Pricing of exchange traded funds

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

Search-for-yield in Portuguese fixed-income mutual funds and monetary policy

This paper studies the effects of monetary policy on mutual fund risk taking using a sample of Portuguese fixed-income mutual funds in the 2000-2012 period. Firstly I estimate time-varying measures of risk exposure (betas) for the individual funds, for the benchmark portfolio, as well as for a representative equally-weighted portfolio, through 24-month rolling regressions of a two-factor model with two systematic risk factors: interest rate risk (TERM) and default risk (DEF). Next, in the second phase, using the estimated betas, I try to understand what portion of the risk exposure is in excess of the benchmark (active risk) and how it relates to monetary policy proxies (one-month rate, Taylor residual, real rate and first principal component of a cross-section of government yields and rates). Using this methodology, I provide empirical evidence that Portuguese fixed-income mutual funds respond to accommodative monetary policy by significantly increasing exposure, in excess of their benchmarks, to default risk rate and slightly to interest risk rate as well. I also find that the increase in funds’ risk exposure to gain a boost in return (search-for-yield) is more pronounced following the 2007-2009 global financial crisis, indicating that the current historic low interest rates may incentivize excessive risk taking. My results suggest that monetary policy affects the risk appetite of non-bank financial intermediaries.

Tracking error of exchange-traded funds: Evidence from the UK

This paper is mainly concerned with the tracking accuracy of Exchange Traded Funds (ETFs) listed on the London Stock Exchange (LSE) but also evaluates their performance and pricing efficiency. The findings show that ETFs offer virtually the same return but exhibit higher volatility than their benchmark. It seems that the pricing efficiency, which should come from the creation and redemption process, does not fully hold as equity ETFs show consistent price premiums. The tracking error of the funds is generally small and is decreasing over time. The risk of the ETF, daily price volatility and the total expense ratio explain a large part of the tracking error. Trading volume, fund size, bid-ask spread and average price premium or discount did not have an impact on the tracking error. Finally, it is concluded that market volatility and the tracking error are positively correlated.

Development and validation of a risk model for prediction of hazardous alcohol consumption in general practice attendees : the PredictAL study

Background: Little is known about the risk of progression to hazardous alcohol use in people currently drinking at safe limits. We aimed to develop a prediction model (predictAL) for the development of hazardous drinking in safe drinkers. Methods: A prospective cohort study of adult general practice attendees in six European countries and Chile followed up over 6 months. We recruited 10,045 attendees between April 2003 to February 2005. 6193 European and 2462 Chilean attendees recorded AUDIT scores below 8 in men and 5 in women at recruitment and were used in modelling risk. 38 risk factors were measured to construct a risk model for the development of hazardous drinking using stepwise logistic regression. The model was corrected for over fitting and tested in an external population. The main outcome was hazardous drinking defined by an AUDIT score >= 8 in men and >= 5 in women. Results: 69.0% of attendees were recruited, of whom 89.5% participated again after six months. The risk factors in the final predictAL model were sex, age, country, baseline AUDIT score, panic syndrome and lifetime alcohol problem. The predictAL model's average c-index across all six European countries was 0.839 (95% CI 0.805, 0.873). The Hedge's g effect size for the difference in log odds of predicted probability between safe drinkers in Europe who subsequently developed hazardous alcohol use and those who did not was 1.38 (95% CI 1.25, 1.51). External validation of the algorithm in Chilean safe drinkers resulted in a c-index of 0.781 (95% CI 0.717, 0.846) and Hedge's g of 0.68 (95% CI 0.57, 0.78). Conclusions: The predictAL risk model for development of hazardous consumption in safe drinkers compares favourably with risk algorithms for disorders in other medical settings and can be a useful first step in prevention of alcohol misuse.

The role of deposit insurance and bank’s asset size in the 2008 financial crisis

In this paper we analyze the role of deposit insurance in providing the market with liquidity in times of financial turmoil. To do so, we look at the variation in insured and uninsured deposits between 2005Q3 and 2011Q3, controlling for liquidity, solvency and capital adequacy indicators, and find evidence that deposit insurance does provide some confidence in keeping funds in banks in times of turmoil. Additionally we follow an event study methodology to assess the impact of deposit insurance oriented policies on bank holding companies stock market returns, and find a TBTF effect.

