Brazilian Financial Market Research Articles

The CFO financial performance and the financial market scenario: A Review

This article introduces a literature review on the CFO's financial performance in the ever-challenging Brazilian financial market scenario. Key findings pointed out that the CFO of unlisted companies shows a lower inclination to estimate the cost of equity. The study also highlighted the need for technical and organizational solutions to agency problems, such as sound corporate governance practices, computer-aided accounting systems, incentive-based compensation, clear performance goals, and delegation of operational decisions. The study also examined the CFO's perspective and the companies' strategic ecosystem, finding that duality in the roles can negatively impact financial reporting quality.

Lottery stocks in Brazil: investigating risk premium and investor behavior

PurposeThis study investigates the paradox of lotteries in financial markets, challenging traditional utility models predicated on rational behavior amid uncertainty. It explores why investors are drawn to lotteries despite the potential trade-off between risk-adjusted returns and sporadically substantial gains.Design/methodology/approachEmploying a multifaceted approach, the study first scrutinizes diverse theories elucidating the perplexing behavior of lottery investors. Subsequently, it assesses the premium attached to lottery stock shares in the Brazilian financial market using distinct methodologies, thereby offering a comprehensive analysis of this phenomenon. Finally, the study estimates the risk premium associated with the lottery stocks applying an extended Fama–French multifactor model and searching for evidence of overlap with other risk-based anomalies.FindingsThis research unveils theories underpinning seemingly irrational investor behavior vis-à-vis lotteries, revealing the motivations propelling investors to willingly exchange risk-adjusted returns for the allure of substantial but infrequent gains. Empirical evidence delineates the extent of the premium paid for lottery stocks in the Brazilian market.Originality/valueThe study’s novelty lies in its amalgamation of theoretical exploration, empirical analysis and the application of the Fama–French factor model to gauge the risk premium associated with lottery-related behavior. Furthermore, its investigation of lottery stocks within the Brazilian market introduces a distinctive dimension, elucidating market dynamics and investor behaviors unique to the region.

Do Investment Funds Audited by the Big Four Firms Exhibit Different Performances? Evidence from Brazil

Investment funds manage a portfolio composed of financial instruments; therefore, their accounting reports should undergo a careful process of preparation and auditing. The main purpose of this study is to analyze the effect of being audited by a Big Four audit company on funds’ risk-adjusted performance. The database is composed of equity funds from the Brazilian financial market, with daily returns spanning from January 2005 to March 2023. The funds’ performance was measured based on three indicators, including the Sharpe Ratio and Jensen’s Alpha. Fama and MacBeth regressions were used to test the hypotheses. The main findings indicate that the benefits of audit quality also include a positive effect on the risk-adjusted performance of investment funds, as the coefficient of the variable “Big Four” was positive and significant based on the proxies for risk-adjusted performance. This study advances this area of research by demonstrating the effects of the type of audit on the risk-adjusted performance indicators of investment funds.

Exponential growth of ESG funds: a comparison of funding speed and profitability

In this paper, the general objective is to investigate and compare the speed of fundraising and the profitability of ESG Funds in relation to traditional investment funds in the Brazilian financial market between 2010 and 2021. To achieve this goal, we focused on three specific objectives: analyzing the growth rate of ESG Funds' net assets, evaluating the profitability of these funds and examining the impact of macroeconomic variables such as GDP, IPCA and interest rate (CDI) in this context. Using a quantitative methodology, the research analyzed comprehensive financial data on the funds, including information on asset value and profitability indicators. The results show an exponential growth in the ESG Funds' assets over the period studied, setting them apart from traditional funds. In addition, the profitability of ESG Funds proved to be competitive, often surpassing that of conventional funds, suggesting a paradigm shift in the Brazilian financial market. This study provides valuable insights into the evolution of ESG Funds in Brazil, highlighting their growing importance and potential for economic sustainability. The analysis of macroeconomic variables also revealed that ESG Funds not only remain resilient in different economic scenarios, but can also offer a sustainable and profitable path for investors aware of environmental, social and governance challenges.

Avaliação do momentum no Brasil usando regressões quantílicas

Abstract The purpose of this study was to measure the relationship between expected returns and capital gains overhang (CGO) (a proxy for the disposition effect) in the Brazilian financial market. It also investigated the ability of the disposition effect to induce momentum. Quantile regression allows the study of the importance of extreme values in the regression. In this way, it is possible to study the relationship between the disposition effect and the expected return between losing and winning stocks using data for the Brazilian financial market. This may help explain the conflicting results found in the literature when studying this relationship in other countries. This study contributes to the development of the topic of the relationship between the disposition effect and unrealized capital gains in the financial market. For this, we apply Fama-MacBeth regression and quantile regression models. Initially, we study the relationship between CGO and expected return. Subsequently, we investigate the ability of the disposition effect to generate the momentum effect at extreme quantiles of expected return (0.05th - losing stocks and 0.95th - winning stocks). We used a sample of 227 shares of companies listed on the Brazilian stock exchange (B3) and monthly historical series from January 2000 to October 2018. We found a significant and positive relationship between CGO and expected return across different levels of expected return, decreasing from the lowest to the highest quantile of expected return. This indicates that Brazilian investors, who are prone to the disposition effect, operate at the extreme quantiles of expected return.

