Carlos Patricio Samanez

On the comparison of Schwartz and Smith’s two- and three-factor models on commodity prices

Since Schwartz and Smith (2000) published their study on two-factor model on commodity prices, many studies have used this model and others have extended it. The authors also proposed the three-factor model due to the poor fitting of the two-factor one on long-term futures prices. At that time the authors had only long-term prices from a private source to calibrate, test and compare these models. No public data on long-term future contracts were available. On the other hand, during the last decade the commodity prices soared as did the liquidity of long-term contracts. This means that the interest of the agents in the management of their risk on long-term positions increased the same way and this is the motivation for this study. In this article, we revisit the comparison between two- and three-factor models using public data for short- and long-term contracts (we use up to the 67-month-ahead contract). We also provide a detailed derivation of the three-factor model differently from that of the original article. Following the original article of Schwartz and Smith, we used oil futures prices traded on the New York Mercantile Exchange to calibrate the model. The results show a better fit of the three-factor model for the term structure of prices and volatilities mainly for long maturities contracts, while the two-factor model in most portions of the curve underestimates the risk premiums. This type of analysis is important not only for daily agents negotiating the physical commodities through long-term contracts but also for investment decisions on development of real projects.

Análise de desempenho dos investimentos sustentáveis no mercado acionário brasileiro

We studied the Corporate Sustainability Index (ISE) of the Brazilian Mercantile, Futures and Stock Exchange (BM&FBOVESPA), with the main objective of analyzing the performance of sustainable investments in the Brazilian stock market during the period from December 2005 to December 2010. We mainly used the following measures: Sharpe, Treynor, Jensen, Sortino, Modigliani and Modigliani, and Omega. Our results show that although sustainable investments exhibited some interesting characteristics, such as low diversifiable risk and increasing liquidity, they did not achieve satisfactory financial performance in the analysis period. As the adoption of criteria that demand high performance of companies in relation to sustainability issues becomes mandatory, the value of these investments will tend to increase.

Dynamic relationships between crude oil prices and socially responsible investing in Brazil: evidence for linear and non-linear causality

ABSTRACT Recent years have witnessed an increasing interest in socially responsible investing (SRI), reflecting investors’ growing awareness of social, environmental, ethical and corporate governance issues. At the same time, the effect of oil price shocks on stock price returns has become a prominent issue due to surges in energy prices. Using the Brazilian corporate sustainability index (ISE) as a benchmark for socially responsible investments in the Brazilian stock market, the present study extends the understandings on the impact of oil prices on stock price behaviour, focusing on a new class of assets: those from socially responsible firms. To this end, apart from conventional linear causality approaches, we apply a nonparametric test by Diks and Panchenko (DP) on daily data spanning from January 2008 to December 2015 to test for non-linear causality, before and after controlling for conditional heteroscedasticity. Our findings show that, in spite of their efforts to become more socially responsible, firms that have adhered to the ISE in recent years are influenced by crude oil spot prices, especially the WTI crude. In line with previous studies, we also provide consistent evidence that the Brazilian stock market, as a whole, is associated with the international crude oil market.

Ex-ante economic assessment in incremental R&D projects: technical and development time uncertainties addressed by the real options theory

This paper analyzes changes in the assessment of an incremental R&D project by an industrial firm with the progressive consideration of the endogenous treatment of its main sources of uncertainty: technical performance and development time. We found that the project, which was unfeasible under a deterministic assessment by Net Present Value (NPV) without flexibility, became feasible after the treatment of the technical uncertainty by a real options model (NPV with flexibility). Moreover, the project gained approximately 51 percent more value in flexibility when a treatment of the development time uncertainty was added to the model. In terms of additional flexibility per unit cost of the project, the gain is approximately 44 percent. This result demonstrates the importance of addressing the combination of these sources of uncertainty in R&D projects, especially those that are incremental, which is a difficult category to analyze in terms of quantitative benefits.

Evaluating the economy embedded in the Brazilian ethanol–gasoline flex-fuel car: a Real Options approach

The introduction of the flex-fuel cars in the Brazilian market in 2003 changed considerably the consumer decision-making process. Prior to this date, it was necessary to choose the automobile type only by gasoline or by ethanol fuel; today it is possible to choose a car type with both fuel options. This flexibility generates economic advantages for his owner, but what are the financial benefits of a flex-fuel car in comparison with a car using only gasoline? Geographically, where is the owner of the benefits from this flexibility located? This article presents an empirical application of the Real Options Theory in the analysis of the flex-fuel car option for five geographic Brazilian regions: Northern, Northeastern, Central-Western, Southeastern and Southern. The regional price differences as well as the consumer preferences of these regions were met. For this purpose, historical fuel prices were considered stochastic and following a Mean Reverting Stochastic process. The prediction and option values were generated by a Monte Carlo simulation. The results indicated that the option embedded on the Brazilian flex-fuel car adds considerable value to the owner in all regions and car models considered, with the Southeastern Region receiving most benefits by the flex option.

