Three essays on economics of predictability of stock returns

A PhD Dissertation, presented as part of the requirements for the Degree of Doctor of Philosophy from the NOVA - School of Business and Economics

Predictability of stock market returns: Evidence from Eurozone's banking sectors

This paper analyzes the in-, and out-of sample, predictability of the stock market returns from Eurozone’s banking sectors, arising from bank-specific ratios and macroeconomic variables, using panel estimation techniques. In order to do that, I set an unbalanced panel of 116 banks returns, from April, 1991, to March, 2013, to constitute equal-weighted country-sorted portfolios representative of the Austrian, Belgian, Finish, French, German, Greek, Irish, Italian, Portuguese and Spanish banking sectors. I find that both earnings per share (EPS) and the ratio of total loans to total assets have in-sample predictive power over the portfolios’ monthly returns whereas, regarding the cross-section of annual returns, only EPS retain significant explanatory power. Nevertheless, the sign associated with the impact of EPS is contrarian to the results of past literature. When looking at inter-yearly horizon returns, I document in-sample predictive power arising from the ratios of provisions to net interest income, and non-interest income to net income. Regarding the out-of-sample performance of the proposed models, I find that these would only beat the portfolios’ historical mean on the month following the disclosure of year-end financial statements. Still, the evidence found is not statistically significant. Finally, in a last attempt to find significant evidence of predictability of monthly and annual returns, I use Fama and French 3-Factor and Carhart models to describe the cross-section of returns. Although in-sample the factors can significantly track Eurozone’s banking sectors’ stock market returns, they do not beat the portfolios’ historical mean when forecasting returns.

Relationship between national culture, democracy and environmental performance: A panel data analysis

This paper demonstrates the significance of culture in examining the relationshipbetween democratic capital and environmental performance.The aim is to examine the relationship among scores on the Environmental Performance Index and the two dimensions of cross cultural variation suggested by Ronald Inglehart and Christian Welzel. Significantional interrelationships among democracy, cultural and environmental sustaintability measures could be found, following the regression results. Firstly, higher levels of democratic capital stock are associated with better environmental performance. Secondly importance to distinguish between cultural groups could be confirmed.

Performance analysis of an SRI screen based on employment quality in high and low capital industries: International evidence

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 and Maastricht University School of Business and Economics

Assessing performance drivers in cross-border M&A

This research is an investigation on the deal-specific factors impacting long-term performance of cross-border M&A and on the nature of such relations. The analysis is conducted on a sample of 187 cross-border deals completed within the pharmaceutical and biotech industries by Western European bidders between 2000 and 2009. Findings suggest that post-deal variation in gross profit improves when bidders diversify in other businesses, when assets are purchased instead of equity, and when stock is used as deal currency. Furthermore, the method of payment is found to moderate the effects geographical distance has on deal outcomes.

Overstock and stock-out in Volkswagen Autoeuropa

The following work is a case study of overstock and stock-out problems at Volkswagen Autoeuropa (VWAE). It introduces the supply chain of Autoeuropa and specializes then on failures connected to inventory problems. Having a successful supply chain is important in a world where products become more and more similar as it can give to companies an edge over their competitors. The case shows three practices that VWAE uses to prevent and to overcome stock problems. Information was gathered by doing interviews with different managers, by analyzing the company’s key processes and by literature research related to the topics of supply chain management and flexibility in the supply chain. Three practices were further investigated: the use of alternative parts, support of the supplier and a rating system of suppliers. In the question section of this work the importance of flexibility and Supplier Relationship Management (SRM) when connected to supply chain management are explained. The described different practices are numerically analyzed and it is concluded that each practice brings both cost savings and the possibility of achieving target numbers to the company, showing the company’s flexibility to react to supply chain disturbances. Because of confidentiality reasons, persons in the case are fictionalized and numbers are wherever possible equalized to 100 in order to display true proportions.

Anatomy of the portuguese stock market risk and return in the 1977-2012 period

This paper analyses the Portuguese stock market since it reopened in 1977, with a special focus on the evolution of the statistic and stochastic characteristics of the market return throughout this 36 year period. The market return for the period of time between 1977 and 2012 (September 28th) is estimated and then compared with the return that would have been achieved with Government bonds and treasury bills, which allows us to confirm that the hierarchy of return / risk across the different financial instruments is verified. The market risk premium for this 36 year period is also estimated and a comparison with other markets is performed, suggesting that the Portuguese market’s risk has not been compensated by an adequate return. The study also examines the evolution of the Portuguese market’s volatility in the 1977-2012 period and compares it with other markets, showing the existence of extremely high peaks during the first 11 years, but indicating a downwards trend throughout the whole period under analysis. Finally, the correlation between market returns for Portugal and for other countries and the degree of integration are estimated and their evolution throughout time is assessed, leading to the conclusion that the performance of the Portuguese stock market has become increasingly correlated with major European markets – correlation with some markets close to 0.70 from 2000 onwards-, but that country-specific risk factors are still relevant.