Avaliação do comportamento dos bancos brasileiros em transações de fusão e aquisição

Abstract This study aims to determine the impact of an M&A on the performance of the consolidating bank in relation to its competitors in both the intermediation and profitability approaches, in addition to proposing an M&A ranking metric for a more accurate performance analysis. Although some studies assess the performance of banks in M&As, the explanation of their impact on institutions in the market can be better explored by proposing a financial-operational metric, different from valuations by the stock market, complemented with the point of view of organizational strategies that appear in the literature as essential for the continuity of the resourcefulness of the topic. Assessing the consequences of bank M&As and understanding their intentions provides better management of both institutions and the country's socioeconomic aspects. It also provides guidelines and new tools for performance evaluation for academics, managers, and government officials on M&A processes. The research method is quantitative-qualitative. In the quantitative approach, the data envelopment analysis (DEA) technique with a second stage of multiple linear regression was used. The database was formed by information from the banks' financial statements from 2000 to 2018 (representing the CAMELS), supplemented with macroeconomic and market structure information. In the qualitative approach, the impact of these regressed variables was determined in the quantitative stage for four case studies, which are the Big4 banks that represent approximately 87% of the Brazilian financial market. Although some studies deal with the topic of the relationship between efficiency and M&As, this study shows that there is no clear and direct relationship between M&As and the performance (efficiency) of banks in the market. The results suggest that banks carry out M&As for reasons other than the search for efficiency, leaving efficiency as a consequence of the operation. This article contributes to the proposal of a new metric for measuring the efficiency of M&As, whose function is to establish a ranking and relativize the analysis of banks' performance in relation to the market as a whole, allowing the visualization of the relative effect vis-à-vis competitors.

RECOVERING PROBABILITY FUNCTIONS WITH FOURIER SERIES

The COS method was introduced in Fang & Oosterlee (2008) and then was applied to pricing a variety of stock options for continuous random variables. This paper adapts the Fourier-cosine series (COS) method to recover discrete probability mass functions. We approximate mixture and compound probability distributions with cosine series. Enormous precision and computational speed are the qualities of the function estimates here obtained. We also develop the pricing framework to trade derivatives subject to discrete random variables. We apply the method to calculate, for the first time, the price of an interest rate derivative of recent vintage introduced in the Brazilian financial market. Parameter calibration confirms the quality of the model.

Different types of institutions operating in the Brazilian financial market and variations in the profitability of institutions in the sector

Different types of institutions operating in the Brazilian financial market and variations in the profitability of institutions in the sector

Asset pricing in the Brazilian financial market: five-factor GAMLSS modeling

Asset pricing in the Brazilian financial market: five-factor GAMLSS modeling

Investment portfolio tracking using model predictive control

AbstractThe composition of an investment portfolio aiming to increase the financial returns while reducing the exposure to risk is a topic of growing interest in the world. In this direction, we propose a model predictive control (MPC) strategy in order to optimize the investment portfolio selection taking into account the tracking of a reference portfolio with desired return. In addition, an analysis comparing different sizes of the prediction horizon according to VPH‐MPC (Varying Predictive Horizon‐MPC) and FPH‐MPC (Fixed Predictive Horizon‐MPC) algorithms is conducted. Finally, we propose an optimal control problem using the tracking error as a function of loss of CVaR (Conditional Value at Risk) measurement. Numerical experiments are run based on Brazilian Stock Exchange data. The experimental results are compared with the Markowitz portfolio optimization model, a conventional tracking strategy, and benchmarks from the Brazilian financial market. This comparison indicates a good tracking performance obtained by the proposed MPC in the two versions while satisfying the constraints.

The Brazilian financial market reaction to COVID-19: A wavelet analysis

We study the Brazilian stock market response to the COVID-19 pandemic. Considering the COVID-19 data from January 22, 2020, to August 31, 2021, and a daily dataset comprised of the Bovespa index - the main performance indicator of the stocks in the Brazilian capital market -, its sector components, and COVID-19 cases and deaths in the most affected countries, we employ the wavelet tools of partial coherences, partial phase differences, dissimilarities, and VaR ratio. We find significant partial coherence spots, decrease in dissimilarity, and increase in VaR ratio suggesting the Brazilian stock market responded forcefully to COVID-19 local and international data and that this response varies over time and frequencies being modulated by the local stage of outbreak. The results also suggest a higher response to deaths data and that both market wide response and the sector contagion are more evident on longer term frequencies.

