Currently Funded Projects

The Research Foundation funds grants for high-quality research projects that expand the body of investment knowledge available to practitioners, assist practitioners in understanding and applying this knowledge, and contribute to the investment management community's effectiveness in serving clients. The foundation has a research grant budget of US$125,000 a year. The Research Foundation's research agenda is directed by the research director, Laurence B. Siegel.

The following is a list of currently funded research projects:

Short-Termism

James Juniper

This monograph will highlight the interrelationship between the phenomenon of “short-termism” and the recent debates on how to model the switching of investor sentiment from “irrational exuberance” to “uncertainty aversion.” The new models of uncertainty aversion allow researchers to discriminate between conventional risk premia and additional premia that supposedly reflect investor ambiguity about the return process. In some models of ambiguity aversion, long-term uncertainty premia can arise, which might explain short-termism on the part of financial investors. We would construct a bridge from investor behavior to corporate managerial behavior. Short-termism can also be connected to the literature on strategic management. While product development cycles are undoubtedly becoming shorter along with the horizon for profitable exploitation of new inventions, investors still need to adopt long term horizons. In strategy research, competencies are typically defined by their “spatial” ability to span a variety of product families and additionally by their persistence. Therefore, supporting long-termism in capital markets is not the same thing as favoring durable products over those that are more short-lived and more exposed to competitive rivalry. It is more about promoting long-term investment in a firm’s strategic architecture based around competencies rather than on end products and their associated business units.

Central Banking and Monetary Policy in Emerging Markets Countries
David DeRosa

The monograph provides an introduction to emerging markets and gives a history of finance, money, monetary policy, and central banking in the emerging markets. The major issues and goals facing a central bank in an emerging market involve exchange rates, economic extremes (of hyperinflation, depression, deflation, and bubbles), and currency crises. The issue of foreign exchange introduces questions about pegging currency and what foreign exchange regime to put in place — out of a wide spectrum of possibilities. In deciding monetary policy, a central bank in an emerging market faces the same issues as all central banks face, including balance of trade/balance of payments and the trade-offs among fixed exchange rates, an independent money supply/interest rates, and an open capital account. The book includes a survey and history of how central banks actually conduct monetary policy that illustrates what policy can and cannot do; applications to the emerging markets are discussed. The analysis of currency and how emerging markets fit into the international finance picture addresses floating vs. fixed exchange rates and whether these markets are simply at the mercy of international capital flows. The book closes with a summary of what emerging market central banks can reasonably be expected to do and not do.

Separation of Alpha and Beta

Roger Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA

The intention of this book is to walk the reader through the theory and application of portable alpha strategies. The author provides a brief history of portable alpha and pure alpha strategies and then turns to the theory necessary for understanding the distinction between alpha and beta. Central to this understanding is the discussion of the gains in mean–variance efficiency available from using portable alpha strategies. The practical elements involved in instituting a portable alpha program are illustrated by data-based examples. Also on a practical level, case studies from actual portable alpha applications provide the platform for a discussion of the issues that arise in implementing these programs.

Emotional Intelligence and Investment Behavior
John Ameriks and Peter Salovey

In the past decade, psychologists have established emotional competence or emotional intelligence (EI), as an important set of skills in the realm of decision-making and interpersonal relationships. This research suggests a link between EI and investment behavior. Awareness and understanding of this link may be important in helping investors manage their assets effectively.

Faith Based Finance: The Islamic Way
By Zaha Rina Zahari and Dr. Bala Shanmugam
The link between faith and commerce had always been sensitive. The start of Islamic Finance and its evolution over the last 4 decades has bridged that gap. The ancient Semitic families viewed usury as a vile enterprise and strived to forbid it, but then only managed to enforce the restrictions on a partial basis. The Christian faith championed the usury issues through Calvinism but subsequently economic gains overshadowed gains in the hereafter. Usury was also denounced by various spiritual leaders and philosophers of ancient timers, including Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Aquinas, Moses, Philo and Gautama Buddha.
By the 1960s Muslims started to seriously take up the battle against usury (and interest) and commenced setting up financial institutions in line with Shariah (Islamic Law). The central principles of Islamic finance were instituted as follows:

Being riba (interest) free
Being gharar (speculation) free
To be prepared to accept a share in the risk
To respect the sanctity of contracts
To participate only in activities approved by Shariah

To remain within the confines of the Shariah, Islamic finance resorted to a number of financial practices such as musharakah (profit and loss joint venture) and mudharabah (trustee profit sharing partnership) which were pre-Islamic but nevertheless applicable and acceptable to Shariah.
Armed with these instruments together with an innovative mind has allowed Islamic bankers to expand this alternate form of finance to reach the current quantum of US$850 billion. This may also be partly due to oil-driven liquidity as well as increasingly savvy Muslim consumers seeking more sophisticated Islamic financial products. The industry is growing at a blistering pace of 15 per cent per annum. The Islamic Financial Services Board estimates that by 2015 up to 60 per cent of total savings of Muslims globally will be channeled through Islamic accounts. It is therefore not surprising to see global players such as Citibank, HSBC, Deutsche Bank, ABN AMRO etc participating in Islamic finance. The same trend is seen amongst financial centres with London, Singapore, Hong Kong and more recently Tokyo taking up positions in this lucrative market.

This astronomical growth is not merely a retail phenomena. In the wholesale (bond / sukuk) market, the size of Islamic bonds was merely US$8 billion in 2003 but reached US$70 billion by 2007 with the projection being US$150 billion by 2010 (IFSB).
Moving in tandem with banking is the Islamic insurance (Takaful) industry which now has more than 250 firms globally. According to Moodys the global Takaful market would be worth US$7.5 billion by 2015. Similar trends are being recorded in the growth of auxiliary finance products and services such as Islamic REITs, Islamic Private Equity Funds and Islamic Wealth Management.
Of course all is not rosy with the current style of this faith based system. There is growing dissention amongst many devout Muslim bankers who accuse the current system of actually ‘charging interest but disguised in Islamic garb’. Some also argue that riba in reality, refers to usury as opposed to interest. While the clerics and bankers argue over the spirit of the matter, the substance is growing ever so rapidly forcing even skeptics to conclude that Islamic finance is not a passing fad but a viable alternative which is here to stay.

Understanding Professional Investors: Human Nature and the Role of the Emotions
By David Tuckett and Richard Taffler
This book is primarily designed for investment professionals, although finance academics will find it of equal interest. It seeks to provide a practical understanding of the work of fund managers and the processes of thinking and judgment they bring to their work. In this way those working in the investment management environment can be given additional tools to help them manage the emotional and other stresses associated with the highly uncertain, complex, competitive and unpredictable market environments in which they operate.
In particular, the study introduces the important new perspective of emotional finance which builds on the insights Freudian psychoanalysis offers into the workings of the human mind and the unconscious needs and fears that drive much of investment activity. The book draws on the results of over 50 interviews with senior fund managers in the US, UK and Europe designed to understand how emotions may influence working methods and judgments and their functional and dysfunctional consequences.

The Future of Saving and Investing
Organized by Zvi Bodie
Life-cycle saving and investing has become a science. This bold statement was confirmed in October 2006, when Boston University, the Federal Reserve Bank of Boston, and the Research Foundation of the CFA Institute hosted the first conference on the Future of Life-Cycle Saving and Investing. Now, the 2nd conference on the Future of Life-Cycle Saving and Investing will take place on October 22-24, 2008, and will focus exclusively on the retirement phase of the life cycle. This conference will bring together researchers, practitioners, and policymakers from academia, business, and government to hear about the latest scientific research and explore its implications for improving the retirement system.