Measuring the impact of short and lending practices using the DGTW benchmarks

Mutual fund managers increasingly lend their holdings and/or use short sales to generate higher returns for their funds. This project presents a first look into the impact these practices on performance using the performance measures: i) Characteristic Selectivity (CS), the ability of the fund's managers to choose stocks that outperform their benchmarks; ii) Characteristic Timing (CT), the ability of the manager to time the market; iii) and Average Style (AS), the returns from funds systematically holding stocks with certain characteristics. These returns are computed through the DGTW benchmarks. The effect of other variables that have also been shown to impact fund’s returns – total net assets under management, investment styles, turnover and expense ratios – will also be analyzed. I find that managers who use short-sales do not exhibit better stock picking abilities than those who do not, while mutual funds that lend do present higher CS returns. In addition, while lending is not significant for the total performance of a fund, the employment of short-sales and of both short-sales and lending has a negative impact on the fund’s performance.

How do current term structure model behave beyond the last liquid point?: A comparison of the DNS and Smith-Wilson methods

A Work Project, presented as part of the requirements for the Award of a Master’s Double Degree in Finance from Maastricht University and NOVA – School of Business and Economics

Impact of Black-Scholes assumptions on Delta Hedging

In this work we are going to evaluate the different assumptions used in the Black- Scholes-Merton pricing model, namely log-normality of returns, continuous interest rates, inexistence of dividends and transaction costs, and the consequences of using them to hedge different options in real markets, where they often fail to verify. We are going to conduct a series of tests in simulated underlying price series, where alternatively each assumption will be violated and every option delta hedging profit and loss analysed. Ultimately we will monitor how the aggressiveness of an option payoff causes its hedging to be more vulnerable to profit and loss variations, caused by the referred assumptions.

Carry and trend-following strategies

Recent research has shown that carry and trend strategies when combined lead to significant risk-adjusted returns that can be very attractive to investors, at a low cost with small and positive skewness. This study proposes to combine both carry and trend-following, considering a data set of ten years (09/2005-09/2015), within a portfolio composed by three major asset classes: currencies, commodities and equity indices. Following a futures-based methodology, the obtained results show that, indeed, the strategy results inevitably in higher returns and greater sharpe ratios for every asset class in study. This outcome results from the fact that trend proved to provide a significant hedge to the downside risk that carry is exposed to.

Internationalization Strategy

Internationalization is becoming an essential factor for today’s society, determinant for the development not only for individuals but also for Higher Education Institutions. This dissertation aims to advise Nova SBE on how to attract Canadian students. It will also help to understand the current trends and students’ behaviors on studying abroad and based on that provide different. For this to become possible, it was developed a qualitative research in order to understand the main insights on what makes Canadian students to study abroad. The biggest obstacle for students studying abroad is the lack of financial funds, which makes scholarships a requirement for students to consider this possibility. In what concerns the study of Nova SBE, it was mentioned that there is a lack of attention and care by the faculty staff in order to help the students integrate in the university and the city.

The value creation radar applied to the space engineering sector

This case study illustrates the application of the Value Creation Radar (VCR) to SenSyF, an Earth Observation (EO) system which was developed by Deimos Engenharia S.A. (DME), the Portuguese affiliate of Elecnor Deimos. It describes how a team of consultants adopted the VCR in order to find new market applications for SenSyF, selected the one with the highest potential, and defined a path to guarantee a sustainable market launch. This case study highlights the main challenges of bringing a technology-driven company closer to the market in the pursuit of long-term sustainability, while not compromising its technological capabilities

Os diferentes níveis de regulação legal dos conflitos de interesses no âmbito da gestão de fundos de investimento mobiliário

In the context of the activity developed by securities investment funds (hereinafter referred to “SIF”) the holders of investment units have a very tiny power to intervene. Aware of the risks that a decoupling between ownership and control may pose, the legislator has foreseen a number of impositions and limitations to the activity of the managing entities, namely to prevent or prohibit the performance of acts in situations of potential conflicts of interests. Accordingly, the purpose of the dissertation on – “Os diferentes níveis de regulação legal dos conflitos de interesses no âmbito da gestão de FIM” – is exactly to determine the field of application of the several levels of legal regulation of the conflicts of interests that arise within the scope of the management of SIF, both at the level of the new legal requirements governing collective investment undertakings, and at the level of the legal requirements governing the conflicts of interests foreseen in the Portuguese Securities Code, in order to clarify the articulation of these different levels of conflicts of interests regulations.