New Trends in the Brazilian Financial Market

This article aims to provide an overview of the recent updates of the Brazilian legal system, presenting the main issues that may affect the attraction of foreign investments and the challenges regarding the financial market that arise in the current Brazilian legal framework.

Sentiment Analysis Applied to News from the Brazilian Stock Market

Investments in the stock market have grown in Brazil in recent years, especially considering the individual number of investors. According to data from April 2020, the Brazilian stock market reached the historic mark of 2.38 million active investors, and with this scenario, there is an increasing need to study the Brazilian financial market, seeking to better understand its fluctuations. Recent work in the literature indicates that a companys stock values can be influenced by published news. Therefore, this work contributes to the automatic sentiment analysis applied to news written in Portuguese and related to the Brazilian stock market. For this, we performed three sentiment analysis strategies: two based on machine learning, using the Naive Bayes classifier and a Multilayer Perceptron neural network; and the other based on the lexical approach. Also, we proposed two dictionaries, focused on the financial domain and adapted to Portuguese. Our results show that the Naive Bayes classifier and the Multilayer Perceptron overcomes the best lexical approach. It is worth mentioning that the accuracy achieved by the best lexical approach was with the adapted dictionary proposed here.

Towards the Categorization of Brazilian Financial Market Headlines

Financial market news portals are valuable sources of information as they hold great power over investors' decision-making processes. Due to the vast amount of text data produced by news portals, several studies have been conducted to comprehend the behavioral variations of texts and automate the categorization of short texts. However, extracting useful information that influences investors' decision-making process is not a trivial task, given that news portals use a heterogeneous and specific language for each content produced, making it challenging to generate a standard document format. This work proposes GOOSE, a solution for the cateGOrizatiOn of Short texts derived from multiple sources of information, to portray the financial market's current situation. To this end, GOOSE is based on Bidirectional Long Short-Term Memory (Bi-LSTM) and GloVe Embeddings to increase reliability in the short texts classification process. That way, GOOSE obtains data from news portals, which, once combined with a word embedding mechanism, are used as input for the Bi-LSTM to classify financial market news texts. The results obtained showed that GOOSE's efficiency in categorizing texts had an accuracy of 84% but also demonstrated the feasibility of its use in the extraction of information from financial market news portals.

Share portfolio advisory: Use of the Markowitz method to optimize the risk/return ratio in individual investor shares portfolio

With the growing development of the Brazilian financial market, the interest of small investors was visible, from the year 2019 and until june 2020 the entry of individual investors in the stock exchange had a growth of 174.7% reaching 2,824,239 people according to B3. Despite this significant number, only 3% of the population that has some investment product owns shares of publicly traded companies, given this information is really the niche market that can be exploited. In most cases this small percentage is due to the profile of the Brazilian investor, which can be termed as conservative. Even investors who own a stock portfolio have a low value intended for this type of capital market product. This fear can be attributed to the lack of time to study the market and even by not having knowledge of it, another point that we have to take into account is the emotional and psychological insecurity of gains and losses in the small investor's portfolio, tied to poor risk management. Given the scenario, we advise some stock portfolios by reducing their risks or optimizing their returns by Markowitz's method that uses statistical and rational methods. It became apparent during the study the cost benefit and assertiveness of the same. For the development of this work, the Design Thinking method was used.

The Challenge of Determining the WACC of Electricity Transmission Service Operators: The Brazilian Case

Objective: ANEEL, the Brazilian National Electric Energy Agency, regularly renews its tariff model to remunerate the electricity transmission service operators. This study focuses on the conceded rate of return of the operators’ regulatory capital. We aim to contribute to the methodological improvement of the regulator’s approach in future tariff reviews by focusing on issues concerning the calculation of this key figure.Method: We critically review ANEEL’s concept of the regulatory rate of return, stressing issues concerning the calculation of this key figure.Originality/Relevance: We are not aware of any research that analyzes ANEEL’s actual model for calculating the regulatory rate of return. In line with ANEEL’s search for support, we intend that our considerations will help improve the regulator’s approach and serve as stimuli to search for answers to open questions.Results: We revealed five aspects that give rise to deeper reflections. Our findings suggest that the concept for determining the regulatory rate of return could be adapted to better reflect the Brazilian financial market conditions.Theoretical/Methodological contributions: As a main finding, the sample of US electric energy companies involved in calculating the so-called ߠfactor should be reconsidered. Furthermore, to compute the weights of these companies to calculate the sample’s unleveraged ß, companies with missing data should be excluded. Moreover, instead of gathering the data for the WACC calculation from quite different periods, these periods should be aligned on a theoretical basis.

