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- Convexity adjustments for ATS modelsPublication . Gaspar, Raquel M.; Murgoci, AgathaPractitioners are used to value a broad class of exotic interest rate derivatives simply by adjusting for what is known as convexity adjustments (or convexity corrections). We start by exploiting the relations between various interest rate models and their connections to measure changes. As a result we classify convexity adjustments into forward adjustments and swaps adjustments. We, then, focus on affine term structure (ATS) models and, in this context, conjecture convexity adjustments should be related of affine functionals. In the case of forward ad¬justments, we show how to obtain exact formulas. Concretely for LIBOR in arrears (LIA) contracts, we derive the system of Riccatti ODE-s one needs to compute to obtain the exact adjustment. Based upon the ideas of Schrager and Pelsser (2006) we are also able to derive general swap adjustments useful, in particular, when dealing with constant maturity swaps (CMS). Our approach bypasses the need for Taylor approximations or unrealistic assumptions. They include exact convexity adjustments previously derived, such as the adjustments associated with Gaussian models, but are far more general as they provide solutions for the entire ATS class of models.
- Value investing: the book-to-market effect, accounting information, and stock returnsPublication . Almas, David; Duque, JoãoAlthough the book-to-market (B/M) effect is vastly studied, the majority of the conclusions in prior analysis is only applicable to U.S. firms. In this work, we evaluate the performance of portfolios selected using three modified versions of B/M strategy applied to stocks listed in Euronext markets (Paris, Amsterdam, Brussels, and Lisbon) between 1993 and 2003. From the analysis of 4,715 firms across 11 years, 943 firms were elected as reference for portfolio formation. The modified B/M strategies use accounting information to segregate good from troubled firms. The first strategy follows Piotroski's (2000) nine signals to measure three areas of the companies' financial situation and enabling to select firms from the high B/M quintile. The second strategy creates a portfolio from the intersection of high B/M portfolio with low accruals portfolios, following Bartov and Kim (2004) research design. The last strategy combines high B/M and low probability of bankruptcy, using the methodology described in Airman (1968) and Hillegeist et al. (2004). This study shows that the average annual return observed by the high B/M portfolio is increased by 9.2% using the strategy developed by Piotroski (2000). Furthermore, there is clear evidence that the entire high B/M firms return distribution is shifted to the right when the score screen is applied. By opposition, other suggested alternative techniques pointed out in the literature using similar accounting and market data failed to prove as being a more efficient investment strategy
- Value Investing: The Book-To-Market Effect, Accounting Information, and Stock ReturnsPublication . Almas, David; Duque, JoãoAlthough the book-to-market (B/M) effect is vastly studied, the majority of the conclusions in prior analysis is only applicable to U.S. firms. In this work, we evaluate the performance of portfolios selected using three modified versions of B/M strategy applied to stocks listed in Euronext markets (Paris, Amsterdam, Brussels, and Lisbon) between 1993 and 2003. From the analysis of 4,715 firms across 11 years, 943 firms were elected as reference for portfolio formation. The modified B/M strategies use accounting information to segregate good from troubled firms. The first strategy follows Piotroski's (2000) nine signals to measure three areas of the companies' financial situation and enabling to select firms from the high B/M quintile. The second strategy creates a portfolio from the intersection of high B/M portfolio with low accruals portfolios, following Bartov and Kim (2004) research design. The last strategy combines high B/M and low probability of bankruptcy, using the methodology described in Altman (1968) and Hillegeist et al. (2004). Value Investing: The Book-To-Market Effect, Accounting Information, and Stock Returns. This study shows that the average annual return observed by the high B/M portfolio is increased by 9.2% using the strategy developed by Piotroski (2000). Furthermore, there is clear evidence that the entire high B/M firms return distribution is shifted to the right when the score screen is applied. By opposition, other suggested alternative techniques pointed out in the literature using similar accounting and market data failed to prove as being a more efficient investment strategy
- CDOs in the light of the current crisisPublication . Gaspar, Raquel M.; Schmidt, ThorstenThis paper proposes a top-down model for pricing Collateralized Debt Obligation (CDOs). Our proposal is both treatable and realistic, in the sense we are able to obtain closed-form solutions to single tranche CDOs and capturing extreme credit events. We use as key ingredients the so-called (T, x)-bonds, as proposed in Filipovic, Overbeck, and Schmidt (2008), but generalize their affine specificationby including shot-noise processes. Our claim is that affine diffusions combined with shot-noise processes lead to an improved modeling of CDO spreads in comparison to existing affine jump-diffusion models. The proposed approach allows in particular for better capturing the possibility of extreme events, like the ones underlying the current crisis. We illustrate our results with a very concrete (simple) instance of our class of models. Finally, we identify the connections between the top-down and bottom-up approaches for modeling credit risk, within our class of models. Concretely, we show that even when taking a bottom-up approach the aggregate loss process would be a process of affine shot-noise type.
