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Este artículo presenta un análisis descriptivo de las prácticas y supuestos adoptados en los informes de valoración de las empresas brasileñas. Las metodologías y los supuestos de los modelos de pronóstico se analizaron utilizando informes de valoración aportados por la Comisión de Valores Mobiliarios de Brasil desde 2004 hasta 2018. Los resultados indican una preferencia por el método de flujo de caja descontado sobre períodos de proyección de entre 5 y 16 años, medidos en moneda nacional sin ajustes por inflación. Las tasas de crecimiento, tanto nominales como reales, no fueron homogéneas debido a las grandes fluctuaciones a lo largo de los años y entre los sectores analizados. Además, las proyecciones de las variables macroeconómicas no resultaron precisas en comparación con los valores económicos reales. También se analizaron las variables utilizadas para determinar los múltiplos presentados en los informes de valoración; los resultados indican que cuanto más elevado sea el riesgo, menor será el múltiplo proyectado y cuanto más elevado el endeudamiento y la tasa de inflación, más elevado será el valor del múltiplo. This paper performs a descriptive analysis of the practices and assumptions adopted in the valuation reports of Brazilian companies. The methodologies and assumptions of the forecast models were analysed using valuation reports available from the Brazilian Securities and Exchange Commission between 2004 – 2018. The results indicate a preference for the discounted cash flow methodology over projection periods of between five and sixteen years that are measured in national currency without adjustment for inflation. Growth rates, both nominal and real, were not homogeneous due to large fluctuations over the years and among the sectors analysed. Moreover, the macroeconomic variable projections were not accurate when compared to actual economic values. The variables used to determine multiples presented in valuation reports were also analysed; the results indicate that the higher the risk, the lower the projected multiple, and the higher the indebtedness and the inflation rate, the higher the multiple value.

We show that when asset returns satisfy a location-scale property (possibly conditionally as e.g. for a multivariate generalized hyperbolic distribution) and the investor has law-invariant and increasing preferences, the optimal investment portfolio always exhibits two-fund or three-fund separation. As a consequence, we recover many of the three-fund (and two-fund) separation theorems that have been derived in the literature under very specific assumptions on preferences or distributions. These are thus merely special cases of the general characterization result for optimal portfolios that we provide. [ABSTRACT FROM AUTHOR]

This paper provides novel evidence that child health affects adult financial behavior, that is, risky asset market participation. We do so by using a longitudinal dataset with a rich set of covariates and exploit sibling fixed‐effects (FE) to control for invariant unobserved heterogeneity. We begin by proposing a new mechanism working via skill formation and portfolio choice. To be precise, we test two hypotheses. First, we expect a negative correlation between poor child health and risky asset market participation. Second, this correlation should be mostly explained by differences in skills. To test these hypotheses, we use data from the National Longitudinal Study of Youth 1979 (NLSY79). Our results show that poor child health is associated with an 11 pp decrease in adult risky market participation conditional on demographics and family background. Moreover, our results suggest that disruption in pre‐labor market skill formation is a main mediator of this relationship. These results are robust to a wide range of robustness checks. Our findings have implications for the design of health policies and policies intended to increase financial literacy and asset market participation. [ABSTRACT FROM AUTHOR]

This study analyzes the impact of a newly emerging type of anti-money laundering regulation that obligates cryptocurrency exchanges to report suspicious transactions to financial authorities. We build a theoretical model for the reporting decision structure of a private bank or cryptocurrency exchange and show that an inferior ability to detect money laundering (ML) increases the ratio of reported transactions to unreported transactions. If a representative money launderer makes an optimal portfolio choice, then this ratio increases further. Our findings suggest that cryptocurrency exchanges will exhibit more excessive reporting behavior under this regulation than private banks. We attribute this result to cryptocurrency exchanges' inferior ML detection abilities and their proximity to the underground economy. [ABSTRACT FROM AUTHOR]

Time‐varying asset returns lead highly risk‐averse investors to choose market‐timing exposures that increase in their horizon, in agreement with the common advice to reduce risk with age, but in contrast to theoretical work that prescribes constant portfolio weights. In a market where an investor with constant absolute risk aversion and finite horizon trades an asset with temporary fluctuations, we find asymptotically optimal investment strategies that are independent of the asset's average return and decline over time with a power of the remaining horizon, with the exponent determined by the curvature of mean reversion. For long‐term safe assets, which have a zero average return, the investor's certainty equivalent declines over time at a lower rate, implying that a nonzero average return is negligible for asymptotically optimal strategies but critical to their performance. [ABSTRACT FROM AUTHOR]

