio, we present an analytical framework offering pragmatic solutions for long-term investors seeking exposure to volatility. The benefit of volatility exposure for a conventional portfolio is shown through a mean / modified Valueat-Risk portfolio optimization. Pure volatility investment makes it possible to partially hedge downside equity risk, thus reducing the risk profile of the portfolio. Investing in the volatility risk premium substantially increases returns for a given level of risk. A well calibrated combination of the two strategies enhances the absolute and risk-adjusted returns of the portfolio.
Research in International Business and Finance, 2013
Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hed... more Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hedge. This paper examines the optimal strategic asset allocation for a Brazilian investor seeking to hedge inflation risk at different horizons, ranging from one to 30 years. Using a vector-autoregressive specification to model intertemporal dependency across variables, we measure the inflation hedging properties of domestic and foreign investments and carry out a portfolio optimisation. Our results show that foreign currencies complement traditional assets very efficiently when hedging a portfolio against inflation: around 70% of the portfolio should be dedicated to domestic assets (equities, inflation-linked (IL) bonds and nominal bonds), whereas 30% should be invested in foreign currencies, especially the US dollar and the euro.
Journal of Banking & Finance, 2012
Pension fund returns can be decomposed into different sources, including market movements, asset ... more Pension fund returns can be decomposed into different sources, including market movements, asset allocation policy, and active portfolio management. We use a unique database covering the asset allocations of US defined-benefit pension funds for the period 1990-2008, and we test the role of each factor in explaining their returns. Our results shed new light on pension funds' sources of performance. While the previous literature emphasized that policy allocation accounts for the bulk of returns, leaving little room for active management, we show that taking explicit account of market movement can change the results significantly. Although active management plays a minor role in global asset allocation, its role is predominant in explaining returns to individual asset classes, whether traditional or alternative. This paper rehabilitates the contribution of active management as a source of performance for pension funds, at least at the asset class level.
European Financial Management, 2009
The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has c... more The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has changed significantly. In this paper, we study the dynamics of conditional volatilities and correlations for three asset classes, IL bonds, nominal bonds and equities, in the United States and Europe. Using a DCC-MVGARCH for the period 1997-2007, we highlight the change that took place in 2003. Although IL bonds once had definite diversification power, they are now highly correlated with nominal bonds and have reached similar volatility levels. As a result, the two asset classes are practically substitutable. This seems to be due to more stable inflation expectations and to a more liquid IL bond market. Although diversification was a valuable reason for introducing IL bonds in a global portfolio before 2003, this is no longer the case. Dynamic portfolio optimization using our estimates of conditional correlations and volatilities clearly demonstrates that the optimal weight of IL bonds in a portfolio decreased sharply in 2003 in favor of nominal bonds and equities.
Hedging Inflation Risk in a Developing Economy
SSRN Electronic Journal, 2011
... 2 Amundi (Crédit Agricole and Société Générale Asset Management), 90 bd Pasteur, 75015 Paris,... more ... 2 Amundi (Crédit Agricole and Société Générale Asset Management), 90 bd Pasteur, 75015 Paris, France * Comments can be sent to marie.briere@amundi.com, or ombretta.signori@amundi. com. ... This phenomenon is known as the pass through effect (Belaish (2003), Ca'Zorzi ...
Inflation and Individual Equities
We study the inflation hedging ability of individual stocks. While the poor inflation hedging abi... more We study the inflation hedging ability of individual stocks. While the poor inflation hedging ability of the aggregate stock market has long been documented, there is considerable heterogeneity in how individual stock returns covary with inflation. Stocks with good inflation-hedging abilities since 1990 have had higher returns, on average, than stocks with low inflation betas and tend to be drawn from the Oil and Gas and Technology sectors. However, we show that there is substantial time variation of stock inflation betas. This makes it difficult to construct portfolios of stocks that are good inflation hedges out of sample. This is true for portfolios constructed on past inflation betas, sector portfolios, and portfolios constructed from high-paying dividend stocks.<br><br>Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at <a href="http://www.nber.org/papers/&...