Extreme observations and diversification in Latin American emerging equity markets

In this paper, we focus on the tails of the unconditional distribution of Latin American emerging markets stock returns. We explore their implications for portfolio diversification according to the safety tirst principIe, tirst proposed by Roy (1952). We tind that the Latin American emerging markets have signiticantly fatter tails than industrial markets. especially, the lower tail of the distrihution. We consider the implication of the safety tirst principIe for a U .S. investor who creates a diversitied portfolio using Latin American stock markets. We tind that a U.S. investor gains by adding Latin American equity markets to her purely domestic portfolio. For different parameter specitications. we finu a more realistic asset allocation than the one suggested by the Iiterature haseu on the traditional mean-variance framework.

Speculative bubbles and contagion: analysis of volatility's clusters during the DotCom bubble based on the dynamic conditional correlation model

Reviewing the de nition and measurement of speculative bubbles in context of contagion, this paper analyses the DotCom bubble in American and European equity markets using the dynamic conditional correlation (DCC) model proposed by (Engle and Sheppard 2001) as on one hand as an econometrics explanation and on the other hand the behavioral nance as an psychological explanation. Contagion is de ned in this context as the statistical break in the computed DCCs as measured by the shifts in their means and medians. Even it is astonishing, that the contagion is lower during price bubbles, the main nding indicates the presence of contagion in the di¤erent indices among those two continents and proves the presence of structural changes during nancial crisis

Corporate governance and its influence on the investment decision process of equity market's professionals: An inside view of how corporate governance issues influence the decision-making process of sell-side and buy-side professionals when analyzing Brazilian listed companies

Corporate governance has been in the spotlight for the past two decades, being subject of numerous researches all over the world. Governance is pictured as a broad and diverse theme, evolving through different routes to form distinct systems. This scenario together with 2 types of agency problems (investor vs. management and minorities vs. controlling shareholders) produce different definitions for governance. Usually, studies investigate whether corporate governance structures influence firm performance, and company valuation. This approach implies investors can identify those impacts and later take them into consideration when making investment decisions. However, behavioral finance theory shows that not always investors take rational decisions, and therefore the modus operandi of those professionals needs to be understood. So, this research aimed to investigate to what extent Brazilian corporate governance standards and practices influence the investment decision-making process of equity markets' professionals from the sell-side and buy-side. This exploratory study was carried out through qualitative and quantitative approaches. In the qualitative phase, 8 practitioners were interviewed and 3 dimensions emerged: understanding, pertinence and practice. Based on the interviews’ findings, a questionnaire was formulated and distributed to buy-siders and sell-siders that cover Brazilian stocks. 117 respondents from all over the world contributed to the study. The data obtained were analyzed through structural equation modeling and descriptive statistics. The 3 dimensions became 5 constructs: definition (institutionalized governance, informal governance), pertinence (relevance), practice (valuation process, structured governance assessment) The results of this thesis suggest there is no definitive answer, as the extent to which governance will influence an investment decision process will depend on a number of circumstances which compose the context. The only certainty is the need to present a “corporate governance behavior”, rather than simply establishing rules and regulations at firm and country level.

The influence of the global crisis on the slowdown of the emerging markets

A presente dissertação investiga a relação empírica entre a crise financeira de 2007-2009, a crise da dívida soberana de 2010-2012 e a recente desaceleração dos mercados de capitais nos mercados emergentes. A exposição dos mercados emergentes à crise nos desenvolvidos é quantificada através de um modelo de interdependência de factores. Os resultados mostram que estes sofreram, de facto, um choque provocado por ambas as crises. No entanto, este foi um choque de curta duração enquanto os mercados desenvolvidos ainda lutavam com as consequências resultantes das sucessivas crises financeiras. A análise do modelo mostra ainda que após a crise da divida soberana, enquanto os mercados desenvolvidos iniciam a sua recuperação, os emergentes desaceleram o seu crescimento. De forma a completar a análise do modelo foi efectuado um estudo sobre a influência dos fluxos de capitais entre os mercados emergentes e desenvolvidos na direcção do seu crescimento, revelando que existe uma relação entre estes dois eventos.