The selection of an appropriate portfolio hedging strategy is a concern for both investment theory and practice. Options are believed to be flexible and useful hedging instruments, but they are also complicated to manage and costly to implement in a strategy, intensifying the financial leverage, and thus increasing the riskiness of a portfolio. This paper investigates the hedging strategies with options as efficient hedging tools and the possibility to identify an efficient hedging strategy with options that will not result in smaller utility for investors, compared to other strategies under defined criteria. The empirical analysis is based on simulated returns of the following trading strategies: a covered call, protective put, collar, ratio covered call strategy and a buy-and-hold unhedged stock. The return distributions of these strategies are compared using the stochastic dominance criteria up to the third degree, which is an appropriate approach for investors who prefer the greater return, are risk-averse in terms of downside volatility and in terms of a loss, and who prefer greater positive skewness. The results obtained from the simulated returns indicate that portfolio hedging strategies with options are never dominated by an unhedged portfolio. This finding confirms that hedging strategies with options are useful tools for risk hedging. The methodology used in the paper also presents the general framework that can be used in investment decision-making in the presence of uncertainty. [ABSTRACT FROM AUTHOR]

We address a portfolio selection problem that combines active (outperformance) and passive (tracking) objectives using techniques from convex analysis. We assume a general semimartingale market model where the assets' growth rate processes are driven by a latent factor. Using techniques from convex analysis we obtain a closed-form solution for the optimal portfolio and provide a theorem establishing its uniqueness. The motivation for incorporating latent factors is to achieve improved growth rate estimation, an otherwise notoriously difficult task. To this end, we focus on a model where growth rates are driven by an unobservable Markov chain. The solution in this case requires a filtering step to obtain posterior probabilities for the state of the Markov chain from asset price information, which are subsequently used to find the optimal allocation. We show the optimal strategy is the posterior average of the optimal strategies the investor would have held in each state assuming the Markov chain remains in that state. Finally, we implement a number of historical backtests to demonstrate the performance of the optimal portfolio. [ABSTRACT FROM AUTHOR]

The paper considers a nonparametric approach to determine portfolio efficiency using specific directions toward the portfolio frontier function. This approach allows for a straightforward incorporation of higher moments of the returns distribution beyond mean and variance. The nonparametric approach is extended by the computation of optimal directions endogenously by maximizing the distance toward the portfolio frontier as a novel methodological feature. An empirical application to Fama–French portfolios demonstrates the applicability of the nonparametric approach. The results show that the optimal directions to the frontier depend on the portfolio considered as well as on the period for which the moments are estimated. Skewness in particular plays a role in determining the optimal direction, whereas kurtosis seems to be less crucial. [ABSTRACT FROM AUTHOR]

We explore martingale and convex duality techniques to maximize expected risk-averse utility from consumption in a general multi-dimensional (non-Markovian) semimartingale market model with jumps and non-linear wealth dynamics. The model allows to incorporate additional cash flows via non-linear margin payment functions in the drift term that depend on the allocation proportion. These can be used to cast frictions such as the impact of the portfolio choices of a 'large' investor on the expected assets' returns, funding costs arising from differential borrowing and lending rates, and the cash inflow of a firm in a neoclassical economy with constant return-to-scale Cobb–Douglas technology subject to exogenous aggregate shocks. We provide a general verification theorem for random utility fields satisfying the usual Inada conditions, find conditions under which jumps in our model lead to precautionary saving, and present an explicit characterization for CRRA. We report two-fund separation-type results which assert that optimal allocations move along one-dimensional segments, and illustrate our results numerically for various margin payment functions and bounded variation tempered α -stable jumps. [ABSTRACT FROM AUTHOR]

Investments in Brazil are increasingly allocated to the stock market, at the expense of more conservative investments. Would finding higher-quality assets allow investors to increase their risk-return ratio? We analyze quality with several metrics, including the quality-minus-junk (QMJ) factor for Brazil. We find that quality companies are valued more by investors, with a higher price-to-book ratio. A portfolio of shares of higher quality shows a significant positive return over the period analyzed, adjusted for several risk factors. The sample members classified as quality companies remained within this classification over time. [ABSTRACT FROM AUTHOR]

This paper empirically investigates the out‐of‐sample performance of the 1/N naive rule and the Markowitz mean–variance strategies in the largest emerging market (i.e., China's A‐shares market) and provides three new findings. First, we show that some mean–variance optimization strategies can outperform the 1/N rule in China's A‐shares market, while minimum‐variance strategies cannot. Using certainty equivalent return (CER) instead of Sharpe ratios does not change our results qualitatively. Second, we find an obvious advantage of mean–variance optimization when N is large. Third, when transaction costs are taken into account, the profitability of the unconstrained mean–variance optimizations almost vanishes, while the profitability of the mean–variance optimizations with the short‐sale constraint remains. Our results are robust to using a shorter estimation window of about 60 months. These results provide support for the use of optimal diversification strategies in emerging markets. [ABSTRACT FROM AUTHOR]