Avaliação da opção de troca de combustível no ­carro brasileiro flex: um estudo por região geográfica ­usando teoria de opções reais e simulação estocástica

The introduction of the flex-fuel car to the Brazilian market in 2003 considerably changed the consumer decision making process. Previously, it was necessary to choose the automobile type, and then the market moved to only gasoline or only sugarcane ethanol; currently, it is possible to choose a car that can run with a combination of these fuels. This flexibility generates economic advantages for the owner, but what are the financial benefits of flex-fuel technology? Geographically, where must the owner be located to have this flexibility? The present paper empirically applies the real options theory to an analysis of the options embedded in the flex-fuel car for five Brazilian geographic regions. The regional price differences and the consumer preferences within these regions were analyzed. For this purpose, historical fuel prices were considered to be stochastic, thus following mean reverting stochastic processes. Price forecasts and option values were generated by Monte Carlo simulation. The results indicated that the option to choose the most inexpensive fuel adds considerable value for the flex-fuel car owner in all regions and car models considered, with the southern region seeing the greatest benefit in the flex option.

Canonical correlation analysis in the definition of weight restrictions for data envelopment analysis

This work investigates the use of canonical correlation analysis (CCA) in the definition of weight restrictions for data envelopment analysis (DEA). With this purpose, CCA limits are introduced into Wong and Beasleys DEA model. An application of the method is made over data from hospitals in 27 Brazilian cities, producing as outputs average payment (average admission values) and percentage of hospital admissions according to disease groups (International Classification of Diseases, 9th Edition), and having as inputs mortality rates and average stay (length of stay after admission (days)). In this application, performance scores were calculated for both the (CCA) restricted and unrestricted DEA models. It can be concluded that the use of CCA-based weight limits for DEA models increases the consistency of the estimated DEA scores (more homogenous weights) and that these limits do not present mathematical infeasibility problems while avoiding the need for subjectively restricting weight variation in DEA.

Economic valuation of a toll road concession with traffic guarantees and the abandonment option

Governments worldwide have been encouraging private participation in transportation infrastructure. To increase the feasibility of a project, public-private partnership (PPP) may include guarantees or other support to reduce the risks for private investors. It is necessary to value these opportunities under a real options framework and thereby analyze the projects economic feasibility and risk allocation. However, within this structure, sponsors have an implicit option to abandon the project that should be simultaneously valued. Thus, this article proposes a hypothetical toll road concession in Brazil with a minimum traffic guarantee, a maximum traffic ceiling, and an implicit abandonment option. Different combinations of the minimum and maximum levels are presented, resulting in very high or even negative value added to the net present value (NPV). The abandonment option impacts the level of guarantee to be given. Governments should calibrate an optimal level of guarantees to avoid unnecessarily high costs, protect the returns of the sponsor, and lower the probability of abandonment.

Avaliação de opções de swing em contratos de gás natural usando um modelo de dois fatores

In the natural gas (NG) market, contracts incorporate flexibility in the volume of the product. These contracts are known as swing options. Such contracts allow the option holder to exercise the right to receive greater or smaller amounts of NG contracted in accordance with market. Variation in the price of NG, which is the main source of uncertainty, was modeled in this study as a stochastic process using the two-factor model of Schwartz and Smith (2000), which was incorporated into assessment of the quarterly seasonality. To estimate NG spot prices using the Henry Hub prices of futures contracts traded on the NYMEX, it was necessary to implement the Kalman filter. The pricing of the option was conducted using the binomial tree model bi-variable developed by Hahn and Dyer (2011). The value of the swing option was positive in both cases analyzed, indicating that this option should be considered for inclusion in NG contracts. The characteristics of the analysis were the same as those specified in Jaillet, Ronn and Tompaidis (2004).

Evaluating the risk premium in the U.S.A. natural gas market: evidence from low-price regime

ABSTRACT In recent years, the U.S.A. natural gas market has seen enormous changes. The expectations of abundant supply of shale gas and the slow U.S.A. economic recovery have pushed gas prices below US