Liberalização da conta de capital e fluxos de portfólio para o Brasil

The present work seeks to investigate the dynamics of capital account liberalization and its impact on short run capital flows to Brazil in the period of 1995-2002, considering different segments such as the monetary, derivative and equity markets. This task is pursued by developing a comparative study of financial flows and examining how it is affected by the uncovered interest parity, country risk and the legislation on portfolio capital flows. The empirical framework is based on a vector autoregressive (VAR) analysis using impulse-response functions, variance decomposition and Granger causality tests. In general terms the results indicate a crucial role played by the uncovered interest parity and the country risk to explain portfolio flows, and a less restrictive (more liberalized) legislation is not significant to attract such flows.

Moral hazard and nonlinear pricing in a general equilibrium model

The paper analyzes a two period general equilibrium model with individual risk and moral hazard. Each household faces two individual states of nature in the second period. These states solely differ in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period households choose a non-observable action. Higher leveis of action give higher probability of the good state of nature to occur, but lower leveIs of utility. Households have access to an insurance market that allows transfer of income across states of oature. I consider two models of financiaI markets, the price-taking behavior model and the nonlínear pricing modelo In the price-taking behavior model suppliers of insurance have a belief about each household's actíon and take asset prices as given. A variation of standard arguments shows the existence of a rational expectations equilibrium. For a generic set of economies every equilibrium is constraíned sub-optímal: there are commodity prices and a reallocation of financiaI assets satisfying the first period budget constraint such that, at each household's optimal choice given those prices and asset reallocation, markets clear and every household's welfare improves. In the nonlinear pricing model suppliers of insurance behave strategically offering nonlinear pricing contracts to the households. I provide sufficient conditions for the existence of equilibrium and investigate the optimality properties of the modeI. If there is a single commodity then every equilibrium is constrained optimaI. Ir there is more than one commodity, then for a generic set of economies every equilibrium is constrained sub-optimaI.

Testing the hypothesis of contagion using multivariate volatility models

The aim of this paper is to test whether or not there was evidence of contagion across the various financial crises that assailed some countries in the 1990s. Data on sovereign debt bonds for Brazil, Mexico, Russia and Argentina were used to implement the test. The contagion hypothesis is tested using multivariate volatility models. If there is any evidence of structural break in volatility that can be linked to financial crises, the contagion hypothesis will be confirmed. Results suggest that there is evidence in favor of the contagion hypothesis.

The theory of storage and the volatility in commadity markets

Esse estudo estende a metodologia de Fama e French (1988) para testar a hipótese derivada da Teoria dos Estoques de que o convenience yield dos estoques diminui a uma taxa decrescente com o aumento de estoque. Como descrito por Samuelson (1965), a Teoria implica que as variações nos preços à vista (spot) e dos futuros (ou dos contratos a termo) serão similares quando os estoques estão altos, mas os preços futuros variarão menos que os preços à vista quando os estoques estão baixos. Isso ocorre porque os choques de oferta e demanda podem ser absorvidos por ajustes no estoque quando este está alto, afetando de maneira similar os preços à vista e futuros. Por outro lado, quando os estoques estão baixos, toda a absorção dos choques de demanda ou oferta recai sobre o preço à vista, uma vez que os agentes econômicos têm pouca condição de reagir à quantidade demandada ou ofertada no curto prazo.

Estimating and forecasting the volatility of Brazilian finance series using arch models (Preliminary Version)

The goal of this paper is to present a comprehensive emprical analysis of the return and conditional variance of four Brazilian …nancial series using models of the ARCH class. Selected models are then compared regarding forecasting accuracy and goodness-of-…t statistics. To help understanding the empirical results, a self-contained theoretical discussion of ARCH models is also presented in such a way that it is useful for the applied researcher. Empirical results show that although all series share ARCH and are leptokurtic relative to the Normal, the return on the US$ has clearly regime switching and no asymmetry for the variance, the return on COCOA has no asymmetry, while the returns on the CBOND and TELEBRAS have clear signs of asymmetry favoring the leverage e¤ect. Regarding forecasting, the best model overall was the EGARCH(1; 1) in its Gaussian version. Regarding goodness-of-…t statistics, the SWARCH model did well, followed closely by the Student-t GARCH(1; 1)

Hedging options in a garch environment: testing the term structure of stochastic volatility models

This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S&P500 index volatility. U sing measurements of the ability of volatility models to hedge and value term structure dependent option positions, we fmd that hedging tests support the Black-Scholes delta and gamma hedges, but not the simple vega hedge when there is no model of the term structure of volatility. With various models, it is difficult to improve on a simple gamma hedge assuming constant volatility. Ofthe volatility models, the GARCH components estimate of term structure is preferred. Valuation tests indicate that all the models contain term structure information not incorporated in market prices.

