Stops and bonanzas in the EU: Does being part of the Euro Area make a difference?

In this paper, we investigate whether being part of the euro area influences the conditional probability of going through a sudden stop or a bonanza of capital flows. Our sample period is from 1995 until 2014. We identify these two phenomena and we evaluate which push and pull factors help predict the conditional probability of experiencing one of them. We find that most countries had significant capital inflows until 2008 and that there were more sudden stops during the recent financial crisis than in any other moment in our sample. The factors that better help forecast the conditional probability of a sudden stop are global uncertainty (represented by the push factor “Volatility Index”), and the domestic economic activity (pull factors “GDP growth” and “consumer confidence”). An indicator of country risk (pull factor “change in credit rating”) is the most significant one for predicting bonanzas. Ultimately, we find no evidence that being part of the euro area influences the conditional probability of going through a sudden stop or a bonanza.

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.

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.

Trading the differences in expectations between the CDS and bond markets

This paper uses the framework developed by Vrugt (2010) to extract the recovery rate and term-structure of risk-neutral default probabilities implied in the cross-section of Portuguese sovereign bonds outstanding between March and August 2011. During this period the expectations on the recovery rate remain firmly anchored around 50 percent while the instantaneous default probability increases steadily from 6 to above 30 percent. These parameters are then used to calculate the fair-value of a 5-year and 10- year CDS contract. A credit-risk-neutral strategy is developed from the difference between the market price of a CDS of the same tenors and the fair-value calculated, yielding a sharpe ratio of 3.2

Zon-Optimus merger: Case study

The present Work Project was performed as a Case Study, analysing the merger between Zon, a leading Portuguese Pay TV operator and Optimus, the third largest mobile company in Portugal. The Case Study was developed with the purpose of understanding the value creation of the Zon-Optimus merger, being analysed the: (i) industry trends, (ii) parties’ contribution, (iii) pre-merger events, (iv) merger rationale, (v) deal structure and valuation, (vi) competition authority decision and (vii) competitive advantages and future strategy. Was also attached a Teaching Note where synergies, implied valuations, exchange ratios, shareholder agreements, swot analysis, among others, were duly analysed.

Management consulting Winning

A few decades ago, global management consulting was considered to be one of the most attractive industries due to its abnormal high profit margins and above-average growth rates. However, after the dot-com bubble in 2000 and the last global financial crisis, firms folded and growth rates declined sharply. In an attempt to overcome the uncertainty and information volatility, internationalization is commonly cited as a good strategy. WMC, a Portuguese SME founded in 2012, has now decided to expand its management consulting services. Therefore, a scoring model was created to assess selected European countries’ attractiveness taking into consideration macro and microeconomic data. Results show that Spain is the best option at the moment, mainly because it is where the company has the larger number of projects already developed and is more likely to leverage its network.

Cross sectional default probabilities in european corporate bonds

This study attempts to identify basis-trading opportunities in the European banking sector by comparing two different measures for the market’s assessment of risk: market-observed CDS spreads and model-implied Z-spreads. Using a sample of 10 banks, over a period of 3 years following the European banking crisis, it can be concluded that there were arbitrage opportunities in the sector, as evidenced by the derived negative bases.

Money never sleeps – overnight returns in equity markets

The present research analyses overnight returns’ outperformance in relation to daytime returns. In a first stage, it will be assessed whether these returns are robust throughout time, markets and across different scopes of analysis (e.g. weekdays, months, states of the economy). In a second stage, several hypothesis will be empirically tested, in an attempt to understand what drives non-trading period returns (e.g. liquidity, market volatility). Even though several authors have analysed overnight returns and suggested several explanatory factors, there seems to be no consensus in the literature regarding its drivers.

An equity wealth preservation strategy: Following the macro trend

Financial crisis have happened in the past and will continue to do so in the future. In the most recent 2008 crisis, global equities (as measured by the MSCI ACWI index) lost a staggering 54.2% in USD, on the year. During those periods wealth preservation becomes at the top of most investor’s concerns. The purpose of this paper is to develop a strategy that protects the investment during bear markets and significant market corrections, generates capital appreciation, and that can support Millennium BCP’s Wealth Management Unit on their asset allocation procedures. This strategy extends the Dual Momentum approach introduced by Gary Antonacci (2014) in two ways. First, the investable set of securities in the equities space increases from two to four. Besides the US it will comprise the Japanese, European (excl. UK) and EM equity indices. Secondly, it adds a volatility filter as well as three indicators related to the business cycle and the state of the economy, which are relevant to decide on the strategy’s exposure to equities. Overall the results attest the resiliency of the strategy before, during and after historical financial crashes, as it drastically reduces the downside exposure and consistently outperforms the benchmark index by providing higher mean returns with lower variance.

Noble energy oil & Gas

Equity research report

The role of dispersion into assets allocation

Dispersion of returns has gained a lot of attention as a measure to distinguish good and bad investment opportunities time. In the following dissertation, the cross-sectional returns volatility is analyzed over a fifteen year period across the S&P100 Index composition. The main inference drawn from the data sample is that the canonical measure of dispersion is highly macro-risk driven and therefore more biased towards returns volatility rather than its correlation component.

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.

Improving accuracy of inflation forecasts using macroeconomic information

This thesis examines the effects of macroeconomic factors on inflation level and volatility in the Euro Area to improve the accuracy of inflation forecasts with econometric modelling. Inflation aggregates for the EU as well as inflation levels of selected countries are analysed, and the difference between these inflation estimates and forecasts are documented. The research proposes alternative models depending on the focus and the scope of inflation forecasts. I find that models with a Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) in mean process have better explanatory power for inflation variance compared to the regular GARCH models. The significant coefficients are different in EU countries in comparison to the aggregate EU-wide forecast of inflation. The presence of more pronounced GARCH components in certain countries with more stressed economies indicates that inflation volatility in these countries are likely to occur as a result of the stressed economy. In addition, other economies in the Euro Area are found to exhibit a relatively stable variance of inflation over time. Therefore, when analysing EU inflation one have to take into consideration the large differences on country level and focus on those one by one.

A comparative review of risk based portfolio allocations: An empirical study throughout rising yields

Since the financial crisis, risk based portfolio allocations have gained a great deal in popularity. This increase in popularity is primarily due to the fact that they make no assumptions as to the expected return of the assets in the portfolio. These portfolios implicitly put risk management at the heart of asset allocation and thus their recent appeal. This paper will serve as a comparison of four well-known risk based portfolio allocation methods; minimum variance, maximum diversification, inverse volatility and equally weighted risk contribution. Empirical backtests will be performed throughout rising interest rate periods from 1953 to 2015. Additionally, I will compare these portfolios to more simple allocation methods, such as equally weighted and a 60/40 asset-allocation mix. This paper will help to answer the question if these portfolios can survive in a rising interest rate environment.

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.