- Efficiency, concentration and competition in the brazilian banking sector: a comparative literature analysisPublication . Wolters, Mark; Couto, EduardoThe past two decades have seen a revolution in the Latin American banking industry with a rash of crises, reforms, deregulation, privatizations, and foreign bank investment. The region has become a hot bed of interest in global financial markets. Brazil in particular has seen a significant change in its banking sectors competitive makeup with increases in foreign bank participation and lessening of public bank burden on the federal government. Competition, consolidation, and efficiency measures throughout the region have led to a reexamining of the costs and benefits of consolidated banking sectors and the threat of monopolistic actions of banks. Possible statistical analytical tools for efficiency, concentration, and competition are discussed, such as the Panzer Rosse H-Statistic, Frontier Analysis, and others. The quiet life theory of a monopoly is examined and put up against the efficient structure hypothesis of Demsetz in order to see which theory may hold more credence in the Brazilian banking sector upon further research. The paper finished with the analysis of the Brazilian banking sector and how developments can we do in future research to expand and fortify the previous findings about Brazilian banking sector.
- Do insiders time their trades? Evidence from Euronext LisbonPublication . Gonçalves, Pedro; Duque, JoãoIn this paper, we examine the existence of insider trading abnormal profits in Euronext Lisbon from January 2001 to December 2005. Using the methodology of event studies, our overall results show that, in spite of existing legislation to regulate transactions, insiders are still able to make abnormal profits. Results also show that insider buying is a stronger indicator than insider selling and that the magnitude and duration of abnormal profits depend on both firm and transaction-specific factors. These include industry classification, firm size, firm valuation and relative trading volume.
- Electricity market interconnections and electricity price volatilityPublication . Fonseca, Nuno; Duque, JoãoIn this paper, we present a model of changes in electricity price returns in the context of interconnected electricity markets. This model predicts an inverse relationship between the increase in interconnection capacity and the volatility of price returns in the corresponding electricity markets. This means that an increase of interconnection between two markets leads to a decrease in the volatility of their prices. We support our model with empirical results from the Australian, European and USA electricity markets. The results suggest that this inverse relationship between interconnection and volatility exists, meaning that when markets tend to be physically interconnected, variance tends to be reduced.
- O enquadramento filosófico para a investigação: algumas reflexões introspectivas ao positivismoPublication . Nevado, Pedro PicalugaNo âmbito da ciência e da construção de conhecimento científico reflectimos sobre a ontologia, a epistemologia e a metodologia que caracterizou o debate filosófico e científico a partir de Descartes, versando Comte e o positivismo. Fazemos uma incursão ao âmago do pensamento positivista e discutimos diferentes problemáticas a fim de procurar eventuais inconsistências. Concluímos enunciando algumas questões e dúvidas compatíveis com brechas no corpo teórico positivista que aconselham a pesquisas futuras de esclarecimento, nomeadamente em debates relevantes como são o do racionalismo e empirismo, o do dedutivismo silogístico e cartesiano, o do indutivismo e dedutivismo, ou o da unidade e diversidade metodológica.
- Popper e a investigação: a metodologia hipotética - dedutivaPublication . Nevado, Pedro PicalugaO objectivo deste artigo é debater o contributo de Popper e da sua metodologia hipotético - dedutiva para a lógica positivista. Traçamos as diferenças entre o racionalismo de Descartes e Popper e o empirismo de Comte e interrogamo-nos como é que um racionalista como Popper poderia aproximar-se em termos científicos de um empirista como Comte. Vamos ao encontro do curso de acção de investigação hipotético - dedutiva com base em Popper e das suas principais influências, nomeadamente David Hume. Concluímos com os parâmetros principais para a testabilidade duma teoria e para a demarcação da ciência.
- Funding contract duration of microcredit loansPublication . Barroso, Maria Nazaré; Barros, Carlos Pestana; Borges, Maria RosaThis study analyses the funding contract duration of microcredit loans in Portugal from 1999 to 2008, using a data file from the Portuguese Microcredit Association that overseas all microcredit actions. A survival model is used to analyse which characteristics are associated with the duration of the contract, taking into account the uncontrolled heterogeneity of the data. Policy implications are derived for improving the understanding and management of the duration of microcredit funding contracts.