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Bubbles and Regimes : Two Complementary Approaches

June 2013

Bubbles are characterised by a gap between an assetís price and its intrinsic value. Since an assetís intrinsic value is sometimes a matter of debate, we will define a bubble as a very strong and prolonged acceleration of market prices. We believe that the issue raised by financial bubbles can contribute to discussions on the risk-on/risk-off theory as identified by the various regime switches. Our research is part of an analysis of the changing nature of risk that aims to implement innovative risk detection indicators.

" The tool we are proposing allows us to determine both an assetís current volatility regime and whether the asset is in a bubble " 

Rethinking strategic asset allocation in terms of diversification across macroeconomic scenarios

May 2013

A novel approach in Strategic Asset Allocation consists in looking at asset classes as vehicles of more fundamental factors. According to this method, fundamental factors govern the majority of asset class dynamics, and hence asset allocation should be rephrased in terms of risk allocation of fundamental factors. The aim of this letter is firstly to illustrate market segmentation in terms of factors dynamics, and then to focus on some consequences of our approach.

" Asset price dynamics can be largely explained in terms of changes in expectations of macroeconomic variables and market stress " 

Dynamic asset allocation rebalancing strategies in the recent crisis

May 2013

Following the successive crises of 2008 and 2011, the effectiveness of the classic risk/return-based models of asset allocation have been called into question. In this edition of Special Focus, we seek to develop new reallocation strategies & analyze their efficiency in different market cycles.

" 2004-2012 was analysed and segmented in periods based on significant market cycles. " 

Asset class pro-cyclicality under Solvency II

March 2013

Is Solvency II regulation too pro cyclical? In the event of sudden shifts in the marked to market price asset valuation, insurance companies can be forced to sell risky assets at the worst possible moment. In this edition of Special Focus, we compare different asset classes and offer a pro-cyclicality measure in order to better prepare for these new regulations.

" The impact of downgrades has a measurable adverse effect. " 

Forecasting returns on assets in an environment of uncertainty

January 2013

The recent crisis has brought increasing uncertainty to the exercise of forecasting long-term returns due to significant changes in risk levels and observed risk premia. There are also unpredictable effects of non-conventional monetary policies on macro-economic variables. We take a look at the combination of complementary approaches now required in order to overcome these challenges.

" The constant Sharpe ratio hypothesis has proven to provide more diversified portfolios. "  

Country equity allocation: methodology note

January 2013

Here, we look at a methodology that aims to provide an analytical framework to make the most of geographic equity market allocation, taking advantage of main market forces: momentum and valuation.

" In a cyclical approach, there are two aspects of the momentum effect: profits and the market. "  

Sector equity allocation: methodology note

January 2013

Whichever way the market moves - be it up or down - efficient sector allocation is crucial in the search for returns. This methodology aims to detect and capitalize on undervalued, improving sectors, while identifying and avoiding overvalued, downward turning ones.

" An approach halfway between traditional and behavioural finance. " 

Insurance: Solvency II and currency risk

December 2012

The new Solvency II regulation defines the level of capital that insurers must hold in order to avoid insolvency given the risks that they incur. This is an outline of how risk treatment under Solvency II compares to other asset classes and historical observations.

" In simple cases, the capital requirement represents 25% of the foreign-currency asset liability position, whatever the sign. "  

Euro Investment grade corporate bond supply: evolution and prospects

December 2012

After a decade of strong growth, the Euro Investment Grade corporate bond market has run out of steam in the last two years. This piece offers a view on current and perspective trends in corporate bond new issuance, starting with a look at its historical evolution.

" All major forces point to negative net issuance from financials, positive net volumes from industrials. "