João Frois Caldeira

Selection of a Portfolio of Pairs Based on Cointegration: A Statistical Arbitrage Strategy

Statistical arbitrage strategies, such as pairs trading and its generalizations, rely on the construction of mean- reverting spreads with a certain degree of predictability. This paper applies cointegration tests to identify stocks to be used in pairs trading strategies. In addition to estimating long-term equilibrium and to model the resulting residuals, we select stock pairs to compose a pairs trading portfolio based on an indicator of profitability evaluated in-sample. The profitability of the strategy is assessed with data from the Sao Paulo stock exchange ranging from January 2005 to October 2012. Empirical analysis shows that the proposed strategy exhibit excess returns of 16.38% per year, Sharpe Ratio of 1.34 and low correlation with the market.

Predicting the yield curve using forecast combinations

An examination of the statistical accuracy and economic value of modeling and forecasting the term structure of interest rates using forecast combinations is considered. Five alternative methods to combine point forecasts from several univariate and multivariate autoregressive specifications including dynamic factor models, equilibrium term structure models, and forward rate regression models are used. Moreover, a detailed performance evaluation based not only on statistical measures of forecast accuracy, but also on Sharpe ratios of fixed income portfolios is conducted. An empirical application based on a large panel of Brazilian interest rate future contracts with different maturities shows that combined forecasts consistently outperform individual models in several instances, specially when economic criteria are taken into account.

Capital Structure, Cash Holdings and Firm Value: A Study of Brazilian Listed Firms

This study analyzed the relationship between capital structure, cash holdings and firm value for a sample of publicly traded Brazilian firms, using panel data regressions, employing the fixed-effects estimator. Initially, regressions between capital structure (debt to total capital) and cash holdings (cash to assets), as well as between cash holdings and short and long term debt, were estimated. Next, a model between firm value, capital structure and cash holding was employed. The results of this study suggest that debt, both short and long termed, is negatively related to cash holdings, and that the level of cash holdings is also associated to a lower leverage. The study also presented indirect evidence that financially constrained firms hold more cash. With respect to the impact of the capital structure and cash holdings in the firm value, both short and long-term debt had negative marginal effects on the market value of equity, as well as the financial constraint, suggesting a risk-averse behavior of investors with respect to debt. Cash holdings, instead, is valued as positive by investors, but up to an optimum threshold level. Further from that point, the market capitalization is discounted with respect to cash holdings (inverted U-curve), in synergy with static trade-off theory of cash holdings.

Bond Portfolio Optimization Using Dynamic Factor Models

In this paper we use Markowitz’s approach to optimize bond portfolios. We derive closed form expressions for the vector of expected bond returns and for their conditional covariance based on a general class of dynamic heteroskedastic factor models. These estimators are then used as inputs to obtain mean-variance and minimum variance optimal bond portfolios. An empirical examination using the dynamic version of the Nelson & Siegel yield curve model and Svensson’s four factor model is applied involving a data set of 14 future contracts of Brazilian’s interbank rate with dierent maturities indicates that the optimized bond portfoliosA general class of dynamic factor models is used to obtain optimal bond portfolios, and to develop a duration-constrained mean-variance optimization, which can be used to improve bond indexing. An empirical application involving two large data sets of U.S. Treasuries shows that the proposed portfolio policy outperforms a set of yield curve strategies used in bond desks. Additionally, we propose a dynamic rule to switch among alternative bond investment strategies, and find that the benefits of such dynamic rule are even more pronounced when the set of available policies is augmented with the proposed mean-variance portfolios.

Seleção de carteiras utilizando o modelo Fama-French-Carhart

In this article the Fama-French-Carhart factor model is used to obtain short selling-constrained and unconstrained minimum variance portfolios. For that purpose, conditional covariance matrices are obtained based on a recent multivariate factor GARCH specification with a flexible modeling strategy for the common factors, for the individual assets, and for the factor loads proposed by Santos & Moura (2012). An application involving 61 stocks traded on the Sao Paulo stock exchange (BM\&FBovespa) shows that the proposed specification delivers less risky portfolios on an out-of-sample basis in comparison to several benchmark models, including existing factor approaches.