Simulation-based smoothing and filtering in factor stochastic volatility models : two econometric applications

In this article we use factor models to describe a certain class of covariance structure for financiaI time series models. More specifical1y, we concentrate on situations where the factor variances are modeled by a multivariate stochastic volatility structure. We build on previous work by allowing the factor loadings, in the factor mo deI structure, to have a time-varying structure and to capture changes in asset weights over time motivated by applications with multi pIe time series of daily exchange rates. We explore and discuss potential extensions to the models exposed here in the prediction area. This discussion leads to open issues on real time implementation and natural model comparisons.

Simulation -based smoothing and filtering in factor stochastic volatility models : two econometric applications (July-2001)

The past decade has wítenessed a series of (well accepted and defined) financial crises periods in the world economy. Most of these events aI,"e country specific and eventually spreaded out across neighbor countries, with the concept of vicinity extrapolating the geographic maps and entering the contagion maps. Unfortunately, what contagion represents and how to measure it are still unanswered questions. In this article we measure the transmission of shocks by cross-market correlation\ coefficients following Forbes and Rigobon's (2000) notion of shift-contagion,. Our main contribution relies upon the use of traditional factor model techniques combined with stochastic volatility mo deIs to study the dependence among Latin American stock price indexes and the North American indexo More specifically, we concentrate on situations where the factor variances are modeled by a multivariate stochastic volatility structure. From a theoretical perspective, we improve currently available methodology by allowing the factor loadings, in the factor model structure, to have a time-varying structure and to capture changes in the series' weights over time. By doing this, we believe that changes and interventions experienced by those five countries are well accommodated by our models which learns and adapts reasonably fast to those economic and idiosyncratic shocks. We empirically show that the time varying covariance structure can be modeled by one or two common factors and that some sort of contagion is present in most of the series' covariances during periods of economical instability, or crisis. Open issues on real time implementation and natural model comparisons are thoroughly discussed.

Reality check for volatility models

Asset allocation decisions and value at risk calculations rely strongly on volatility estimates. Volatility measures such as rolling window, EWMA, GARCH and stochastic volatility are used in practice. GARCH and EWMA type models that incorporate the dynamic structure of volatility and are capable of forecasting future behavior of risk should perform better than constant, rolling window volatility models. For the same asset the model that is the ‘best’ according to some criterion can change from period to period. We use the reality check test∗ to verify if one model out-performs others over a class of re-sampled time-series data. The test is based on re-sampling the data using stationary bootstrapping. For each re-sample we check the ‘best’ model according to two criteria and analyze the distribution of the performance statistics. We compare constant volatility, EWMA and GARCH models using a quadratic utility function and a risk management measurement as comparison criteria. No model consistently out-performs the benchmark.

Volatility modelling in the forex market: an empirical evaluation

We compare three frequently used volatility modelling techniques: GARCH, Markovian switching and cumulative daily volatility models. Our primary goal is to highlight a practical and systematic way to measure the relative effectiveness of these techniques. Evaluation comprises the analysis of the validity of the statistical requirements of the various models and their performance in simple options hedging strategies. The latter puts them to test in a "real life" application. Though there was not much difference between the three techniques, a tendency in favour of the cumulative daily volatility estimates, based on tick data, seems dear. As the improvement is not very big, the message for the practitioner - out of the restricted evidence of our experiment - is that he will probably not be losing much if working with the Markovian switching method. This highlights that, in terms of volatility estimation, no clear winner exists among the more sophisticated techniques.

Growth and exchange rate volatility: a panel data analysis

The aim of this article is to assess the role of real effective exchange rate volatility on long-run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009. With an accurate measure for exchange rate volatility, the results for the two-step system GMM panel growth models show that a more (less) volatile RER has significant negative (positive) impact on economic growth and the results are robust for different model specifications. In addition to that, exchange rate stability seems to be more important to foster long-run economic growth than exchange rate misalignment