Risk parity: True versus naive approach

This paper studies the performance of two different Risk Parity strategies, one from Maillard (2008) and a “naïve” that was already used by market practitioners, against traditional strategies. The tests will compare different regions (US, UK, Germany and Japan) since 1991 to 2013, and will use different ways of volatility. The main findings are that Risk Parity outperforms any traditional strategy, and the “true” (by Maillard) has considerable better results than the “naïve” when using historical volatility, while using EWMA there are significant differences.

Brazilian equity risk premium analysis: A macroeconomic approach

Double Degree Masters in Economics Program from Insper and NOVA School of Business and Economics

Market risk charge of the trading book: a comparison of the Basel II and Basel III

This paper aims to investigate if the market capital charge of the trading book increased in Basel III compared to Basel II. I showed that the capital charge rises by 232% and 182% under the standardized and internal model, respectively. The varying liquidity horizons, the calibration to a stress period, the introduction of credit spread risk, the restrictions on correlations across risk categories and the incremental default charge boost Basel III requirements. Nevertheless, the impact of Expected shortfall at 97.5% is low and long term shocks decrease the charge. The standardized approach presents advantages and disadvantages relative to internal models.

Momentum risk: An approach following the correlations between active stocks

The momentum anomaly has been widely documented in the literature. However, there are still many issues where there is no consensus and puzzles left unexplained. One is that strategies based on momentum present a level of risk that is inconsistent with the diversification that it offers. Moreover, recent studies indicate that this risk is variable over time and mostly strategy-specific. This work project hypothesises and proves that this evidence is explained by the portfolio constitution of the momentum strategy over time, namely the covariance and correlation between companies in the top and down deciles and across them.

Modeling and forecasting value-at-risk for the Portuguese stock market

The aim of this work project is to find a model that is able to accurately forecast the daily Value-at-Risk for PSI-20 Index, independently of the market conditions, in order to expand empirical literature for the Portuguese stock market. Hence, two subsamples, representing more and less volatile periods, were modeled through unconditional and conditional volatility models (because it is what drives returns). All models were evaluated through Kupiec’s and Christoffersen’s tests, by comparing forecasts with actual results. Using an out-of-sample of 204 observations, it was found that a GARCH(1,1) is an accurate model for our purposes.

Systemic risk for financial institutions in UK

Marginal Expected Shortfall (MES) is an approach used to measure the systemic risk financial institutions face. It estimates how significantly systemic events (poor market performance, out of 1.6 times Standard Deviation borders) are expected to affect market capitalization of a particular firm. The concept was developed in the late 2000s and is widely used for cross-country comparisons of financial firms. For the purposes of generalization of this technique it is often used with market data containing non-domestic currencies for some financial firms. That may lead to results having currency noise in them as it is shown for 77 UK financial firms in our analysis between 2001 and 2014.

Enterprise risk management adoption: An empirical investigation of its effects on firm performance

Enterprise Risk Management (ERM) is gaining relevance among financial and non-financial companies but its benefits still are uncertain. This paper aims at investigating the relationship between ERM adoption and firm performance based on a sample of 1130 non-financial companies belonging to the STOXX® index. A content analysis of individual accounts is performed to distinguish adopters, and a regression analysis explores the effect of ERM adoption on firm performance, proxied by Tobin’s Q. The findings suggest that there is a statistical significant positive effect of ERM adoption on firm performance, meaning that firms are benefiting from the implementation of this process.

Social impact bond feasibility study: Children and youth at risk: the Projecto Família program

Social impact bonds are an increasingly popular method of unlocking typical social investment barriers and fuelling social innovation. This feasibility study aims to understand whether a social impact bond is a suitable tool for decreasing unnecessary foster care placements in Portugal, which have been proven to cause significant social and financial damage to societies. This research question is answered through a financial model which combines the costs of this social problem with Projecto Família’s intervention model, a leading intensive family preservation service. Main findings suggest using SIB funding for a 5-year project with the goal of generating the proper impact measurement metrics lacking in the field.