Frank Fabozzi

Professor of Finance, EDHEC Business School and EDHEC PhD in Finance Core Faculty member

Since you joined EDHEC in 2011, you have been responsible for advising PhD candidates of the programme. Is it different advising experienced professionals and traditional PhD students?

Yes, there is a difference. Typically, in a traditional programme one is supervising a PhD candidate who entered a doctoral programme right after completing an undergraduate programme. Occasionally, in traditional programmes a PhD candidate has some meaningful work experience either as a full-time employee at a bank or asset management firm or as an intern while an undergraduate. At EDHEC, all PhD candidates hold or have held important executive or regulatory positions in the financial industry and are familiar with important issues facing the industry and the state-of-the art tools for dealing with those issues.

Can you comment on what you perceive as successes and the reasons for them? What are the main obstacles to completing a successful dissertation?

Success, of course, is the completion of the dissertation. Ultimately, however, it is the publication of the research contained in the dissertation that attests to the contribution for the financial industry and it is a standard that can be used for assessing whether the candidate has completed a successful dissertation.

At EDHEC, the research requirement for the awarding of the degree involves either the candidate writing two stand-alone research papers or one lengthy product that contains two related research issues. All of the completed dissertations I supervised to date have been two research papers. The majority of the PhD candidates who have completed two research papers have had both papers published or are forthcoming in prominent practitioner-oriented journals.

The most common obstacle is the selection of two topics to research that will be an important contribution to the financial industry. In traditional PhD programmes, often there are a good number of theoretical topics from which to select. In the EDHEC PhD programme, usually at least one topic is based on the candidate’s professional experience. The struggle is often for a second topic that may be unrelated to the candidate’s professional experience. Typically, it is that second paper that is the major hurdle. Yet, it is the challenge of identifying and successfully completing research in a new field that EDHEC prepares a candidate for.

There are a few instances, and I encountered one recently, where a PhD candidate is a perfectionist, continuing to extend research efforts beyond what would be viewed as a significant contribution to the literature and relentlessly polishing off the paper so that it is perfect. Although one would expect that encouragement from a supervisor that the research is good enough to be finalised, the perfectionist is not self-fulfilled and continues expanding and revising the dissertation.

What advice could you give to PhD students looking to identify a suitable/relevant topic for their dissertation?

The first source for our experienced executive PhD candidates in seeking to identify a suitable and relevant topic is to look at one’s professional experience as to what the critical issues that require research are, and to discuss potential topics with colleagues. The second is to discuss potential topics with professors lecturing on one of the specialised courses offered at EDHEC. Typically, the professors of these courses can identify a good number of topics, as well as direct students to key papers that can lead to a suitable topic. Finally, reading research papers published in journals, particularly practitioner-oriented journals, may give rise to ideas for a topic.

What have been the main sources of satisfaction for you?

The principal source of satisfaction is the publication of the two research papers and the subsequent citing of those papers by my peers.

Looking at your numerous publications, you have interests in multiple research areas. What have been your main fields of interest lately?

The reason for my wide range of interests in asset management is that as a trustee/director of regulated investment companies in the BlackRock family of funds, I see all of the major challenges in implementing investment theory in the real world. For this reason I am interested in areas of valuation of complex financial products (cash and derivative products), risk management issues, optimisation issues, and portfolio construction issues. My chief interest is how one moves from theory to successful implementation. Theoretical papers are far less interesting. The literature is filled with theoretical papers with proposed models that have little chance of ever being implemented in practice.

You are the latest recipient of the James R. Vertin Award of the CFA Institute Research Foundation for lifetime excellence in research. What makes your research relevant to practitioners?

I believe that my response to the prior question is relevant here: my writings seek to take practitioners from theory to practice. Moreover, the complaint of many students in finance has been the failure of their professors to show the connection to the real-world. Sharing two experiences I had early in my career would be helpful here.

In the late 1980s I wrote a textbook on investment management. I wrote it the way I trained portfolio managers and traders when engaged by financial firms. The adoptions were not that great because I did not spend many chapters covering the nuances of financial theories that had not been proved useful in practice – that was the feedback obtained from the publisher. After the book had been out for a few years, I received a big pop in sales from a university. A representative from the publisher queried the professor who had adopted the textbook for several courses as to the reason for the adoption when in the past he did not adopt it. The professor stated that when on sabbatical leave he worked for an asset management firm and came to realise that the topics and presentation in the textbook dealt with real-world issues that were important for students to understand.