Under a differential taxation system, portfolio allocation decisions are based not only on the risk-return relationship of assets but also on their tax characteristics. The higher the tax burden on equity securities, the lower the share of stock investment in a tax-optimal portfolio. I use a multitude of changes in personal tax rates to assess the impact of personal taxes on individual stock ownership among a sample of 9,055 listed European firms. I observe lower levels of individual stock ownership, if relative personal taxes on stock ownership are higher than personal taxes on bonds. Cross-sectional evidence further reveals that the relation between personal taxation and individual stock ownership is significantly moderated by firm-specific risk. I additionally provide single country evidence of a tax clientele effect. Following an increase in the personal capital gains tax rate in Austria, I find individual owners to rebalance stock ownership to maximize after-tax returns in light of the new tax rules. [ABSTRACT FROM AUTHOR]

In this paper, we conduct an empirical evaluation of currency hedging (FXH) strategies designed for Latin American investors managing portfolios of US assets with performance measured in their local currency. By analyzing the volatility and value-at-risk (VaR) of the hedged portfolio, our results reveal that FXH is inefficient in lowering portfolio risk when applied to underlying foreign risk-assets like equities and low credit quality corporate bonds. Conversely, a significant reduction in volatility is evident with FXH when the investments are in safer assets, such as high-grade government and corporate bonds. • We focused on Latin American investors that invest in assets denominated in USD. • We studied effectiveness of FX hedging strategies on reducing portfolio risk. • There are no optimal strategies when the portfolio is composed by risky assets. • Hedging currency risk is recommended for high-quality assets. [ABSTRACT FROM AUTHOR]

I find a crackdown on shadow banking has real effects. For identification, I exploit a policy — the "New Regulations on Asset Management" (NRAM) — that restricts the issuance of wealth management products (WMP) in China. I show firms with high WMP exposure experience a decline in investments. The effects are pronounced for firms that are more profitable, have higher revenue growth, and are more financially constrained. Exploration of the possible channels of these effects shows a decline in the credit supply of banks that relied more on WMPs, driven by the fall in their shadow banking activities. • The shadow banking regulation has a real impact on the firms' investment in China. • "New Regulations on Asset Management" (NRAM) are exploited for identification. • Firms with high WMP exposure experience a decline in investments after NARM. • A shadow banking channel can account for this empirical result. • Banks' shadow banking activities declines after announcement of NAMR. [ABSTRACT FROM AUTHOR]

• Professional financial investors compete to achieve high return ranking. • We test how relative performance affects financial decisions in a laboratory. • We find that lower ranking is followed by higher risk in the next period. • Contrary to prior literature, this characterizes all rankings, not only the low ones. • Furthermore, decrease in ranking is followed by increased risk in the next period. We report the results of lab experiments on investment competition, where all subjects receive their accumulated earnings and the subject with the highest returns earns an additional bonus. We find that ranking is negatively correlated with portfolio risk: when subjects realize that their rank is relatively low, they increase their portfolio risk. This behavior is shared by all subjects in all rankings during all trade periods, regardless of the risk-free rate. Furthermore, in a competition, subjects respond to rank changes, increasing (decreasing) their portfolio risk after experiencing a decrease (increase) in their rating, regardless of their ranking. [ABSTRACT FROM AUTHOR]

Medical expenditure risk is widely believed to reduce households' willingness to bear other risks and in turn alter their behavior. In this paper, we investigate the role of health insurance in household financial decision. To this end, we consider a double-multinomial discrete-factor model of insurance choice and portfolio allocation. Using data from a Chinese household survey, we find that enrolling in a health insurance scheme with better policies is associated with a higher probability of owning risky assets. This positive effect is stronger for households with lower risk aversion. Our findings suggest that risk attitudes could indirectly influence portfolio outcomes through affecting households' responsiveness to changes in medical expenditure risk. [ABSTRACT FROM AUTHOR]

The U.S. housing market is heterogeneous in that house price dynamics vary greatly across regions. Depending on the location of the main residence, households are exposed to completely different housing market risk. This paper examines how geographic heterogeneity in housing market risk affects household portfolio allocations. Housing supply elasticity largely explains variation in housing market risk across regions. Where housing supply elasticity is low, households face higher housing market risk since house price growth rates are more volatile and more positively correlated with stock returns and labor income growth rates. Using the restricted version of the Health and Retirement Study (HRS) data with detailed geographic information, I find that households in areas with low housing supply elasticity tend to hold less stock in their portfolios. This tendency, however, weakens after retirement when labor income risk disappears. [ABSTRACT FROM AUTHOR]

