Jose Renato Haas Ornelas

Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities Using Brazilian Real Currency Options

This paper uses the Liu et al. (2007) approach to estimate the optionimplied Risk-Neutral Densities (RND), real-world density (RWD), and relative risk aversion from the Brazilian Real/US Dollar exchange rate distribution. Our empirical application uses a sample of exchange-traded Brazilian Real currency options from 1999 to 2011. Our estimated value of the relative risk aversion is around 2.7, which is in line with other articles for the Brazilian Economy. Our out-of-sample results showed that the RND has some ability to forecast the Brazilian Real exchange rate, but when we incorporate the risk aversion, the out-of-sample performance improves substantially.

Herding Behaviour by Equity Foreign Investors on Emerging Markets

This article analyzes empirically the herding behavior on emerging markets, measuring the degree of herding by foreign investors on emerging equity markets, and evaluating the effects of this behavior on the riskiness of the markets. We use an adaptation of the LSV Herding measure and calculate this measure for a sample of 9 emerging markets over the period 2000-2005. Our overall mean, 4.75, although is lower than previous studies with emerging equity markets during the late 1990’s, still indicates the presence of herding behavior. Therefore we have evidence to support the hypothesis of herding decreasing from the period 1995-2000 to 2000-2005. However, the difference of the sample characteristics between our study and the previous ones may be the responsible for these results. The two main differences on our sample is that we use country allocation, instead of stock allocation (as in Bowe and Domuta (2004) and Kim and Wei (2002)), and the all universe of foreign investors, instead of only funds as in Borensztein and Gelos (2003). In this way an alternative hypothesis would be that funds herd in a higher intensity than the other types of investors. Regarding the effects of Herding on the risk measures, our results are mixed. Our regression analysis showed no effects of the Herding on the volatility, which is one of the main risk measures used by investors. However, the fat tails of equity return’s distribution may be caused by this herding behavior of foreigners. Further studies should address this issue in more in depth since the fat tails may be due to herding of other types of investors also.

Behavior and Effects of Equity Foreign Investors on Emerging Markets

This paper analyzes empirically the behavior of foreign investors on emerging equity markets in a cross-country setting, including 14 emerging markets from the year 2000 to 2005. We could find little evidence that these investors have brought problems to local emerging markets. Foreign investors seem to build and unwind their positions on emerging stock markets slowly enough to avoid problems as price pressure or volatility and kurtosis upswings on the stock market. Also, no negative effects on the foreign exchange market could be found. Regarding feedback trading, we support two hypotheses: positive feedback trading by hedged investors and negative feedback trading by unhedged investors. The latter has stronger statistical evidence and is more likely to occur in the real world. We conclude that there is no reason to impose long-term restrictions to foreign flows.

Apreçamento de opções de IDI usando o modelo CIR

The IDI option from the BM&F (Commodities and Futures Exchange) has unusual characteristics, that make its pricing different from common interest rate options. This paper develops a closed form formula for the pricing of these IDI options, using an arbitrage-free pricing approach. The model used considers only one stochastic factor: the short-term risk-free interest rate. The differential equation used to model the behavior of the interest rate comes from the CIR (COX INGERSOLL & ROSS, 1985) model, which has mean reversion property and does not allow negative nominal interest rates. It is also done a parameter estimation of the proposed model based on historic data, and then compares the theoretical price of the option based on these parameters with the market price and with the theoretical price considering the Vasicek (1977) model.

The Benefits of International Portfolio Diversification

Diversification is one of the main pillars of finance theory. However, its benefits for a conservative investor have been put in check recently with the financial crisis whether it really adds value to the investment profile. The objective of this study is to evaluate if the inclusion of new asset classes add value to a traditional conservative portfolio of USD and EUR bonds. To reach this goal we take into account several asset classes from equities to commodities and generate what would be the efficient frontier under both the Markowitz and the resampling approaches. We also evaluate the effect of the chosen numeraire in the analysis. Our results indicate that the benefits of diversification are higher for less risk averse investors and the choice of the numeraire has a dramatic effect in the portfolio optimization problem and so this is one of the main decisions the investor should care about.

Professional Portfolio Managers - a Setting for Momentum Strategies

Most real world market participants are professional portfolio managers (PPM), which means that they are not managing their own money, but rather managing money for other people (e.g. mutual funds, pension funds). This situation generates an agency feature which has relevant consequences, as investors lacking specialized knowledge may evaluate the PPM just based on his past performance (Performance Based Evaluation - PBE). The objective of this paper is to extend the analysis of the PPMs context inferring the effectiveness of feedback trading in this setting and so describing a source of markets inefficiency. In this sense, we propose a model which considers that professional investment is conducted by a relatively small number of highly specialized PPM using other peoples capital. In a deductive way, we reach four propositions which justify the effectiveness of momentum strategies.

Hidden Risks in Mean-Variance Optimization: An Integrated-Risk Asset Allocation Proposal

The traditional mean—variance asset allocation approach (Markowitz 1952) considers the volatility of returns as the only risk factor. However, investors are usually concerned about other types of risk or negative statistical properties of returns. For instance, investors usually care about credit and liquidity risks, and the skewness and kurtosis of returns. Thus, there is a risk premium embedded in their returns to compensate for additional risk taking. If those risk premia are not taken into account in the analysis, the results of the model tend to be distorted, with portfolios carrying these hidden risks dominating the risk-free portfolios. Moreover, the resulting portfolios for the traditional model tend to be badly behaved due to the overconfidence on the risk/return estimation. Black and Litterman (1992) realize that quantitative asset allocation models have not played the important role they should in global portfolio management, partly due to the previous problems.

Commodity Return Predictability: Evidence from Implied Variance, Skewness and their Risk Premia

This paper investigates the role of realized and implied and their risk premia (variance and skewness) for commodities’ future returns. We estimate these moments from high frequency and commodity futures option data that results in forward-looking measures. Risk premia are computed as the difference between implied and realized moments. We highlight, from a cross-sectional and time series perspective, the strong positive relation between commodity returns and implied skewness. Moreover, we emphasize the high performance of skewness risk premium. Additionally, we show that their portfolios exhibit the best risk-return tradeoff. Most of our results are robust to other factors such as the momentum and roll yield.

Expected Currency Returns and Volatility Risk Premia

This paper addresses the predictive ability of currency volatility risk premium - the difference between an implied and a realized volatility - over US dollar exchange rates using a time-series perspective. The intuition is that, when risk aversion sentiment increases, the market quickly discounts the currency, and later this discount is “accrued”, leading to a future currency appreciation. Based on two different samples with a diversified set of 32 currencies, I document a positive relationship between currency volatility risk premium and future currency returns. Results remain robust even after controlling for traditional fundamental predictors like Purchase Power Parity and interest rate differential

The Cost of Shorting, Asymmetric Performance Reaction and the Price Response to Economic Shocks

We propose and test a model that combines of performance-based arbitrage, short-sale constraints and costly arbitrage. In the model, after an unexpected good earning surprise, short covering causes a price overshooting for highly shorted stocks. However, this price reaction is limited by short-selling costs. Also, while short arbitrageurs are forced to reduce their positions after a negative return, positive returns have no immediate effect on their managed funds, i.e., we propose an asymmetric performance-based arbitrage. The paper empirically tests model predictions using Brazilian short-selling data. Results support the overshooting phenomenon and provide evidence that the intensity of the overshooting is influenced by short-selling borrowing fee. Results also suggest that arbitrageurs behave asymmetrically to good and bad earning news