MILHAU Vincent

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This paper provides a joint quantitative analysis of capital structure decisions (debt versus equity) and debt structure decisions (fixed-rate debt versus floating-rate debt or inflation-linked debt) in a continuous-time setting. We show that optimizing the debt structure has an impact on capital structure decisions, and leads to increases in leverage ratios compared to a pure fixed-rate debt program. We also find that for realistic parameter values, jointly optimizing the debt and capital structures generates a significant increase in firm value with respect to a situation where only the capital structure is optimized.

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This article analyzes whether it is desirable and feasible for an investor endowed with liabilities to hold an equity portfolio with better liability-hedging properties than a broad cap-weighted index. From a theoretical standpoint, the authors show that liability-driven investors will generally benefit from reducing the tracking error of their performance portfolios with respect to liabilities, unless this comes at an exceedingly large loss of performance. The authors then empirically document the heterogeneity of interest-rate-hedging properties across the constituents of the S&P 500 universe, and they show that substantial welfare gains can be achieved by selecting low-volatility and high-dividend-yield stocks. These benefits are further enhanced if a minimum-variance weighting scheme is applied to the selected stocks.

This article analyzes whether it isdesirable andfeasible for an investor endowed with liabilities to hold an equity portfolio with better liability-hedging properties than a broad cap-weighted index. From a theoretical standpoint, the authors show that liability-driven investors will generally benefit from reducing the tracking error of their performance portfolios with respect to liabilities, unless this comes at an exceedingly large loss of performance. The authors then empirically document the heterogeneity of interest-rate-hedging properties across the constituents of the S&P 500 universe, and they show that substantial welfare gains can be achieved by selecting low-volatility and high-dividend-yield stocks. These benefits are further enhanced if a minimum-variance weighting scheme is applied to the selected stocks.

No summary available.

This article analyzes whether it isdesirable andfeasible for an investor endowed with liabilities to hold an equity portfolio with better liability-hedging properties than a broad cap-weighted index. From a theoretical standpoint, the authors show that liability-driven investors will generally benefit from reducing the tracking error of their performance portfolios with respect to liabilities, unless this comes at an exceedingly large loss of performance. The authors then empirically document the heterogeneity of interest-rate-hedging properties across the constituents of the S&P 500 universe, and they show that substantial welfare gains can be achieved by selecting low-volatility and high-dividend-yield stocks. These benefits are further enhanced if a minimum-variance weighting scheme is applied to the selected stocks.

Risk parity portfolios are traditionally constructed by choosing historical volatility as the risk measure. In an asset allocation context, this results in a substantial overweighting of bonds versus more volatile asset classes such as stocks: this is a concern in a low bond yield environment, since the presence of mean reversion in the yield implies that bonds are likely to perform poorly in the next future. In this article, we introduce three distinct risk parity strategies, explicitly designed to respond to changes in interest rate levels. Our results indicate that these strategies deliver higher returns when interest rates start to increase back to their long-term levels, and that the maximum Sharpe ratio portfolio, which also incorporates information on expected returns, is a less robust alternative.

In the absence of inflation-linked bonds or inflation swaps, no perfect hedging strategy\ud exists for inflation-linked liabilities, and nominal bonds are often used as substitute hedging instruments. This paper provides a formal analysis of the problem of hedging inflation-linked liabilities with nominal bonds in the presence of real rate uncertainty as well as realized and expected inflation risks. While a long-only position in nominal bonds will always have a negative exposure to unexpected inflation, our analysis suggests that long-short nominal bond portfolio strategies can in principle be designed to achieve a zero exposure to changes in unexpected inflation (required to hedge inflation-linked liabilities), while having a target exposure to changes in real rate equal to that of liabilities. The practical implementation of such long-short replication strategies, however, is not a straightforward task in the presence of parameter uncertainty. We explore several non-exclusive solutions to the estimation risk problem, including the use of conditional parameter estimation methodologies as well as the introduction of robust restrictions on input parameters or portfolio weights. These approaches lead to substantial improvements in out-of-sample hedging performance.

This thesis consists of a literature review and three articles on liability management and asset-liability management. The first part introduces a generic framework for the analysis of liability management, whose applications concern the management of public and private debt. We use a framework inspired by Markowitz (1952), where we distinguish between "pure" liability management and liability management in the presence of asset constraints. This second situation gives rise on the one hand to an optimization of the debt structure alone, and on the other hand to a joint optimization of the asset and liability structures. In the latter case, we show that the two decisions are closely related, through an infinite series involving asset and liability hedging portfolios. We also present an extension in a dynamic setting, where the debt issuer is assumed to have a CARA utility function. Our study shows that optimal debt management requires the simultaneous issuance of several types of bonds. In the second part, we study the asset management problem for a pension fund in the presence of regulatory constraints. ...