In an experiment where subjects can allocate their wealth between cash and two risky assets, we analyze path-dependent portfolio choices. The experiment is designed to isolate cases where subjects have no prior experiences, and cases where subjects experience isolated changes in wealth or relative prices. We find that subjects tend to be less diversified after wealth or relative price changes, but that the result is much stronger for relative price changes. This erosion in portfolio diversification after relative price changes mainly stems from the choices of subjects with more diversified positions when there are no prior experiences. [ABSTRACT FROM AUTHOR]

This paper uses data from the Health and Retirement Study to investigate the role of inheritances for stockholding. Individual heir fixed-effects estimates show that an inheritance receipt increases subsequent stock market participation. The respective magnitude of this shift is higher for large and fully anticipated receipts, whereas it seems to be largest for fully but larger-than-expected transfers. Generally, our effects are driven by households entering the stock market. Also, a less pre-inheritance liquidity constrained household shows higher post-inheritance stock ownership probability. This suggests, inheritance size as well as receipt and size anticipation are determinants for stockholding. In the context of stock market participation, our results highlight considerable heir and transfer heterogeneity which can have important implications for bequest taxation and economic welfare. By means of the intergenerational transmission of inequality and socio-economic status via the 'wealth channel', households not only benefit from transfer receipt but also from later capital gains, due to stock market participation. [ABSTRACT FROM AUTHOR]

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We study continuous-time consumption and portfolio choice in the presence of Knightian uncertainty about interest rates. We develop the stochastic model that involves singular priors and analyze optimal behavior. When there is sufficiently large uncertainty about interest rates, the agent invests in the asset market only and abstains from the bond market. [ABSTRACT FROM AUTHOR]

We introduce a general equilibrium model with sticky prices and flexible wages. People live over two periods, investing and working in period 1, and consuming in period 2. In the financial market, some investors are informed about the fundamental stock value, while the rest are not, and trust their gut feeling (animal spirits). The informed investors are risk‐averse, and the correlated animal spirits of the uninformed ones affects the stock market equilibrium thus producing an irrational bubble. We find that central bank's leaning against the wind policy is effective in controlling the bubble, if the uninformed investors discount their animal spirits anticipation of future dividends. Moreover, the paper shows that an irrational bubble may have similar effects on stock market prices as a rational bubble. [ABSTRACT FROM AUTHOR]

This paper examines whether the volatility management suggested by Moreira and Muir to improve profitability in the equity market can generate significant benefits both in‐sample and out‐of‐sample in commodity futures markets as well. The in‐sample results show the significant success of volatility management from the 12‐month momentum and market portfolio, but the out‐of‐sample results show that volatility management fails to improve real‐time performance, which indicates that in‐sample results are not obtainable for real‐time investors in the commodity futures markets. To understand the failure of volatility management, we perform the simulation analysis and find that a negative risk‐return relation seems to play a pivotal role in addition to strong volatility persistency to make volatility management successful. [ABSTRACT FROM AUTHOR]

The advent of cryptocurrencies has captivated many investors and motivated portfolio managers to consider adding cryptocurrencies to investor portfolios, driven by the high prospects of cryptocurrency returns and their low correlations with equity returns. Traditional portfolio theory suggests that adding a risk-free asset to an equity portfolio mix produces an improvement in the efficient frontier that depicts an asset allocation decision. Using a similar approach, we examine the effect of adding a cryptocurrency asset (the Bitcoin) to an equity portfolio (the SP500). We find that adding the cryptocurrency to the existing equity portfolio produces a similarly linear efficient frontier which reduces to an asset allocation decision, but with the roles reversed. The SP500 serves as the approximate intercept and the Bitcoin serves as the risky investment choice. [ABSTRACT FROM AUTHOR]

This paper examines whether stock returns are consistent with the value function of prospect theory. We find that beta given a gain yields positive conditional premiums on returns while beta given a loss yields negative conditional premiums. This reflects the fact that the value function is concave for gains and convex for losses, implying risk-averse behavior for gains and risk-seeking behavior for losses respectively. Furthermore, the absolute value of the premiums is greater for losses, which is in line with the value function being steeper in this state. These new findings provide indication that investors behave according to prospect theory. [ABSTRACT FROM AUTHOR]