In the early 1980s when on faculty at MIT’s Sloan School of Management, I discussed with Professor Franco Modigliani, the 1985 recipient of the Nobel Prize in Economics who passed away in 2003, that I thought money and banking textbooks at the time did not effectively prepare students for understanding global capital markets. Professor Modigliani and I put together a detailed outline for a book on the foundations of financial markets that was far different from existing textbooks in that it dealt with the latest developments in capital markets and implementation challenges and issues. The publisher sent the outline to several reviewers. There might have been one or two favourable reviews, but in general the majority of reviewers thought the proposal was awful because it was far different than the coverage in existing books that were covering much more theory. Given the opportunity to publish a book by a Nobel Laureate (and probably solely for that reason), the publisher gave us a contract. The book was extremely successful and within one year the publisher asked us to update the book. That book is still used by Professor Robert Shiller for his financial markets course at Yale and his praise for the book because of its practical orientation is described in his Open Yale course on financial markets. A year or so later, Professor Modigliani and I co-authored an upper level version of the book.

You have edited and/or authored over one hundred books and you are the co-author of an authoritative series of finance books for finance professionals, academics, and students. Could you tell us more about the two latest ones on robust equity portfolio management, and on portfolio construction?

The first of the two books you mentioned has just rolled off the press: Robust Portfolio Management in Equity Markets co-authored with Woo Chang Kim and Jang Ho Kim, and published by John Wiley & Sons. Following the 1952 publication of Markowitz’s mean-variance model, there have been numerous extensions of the original model seeking to overcome implementation issues. In this book, my co-authors and I focus on one of these extensions: addressing problems that arise because of the uncertainty of the estimated inputs (mean, variance, and covariance) in constructing equity portfolios. If in practice the estimated input values are even slightly different from their true values, the estimated optimal portfolio will actually be far from the best choice. We refer to the approach we cover in this book as robust equity portfolio management.

The need to focus on investment analytics in a coherent way has never been greater. In the aftermath of the 2007–2009 financial crisis there has been a tremendous amount of regulatory change. Like most industries, the financial industry is trying to cope with the challenges of managing big data and the risks associated with using models. The second book, Portfolio Construction and Analytics, co-authored with Dessislava Pachamanova and to be published by John Wiley & Sons, is in page proofs. In this book, we look at the analytics process at investment firms from multiple perspectives: the data management side, the modelling side, and the software resources side. We review many widely used approaches to portfolio analytics, and discuss new trends in the application of alternative risk metrics, modelling approaches, and portfolio analytics system design. Although the theoretical underpinnings of some of the modelling approaches are provided or given context, our goal is emphasising how such models are used in practice.

As editor of the Journal of Portfolio Management and associate editor for several journals, what advice can you offer to graduates who would like to publish parts of their dissertations?

As I mentioned earlier, at EDHEC one alternative for completing a PhD dissertation is the writing of two papers. My preference for the two-research paper alternative is that upon the successful defence of the two papers, little modification is needed to convert the paper into a format acceptable for review by a journal.

Writing a paper of reasonable length (say no more than 45 double-spaced pages – a page limit imposed by many journals) that forces the candidate to write concisely with respect to the literature review, contribution to the literature, methodology, data and summary of results is important. A 90-100 page paper submitted for a candidate’s paper will require considerable time to revise/modify to get it into shape to submit to a journal. As editor of the Journal of Portfolio Management, I typically give a “desk rejection” to such papers.

Writing a paper for submission to a journal requires that the candidate understand the critical issues and key results. A paper with more than about 15 tables/figures is often an indication that the author does not know what is important and wants to toss every single finding into the paper.

Lengthy papers are sometimes the result of the author seeking to address every possible question that he or she anticipates might be asked by reviewers. That can be addressed today by providing supplementary material that journals now encourage authors to prepare and that is published online rather than in the published paper.

Two other critical aspects in preparing a paper for submission to a journal should be noted. First, the candidate should make sure that the contribution of the work to the financial industry is clearly stated. I have read papers where the contribution is buried deep in the paper and discussed very briefly, leaving the reviewer to try to figure out why the paper was written. Second, make sure that the forum selected to submit the paper is suitable. I have received well-written and technically correct papers submitted to a journal where I am an editor or a co-editor where the paper’s topic is far out of the range of interest to the journal. Just browsing a paper’s references listed at the end of the paper and not seeing any citations to the selected journal nor journals similar to the selected journal is a hint that the paper is probably off-target for the journal.