Effect of European Sovereign debt crisis on banks’ stock market performances: application to Portuguese data

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

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

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.

O abuso de informação privilegiada (insider trading)

In the stock market, information takes on special relevance, due to the market’s permanent updating and the great fluidity of information existent therein. Just as in any other negotiations, the party with the better information has a bargaining advantage, as it is able to make more advantageous business decisions. However, unlike most other markets, the proper functioning of the stock market is greatly dependent on investors’ trust in the market itself. As such, if there are investors who, due to any condition they possess or office they hold, have access to relevant information which is not accessible to the general public, distrust is bred within the market and, consequently, investment is lessened. Thus, there is a need to prevent those who hold privileged information from using it in abusive ways. In Portugal, abuse of privileged information is set out and punished criminally in Article 378. of the Portuguese Securities Code (‘Código dos Valores Mobiliários’). In this dissertation, I have set out, firstly, to analyze the inherent conditions for there to be a crime of abuse of privileged information; secondly, to analyze two well-known cases, which took place and were decided in other jurisdictions, and attempt to understand how these cases would fall under Article 378. of the Portuguese Securities Code. Whereas the first case, Chiarella v. United States, was scrutinize under Article 378 of the Portuguese Securities Code, in the second, Lafonta v. AMF, the conclusion arrived at was that the crime taken place was different. This analysis allowed, on one hand, the application to a particular case of prerequisites and concepts which were explained, at a first approach, from a more theoretical perspective; on the other hand, it also allowed the further development of specific aspects of the regime, namely the difference between an insider and a tipee, as well as to more clearly set out the limits to the precise character of the information at hand.

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.

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

The accuracy of the escrowed dividend model on the value of European options on a stock paying discrete dividend

This project characterizes the accuracy of the escrowed dividend model on the value of European options on a stock paying discrete dividend. A description of the escrowed dividend model is provided, and a comparison between this model and the benchmark model is realized. It is concluded that options on stocks with either low volatility, low dividend yield, low ex-dividend to maturity ratio or that are deep in or out of the money are reasonably priced with the escrowed dividend model.

The impact of credit conditions on market liquidity – a case for European stock markets

The recent financial crisis has drawn the attention of researchers and regulators to the importance of liquidity for stock market stability and efficiency. The ability of market-makers and investors to provide liquidity is constrained by the willingness of financial institutions to supply funding capital. This paper sheds light on the liquidity linkages between the Central Bank, Monetary Financial Institutions and market-makers as crucial elements to the well-functioning of markets. Results suggest the existence of causality between credit conditions and stock market liquidity for the Eurozone between 2003 and 2015. Similar evidence is found for the UK during the post-crisis period. Keywords: stock

Trading the changes of stock market index composition: Evidence from European markets

This paper studies the changes in European stock market indexes composition from 1995 to 2015. It was found that there are mixed price effects producing abnormal returns around the effective replacement of added and deleted stocks. The price pressure hypothesis seems to hold for added stocks in some indexes but not for deleted stocks as there is not a clear inversion of behaviour after the replacement. Finally, the building and back testing of a trading strategy aiming to capture some of those abnormal returns shows it yields a Sharpe Ratio of 1.4 and generates an annualised alpha of 11%.

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.