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The Journal of Portfolio Management

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Equity Portfolios with Improved Liability-Hedging Benefits

Guillaume Coqueret, Lionel Martellini and Vincent Milhau
The Journal of Portfolio Management Winter 2017, 43 (2) 37-49; DOI: https://doi.org/10.3905/jpm.2017.43.2.037
Guillaume Coqueret
is an assistant professor at the Montpellier Business School in Montpellier, France.
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  • For correspondence: g.coqueret@montpellier-bs.com
Lionel Martellini
is a professor of finance at the EDHEC Business School and director of the EDHEC-Risk Institute in Nice Cedex 3, France.
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  • For correspondence: lionel.martellini@edhec.edu
Vincent Milhau
is a research director at the EDHEC-Risk Institute in Nice Cedex 3, France.
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  • For correspondence: vincent.milhau@edhec.edu
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Abstract

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.

TOPICS: Portfolio construction, analysis of individual factors/risk premia, long-term/retirement investing

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The Journal of Portfolio Management: 43 (2)
The Journal of Portfolio Management
Vol. 43, Issue 2
Winter 2017
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Equity Portfolios with Improved Liability-Hedging Benefits
Guillaume Coqueret, Lionel Martellini, Vincent Milhau
The Journal of Portfolio Management Jan 2017, 43 (2) 37-49; DOI: 10.3905/jpm.2017.43.2.037

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Equity Portfolios with Improved Liability-Hedging Benefits
Guillaume Coqueret, Lionel Martellini, Vincent Milhau
The Journal of Portfolio Management Jan 2017, 43 (2) 37-49; DOI: 10.3905/jpm.2017.43.2.037
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  • Article
    • Abstract
    • LIABILITY-HEDGING PROPERTIES OF EQUITY PORTFOLIOS AND INVESTOR WELFARE
    • CONSTRUCTING EQUITY PORTFOLIOS WITH IMPROVED LIABILITY-HEDGING PROPERTIES
    • ALTERNATIVE WEIGHTING SCHEMES
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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