We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a portfolio choice model that allows for tax sheltering, we show that lower tax rates may increase investment in entrepreneurial equity at the intensive margin, but decrease it at the extensive margin. Using German panel data, we identify tax effects on the portfolio shares of six asset classes by exploiting tax and entry regulation reforms. Our results indicate that lower taxes drive out businesses that are viable only due to tax sheltering, but increase investment in productive entrepreneurial businesses. [ABSTRACT FROM AUTHOR]

Portfolio insurance strategies that ensure a certain minimum portfolio value or floor such as the Constant Proportion Portfolio Insurance (CPPI) and the Option-based Portfolio Insurance are economically important and widely spread among the banking and insurance industries. In distress and volatile market environments, investors such as pension funds have a need to insure their portfolios against downside risk in order to meet certain future payments or liabilities. Non-anticipated shocks or negative interest rates, jumps, crashes, or overnight trading restrictions in stock prices could drop pension fund portfolios below desired levels (present value of pension obligations) making them underfunded with pension assets to pension liabilities ratio below 100%. In particular, within the current low interest rate environment, a high number of pension funds happen to be underfunded which is a severe practical problem. Because of such scenarios, there is a need for an investment strategy which covers both the case of funded and underfunded portfolios. This article introduces a novel strategy which generalizes the CPPI approach. It has the overall target of guaranteeing the investment goal or floor while participating in the performance of the assets and limiting the downside risk of the portfolio at the same time. We show that the strategy accounts for behavioral aspects of the investor such as distorted probabilities, a risk-averse behavior for gains, and a risk-seeking behavior for losses. The proposed strategy turns out to be optimal within the Cumulative Prospect Theory framework by Tversky and Kahneman (J Risk Uncertain 5(4):297–323, 1992). [ABSTRACT FROM AUTHOR]

We draw on the skewness literature to propose regression-based performance evaluation tests designed for investments with option-like returns. These tests deliver conclusions valid for all risk-averse mean-variance-skewness investors and can better account for nonlinearities in returns than option-based factor models. Applied to mutual and hedge funds, our tests usually suggest selecting different funds than standard tests and find that a significant fraction (11%) of hedge funds adds value to investors, whereas this is an insignificant 4% for mutual funds. We also analyze the economic significance of these option-like returns and their out-of-sample persistence. This paper was accepted by Tyler Shumway, finance. [ABSTRACT FROM AUTHOR]

Our paper highlights the benefits derived from holding internationally diversified portfolios, from the perspective of Romanian investors, by assessing the risk and return levels for three portfolio structures, constructed with equities from: (1) Romania and emerging countries; (2) Romania and developed countries; (3) Romania and all countries analysed in this study. Moreover, we undertake a comparative analysis between the results obtained for the period January 2015-February 2018 and the results obtained during the global financial crisis, when increased correlations among global financial markets threatened their diversification potential. Our findings indicate that for both periods considered, portfolios diversified among all equity markets outperform the other two portfolio structures analysed. The performance of portfolios diversified among emerging countries equities is significantly higher than the performance of portfolios diversified with equities from Romania and the developed countries considered, during both the crisis and January - February 2018 period, but the result is reversed when analysing the results for the last six months.

Keynes argues that a beauty contest in financial markets is a combination of rational higher-order beliefs and market psychology or animal spirits. We find that a stable equilibrium, where also market psychology is included, can be possible if uninformed investors agree to reduce their required rate of return indicating that they enlarge the risk of their investment with the animal spirits component.

This paper studies the optimal investment problem for a behavioral investor with probability distortion functions and an S-shaped utility function whose utility on gains satisfies the Inada condition at infinity, albeit not necessarily at zero, in a complete continuous-time financial market model. In particular, a piecewise utility function with hyperbolic absolute risk aversion (HARA) is applied. The considered behavioral framework, cumulative prospect theory (CPT), was originally introduced by [A. Tversky & D. Kahneman (1992) Advances in prospect theory: Cumulative representation of uncertainty, Journal of Risk and Uncertainty5 (4), 297–323]. The utility model allows for increasing, constant or decreasing relative risk aversion. The continuous-time portfolio selection problem under the S-shaped HARA utility function in combination with probability distortion functions on gains and losses is solved theoretically for the first time, the optimal terminal wealth and its replicating wealth process and investment strategy are stated. In addition, conditions on the utility and the probability distortion functions for well-posedness and closed-form solutions are provided. A specific probability distortion function family is presented which fulfills all those requirements. This generalizes the work by [H. Jin & X. Y. Zhou (2008) Behavioral portfolio selection in continuous time, Mathematical Finance18 (3), 385–426]. Finally, a numerical case study is carried out to illustrate the impact of the utility function and the probability distortion functions. [ABSTRACT FROM AUTHOR]