Study on the relationship between the IVol-BR and the future returns of the Brazilian stock market,

ABSTRACT In 2015, the Financial Economics Research Center (NEFIN) of the University of São Paulo proposed an implicit volatility index for the Brazilian stock market based on the daily prices of options for the Bovespa index (Ibovespa) and that measures the expected volatility of the Ibovespa in the next two months. The aim of this study is to determine whether this implicit volatility index can be considered an antecedent indicator of future returns of the Brazilian stock market, given that it represents the expected volatility of the Ibovespa two months into the future. This study contributes to the literature on the implicit volatility index for the Brazilian stock market, which has been scarce until now. This happens due to the recent establishment of the index and due to the fact that there is not an official one published by the B3 S.A. - Brasil, Bolsa, Balcão (B3). Given the relationship found between the Brazilian implicit volatility index and the future returns of the Ibovespa, investors could anticipate instabilities in the Brazilian market by putting together strategies to protect their investment portfolios, as well as identifying opportunities to enter and exit the market. This research corroborates in disclosing the Brazilian implicit volatility index in order for it to become more widely used in academia and in the Brazilian financial market. The increase in studies on this index may also incentivize the launch of an official implicit volatility index by the B3. The relationship between the Brazilian implicit volatility index and the future returns of the Ibovespa is examined using least squares and quantile regressions. The implicit volatility index for the Brazilian stock market could help in predicting the future returns of the Ibovespa, especially for 20-, 60-, 120-, and 250-day future returns.

Concentration and competition in the Brazilian credit market

AbstractCompetition and concentration effects in the banking sector is still a highly object questioned in the public policy. Problems of asymmetric information and high interest rates prompt the discussion on whether bank competition is good or bad for efficiency, or more generally, for social welfare. In recent years, a lot of research work has been carried out investigating the nature of competition in the banking industry. Since the 2008 financial crisis, competition in the banking industry has been characterized with low interest rates, low credit growth, increased regulation and compliance requirements. The objective of this study is to analyze the national credit market by calculating and analyzing concentration and competition indicators, between 2010 and 2020. To compare and estimate indexes of concentration, such as the Herfindahl‐Hirschman index and competition through the Lerner index. The results suggest that the concentration has decreased in the period considered so as competitiveness, suggesting that there is less competition in the market. Despite the limitations pointed out, the results suggest that bank concentration in the Brazilian financial market has been decreasing over the last few years due to an increase position and importance of new players such as Digital Banks, Fintechs and High‐Techs firms, which caused a decrease in the market share of large banks. Although, competition levels are not improving, showing that the market share is being absorbed by Financial Institutions with a considerable size and perhaps not by new entrants in the market.

The impact of rating classifications on stock prices of Brazilian companies

Purpose This paper aims to identify if there is an impact of the rating announcements issued by the agencies on the returns of the stocks of Brazilian companies listed on Brasil Bolsa Balcão, from August 2002 to August 2018, identifying which types of announcement (upgrade, downgrade or the same initial classification) cause variations in prices around the date of disclosure of the rating. Design/methodology/approach The event study methodology was applied to verify the market reaction around the announcement dates in a 21-day event window (−10, +10). The market model was used to calculate the abnormal returns (ARs), and subsequently, the accumulated ARs. Findings The hypotheses tests allowed to verify that the accumulated ARs are different, before and after the three types of rating announcements (upgrades, downgrades and the same classification); in upgrades, the mean of accumulated ARs increases in the days before the event, while in downgrades, this increase occurs after the event. This paper concluded that the rating announcements have an impact on the return of stock of the Brazilian market and that the market reaction occurs most of the time before the event happens, which indicates that the market can anticipate the information contained in the changes in credit ratings. Practical implications The results have considerable implications for portfolio managers, institutional investors and traders. It facilitates investment decision-making in the face of rating classification announcements. Market participants can pay more attention to their investment strategies and asset allocation during periods of risk rating announcements. Additionally, traders can understand the form of investment strategy for superior earnings. Originality/value The importance of the study is related to the fact that the results may explain the causes of specific movements in the Brazilian financial market related to a source of information that may or may not be able to influence the decisions of the financial agents that operate in this market. The justification is centred on the idea that, for investors who somehow react to the announcements, it is relevant to understand the impact of rating classifications on companies, as access to such information allows for more conscious decision-making.

On the Relationship between COVID-19 and Brazilian Financial Market

In our first empirical exercise we assess the conditional relationship in the timefrequency domain between the return on Ibovespa and the cases or deaths by COVID-19 in Hubei, countries with record deaths and the world, for the period from January 29 to July 31, 2020. We also perform a parametric test for Granger-causality in quantiles. Second, we study Brazilian sectoral contagions and pass-through. Our findings are useful to infer on when COVID-19 cycles started to impact Ibovespa cycles and to tell the history of the pass-through of this pandemic across the economic sectors in Brazil.