Estrutura de capital, liquidez de caixa e valor da empresa: estudo de empresas brasileiras cotadas em bolsa

This study analyzed the relationship among capital structure, cash holdings and firm value for a sample of publicly traded Brazilian firms, through panel data regressions, employing the fixed-effects estimator. Initially, it was estimated regressions between capital structure (debt to total capital) and cash holdings (cash to assets), as well as between cash holdings and short and long-term debt. Next, it was applied a regression among firm value, capital structure and cash holdings. The results of this study suggested that debt, both short and long-termed, is negatively related to cash holdings, and that the level of cash holdings is also associated to a lower leverage. The study also presented indirect evidence that financially constrained firms hold more cash. Regarding to the impact of the capital structure on the firm value, short-term debt, long-term debt and the financial constraint had negative marginal effects on the firm value, suggesting a risk-averse behavior of investors in relation to debt. Cash holdings, instead, is valued as positive by investors, but up to an optimum threshold level. Further, the market capitalization is discounted with respect to cash holdings (inverted U-curve), in synergy with static trade-off theory of cash holdings.

ESTIMAÇÃO DA ESTRUTURA A TERMO DA CURVA DE JUROS NO BRASIL ATRAVÉS DE MODELOS PARAMÉTRICOS E NÃO PARAMÉTRICOS

The present paper compares the principal methods for interpolation and adjustment of the yield curve and presents the main concepts relative to the curve, which are of great importance for both policy makers and market participants in general, especially those who directly participate in managing portfolios of fi xed income securities. The results show the superiority of non-parametric models in relation to parametric models with respect to the adjustment of the yield curve. On the other hand, the economic interpretation of the factors that make up the parametric models and their good performance to predict the yield curve has drawn much attention from both researchers and market participants in recent years.

The Role of Taxes and the Interdependence Among Corporate Financial Policies: Evidence from a Natural Experiment

In this paper, we investigate whether and how firms respond to an exogenous tax variation at the investor level by examining their financial decisions following a tax reform for pension funds in Brazil. Consistent with the tax-preference theory of dividends, we find that after implementation of the new law, firms tend to distribute more tax-deductible dividends — called Interest on Equity (IOE) — when the largest or second largest shareholder is a pension fund rather than other types of agents. Surprisingly, control firms also increased (but less than treated firms) their tax-deductible dividend payments, probably to attract more institutional investors and to reduce their cost of capital. We also find that treated firms reduced their leverage relative to control firms after the new law, suggesting that equity tax shields and debt tax shields act as substitute financial instruments. These results are robust to falsification tests and an alternative control group of firms based on a Propensity Score Matching procedure. Overall, our evidence suggests that tax is a first-order determinant of corporate financial decisions and firms adjust their policies in consideration of the interdependence among alternative financial instruments.

Break-Even Inflation Rate and the Risk Premium: An Alternative Approach to the VAR Models in Forecasting the CPI

This paper examines, for the Brazilian case, if break-even inflation rates (BEIR) extracted from fixed income securities are an unbiased estimator of consumer inflation, measured by the CPI. Our estimates suggest that BEIRs are informative about future inflation, especially for the maturity of three months. The main innovation of our work, however, is the method used for estimation, allowing us to conclude that the inflation risk premium, for some maturities considered, varies over time and is not irrelevant from the economic standpoint. We also compared the inflation forecasts obtained from BEIRs with the ones extracted from VAR models used by Central Bank and estimates from the Focus Survey Reports Top5s. The forecasts performed with BEIRs showed greater accuracy than those extracted from VAR models. These projections, however, underperformed those from the Top5s.

Combining Multivariate Volatility Forecasts: An Economic-Based Approach

We devise a novel approach to combine predictions of high-dimensional conditional covariance matrices using economic criteria based on portfolio selection. The combination scheme takes into account not only the portfolio objective function but also the portfolio characteristics in order to define the mixing weights. Three important advantages are that i) it does not require a proxy for the latent conditional covariance matrix, ii) it does not require optimization of the combination weights, and iii) can be calibrated in order to adjust the influence of the best performing models. Empirical application involving a data set with 50 assets over a 10-year time span shows that the proposed economic-based combinations of multivariate volatility forecasts leads to mean–variance portfolios with higher risk-adjusted performance in terms of Sharpe ratio as well as to minimum variance portfolios with lower risk on an out-of-sample basis with respect to a number of benchmark specifications.