Laurent E. Calvet

Laurent E. Calvet

Professor

HEC Paris

Laurent E. Calvet is a Professor of Finance at HEC Paris. He is an engineering graduate from Ecole Polytechnique and Ecole Nationale des Ponts et Chaussées in Paris and holds a PhD in Economics from Yale University. Prior to joining HEC Paris, Laurent Calvet served as the John Loeb Associate Professor of the Social Sciences at Harvard University (1998-2004), and as a Professor and Chair in Finance at Imperial College London (2007-8). In 2006, Laurent Calvet received the “Best Finance Researcher under the Age of 40” award from Le Monde and the Europlace Institute of Finance. His research on asset pricing, household finance, and volatility modeling has appeared in leading economics and finance journals.

  • The elective you teach in the MIF is based on your own research. Can you tell us more about it?

I teach a course on Volatility Modeling. The course covers the Markov-Switching Multifractal (MSM) model of financial volatility, which I co-developed with former Yale classmate Adlai Fisher. MSM permits to model time variation, including extreme movements, in asset prices. MSM is now used by leading institutions, such as hedge funds or the Bank of England, to measure and forecast financial risk.
In work with Benoit Mandelbrot, we have shown that financial prices observed at different time horizons exhibit several important forms of scale-invariance. The Markov-Switching Multifractal captures these regularities by allowing volatility to be driven by components evolving at different time scales. MSM disentangles short-run, medium-run, and long-run fluctuations in financial risk, and can therefore provide accurate forecasts of volatility and value at risk. A full description of MSM can be found in the Wikipedia entry: en.wikipedia.org/wiki/Markov_switching_multifractal.

  • You have also done significant work in the field of household finance. What are the key take-aways of your research for finance professionals?

I have obtained with a former Ph.D. student, Paolo Sodini, an administrative panel containing highly detailed financial and demographic data on every Swedish resident at the end of each year over a decade. The analysis of this dataset has revealed that the investment behavior of households is surprisingly consistent with the precepts of financial theory.

For instance, in "Down or Out" (Journal of Political Economy 2007), John Campbell, Paolo Sodini and I show that the financial portfolios of households are well-diversified, just as the portfolio theory of Markowitz implies. In "Fight or Flight?" (Quarterly Journal of Economics 2009),  we show that households also tend to rebalance their financial portfolios in response to market movements, just as the work of Nobel laureates Paul Samuelson and Robert Merton models predicts.

In a recent paper, "Who are the Value and Growth Investors?", Sebastien Betermier, Paolo Sodini and I use the Swedish panel to understand the value premium, that is the fact that value stocks (that is, companies with high book-to-market ratios) tend to outperform growth stocks (that is, companies with low book-to-market ratios) on average. The origins of the value premium remain the subject of an active debate in finance. Some authors, such as 2013 Nobel laureate Eugene Fama, attribute the success of value investing to the riskiness of value stocks (rational view), while other authors think that the value premium is due to the overpricing of growth firms by irrationally exuberant investors (behavioral view). The Swedish panel reveals that value investors have strong balance sheets and can therefore afford to take financial risk, which is strikingly consistent with rational explanations of the value premium. We also uncover regularities, such as the impact of gender and entrepereneurship, that are consistent with the behavioral view. The paper is available here.

  • How would you describe the HEC MIF Students?

The MIF program attracts high-quality students with strong technical skills and genuine intellectual curiosity. They compare well with the students I have had the pleasure to teach at Harvard, NYE and Imperial College.