The role of crowdfunding in promoting entrepreneurship

Crowdfunding is a collaborative initiative, usually via internet, where people network to collectively raise funds in order to invest in and support projects delivered by other people or organizations. Tools such as crowdfunding are born and thrive in a grassroots environment, with a strong potential to positively disrupt the entrepreneurial generation setting and grow to a position of significant relevance in society, namely at a time when alternatives to traditional forms of finance are welcome and the technology to deliver them is abundant. Entrepreneurship is the act of transforming ideas and projects into economic products or services. Entrepreneurship related to starting new businesses is better known as start‐up ventures. Entrepreneurs face a series of challenges, from idea conception and business plan design, to obtaining finance, promoting new products and services, generating revenues and profits and generally growing and sustaining a business for the long‐run. These challenges can be overwhelming, namely in the start‐up phase of a new venture, leaving several ideas on paper without them having a chance to “grow legs and walk”. This paper and its analysis offer important insights about the contribution of crowdfunding to facilitate the attainment of critical factors for successful entrepreneurship. With extensive use of real practical examples, leveraging previous analytical studies of other crowdfunding implications and reviewing expert literature, by interviewing entrepreneurs, crowdfunding platform owners and by benefitting from hands on experience of working in such an organization, we intend to clarify the impact of crowdfunding in what we considered to be 7 key entrepreneurial requirements detailed further in the introduction section and later in the body of the paper. The findings have implications for entrepreneurs, naturally, and for business generation theory, extending current entrepreneurial guidelines with innovative tools and methodologies capable of sustaining successful ventures in a newly highlighted cooperative world. We live in innovative times where the channels for the transfer of funds and resources suffer disruptive changes with the potential to significantly improve the ability to generate new initiatives for the well‐being of entrepreneurs and all related communities.

Portuguese footwear

This case study deals with the reasons why the Portuguese Footwear Cluster evolved from a small industry focused on the Portuguese internal market into a high-tech industry capable of designing and producing some of the best and most expensive shoes in the world. It went from using the low labor costs of an under-developed economy to produce long series of shoes for pre-designated brands in Northern Europe to having the ability to produce some of the highest quality shoes in the world, in small orders, designed and delivered in record timing, while offering a service of excellence. In 1960, when Portugal became a founding member of EFTA, the footwear industry in Portugal was globally irrelevant, producing low quality shoes directed to the puny internal market and its African colonies. The new free trade zone with economies much more developed that itself, led to the transfer of the labor-intensive, low skilled manufacture from the UK and Scandinavian countries to Portugal. Mostly through joint ventures, the industry was able to mechanize itself so it could produce shoes in long series at low prices. It grew based on that model up until the 1990s, when the emergence of the Asian countries meant either a different strategy or extinction. Taking advantage of a clarified leadership of its trade association, it used the European funds made available to it during the 1990s, to modernize its factory floors, so it could become more nimble and flexible, expand its design capabilities and dramatically change its image abroad. The role of the trade association, APICCAPS, was instrumental throughout the process going well beyond what came to be expected of trade associations. It used its privileged position to provide understanding regarding the current situation and competitive landscape, alerting for changes ahead and at the same time providing a strategic vision on how to deal with the challenges. Moreover, it helped companies get the resources they needed by creating a research center in collaboration with a University, by creating a process that allowed companies to learn from each other via the show casing of projects sponsored by the association or by helping industrials traveling to locations where new customers could be found. The case study provides insight on how the trade association leadership, which has no formal authority over its members, was able to guide and motivate an industry through a consistent positive approach. That approach focused on the solutions, on the opportunities and on the success stories of companies in the cluster rather than on what was wrong or needed to be addressed. Based on this case, one could use the leadership role of the trade association to discuss and change leaders’ roles and styles in other sectors or even companies.