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Evaluating the forecasted Yuan-Dollar evolution (2010) 13 November 2010 (download in PDF)

Last year on 26 November 2009, I try to forecast the evolution of the Yuan-Dollar exchange rate for the year 2010. A very simple long-run model assuming the Purchasing Power Parity (PPP) and a negative relation between the level of prices and the short run interest rate was considered. As conclusion, the forecasting was not bad and the small difference can be perfectly explained by government policies. I expected a 5% of appreciation in Yuan-dollar on Dec-2010 (at november we have 3%), US interest rate has increased 160% this year after 3 years of cutting the rate (I expected an increase of 117% on dec-2010), Chinese interest rate increases 4.7% (I expected an increases 27%). In all the case the forecasted signs were the correct and the differences in the values are explained due to clear policies of avoiding appreciation (devaluation) of Yuan-Dollar by China (US) respectively.

Forecasting the Yuan-Dollar exchange rate evolution (2010)26 November 2009 (download in PDF)

Appreciation of Chinese Yuan has generated so much discussion in the last period. Some people assert that Yuan has the potential to become a world’s reserve currency. China has huge foreign exchange reserves, largely dollar-denominated, and the value of these assets may shrink if the depreciation tendency of the dollar continues. I estimate a simple model using Johansen cointegration test, forecasting and expected increase in the US and Chinese interest rate for the period Dec-2009 to Dec-2010. Furthermore, the Chinese Yuan is expected to appreciate even more, 5% respect to the Dollar, in the same period.

-Is a Bubble in the Treasury Bonds? 22 April 2009 (download in PDF)

The last financial crisis in housing and banks let treasury bonds as one of the last secure investment. However, the crisis also generated a high budget deficit in the US government. Recently, the Chinese goverment, the largest creditor was worried about its holding of Treasuries. If we calculate the level of efficiency and the volatility (using a simple GARCH model) we observed that the Bonds market has reached high inefficient levels and high levels of volatility, arriving to a maximum at the actual moment. It happens not only in the US market but also in the UK.

--Predicting the Crash in the Russian Stock Market 27 March 2009 (download in PDF)

In my article “The Informational Efficiency and the Financial Crashes” published in Research in International Business and Finance on 4th March 2008, I asserted that according to my measure, the Russian market was the most inefficient and the probability of having a crash was the largest. Well, looking at the RST index we can observe that my prediction was right, the Russian index arrived to a maximum on 21st May 2008 (2487.9) and then it crashed arriving to a minimum (498.2) on 2nd February 2009.

-Inefficiency in the Financial System  8 October 2008 (download in PDF)

I analysed the performance of some assets affected by the present financial crisis (AMD, INTC, JPM, AIG, C, GM) and the S&P 500 index. INTC, JPM and C presented a positive annualized return in the period 1986-2008 greater than the return of S&P 500. In the whole period INTC seems to be the best option according to Sharpe, Sortino, Omega and Calmar ratios. However, in the last five years, INTC has presented a negative return and only JPM shows a positive return.
When I analysed the informational efficiency of these assets I found something interesting, the biggest financial companies Citigroup, JP Morgan and AIG have presented a cluster of inefficiency since 2004. These levels of inefficiency are the largest in the whole period from 1986 to 2006. I wonder why the US Government did not act in the period 2005-2007 to revert the tendency. I think that the present crisis is the wild response of the market to revert an inefficiency indicated in the past.

-WIll the clean energy be the new financial bubble?.  24 August 2008 (download in PDF)

Recently, the US economy has been witness of two big bubbles: the dotcom and the housing bubble. Now, different analyst and investors are wondering what will be the next financial bubble (A very difficult question indeed). In the last months, many candidates have been mentioned: Emerging market, institution specializing in retirement, infrastructure investment, bond market, credit card, oil market and clean energy. In the section I talk about the possibility of developing a bubble in the clean energy. As know, nowadays there is an important debate about the feasibility of solving the energy problems with the existing technology without the necessity of breakthrough innovations. Measuring the informational efficiency in the sector and its relationship with the probability of having a crash, I conclude that the clean energy market is efficient nowadays (at 13 August 2008) and presenting a growing efficiency. On the other hand, the probability of having a crash is decreasing given the negative relationship between the two variables.

-Tactical Asset Allocation Using Daily Data  (written with Stefano Marmi from Scuola Normale Superiore di Pisa). 15 July 2008(download in PDF)

A portfolio combining different assets can produce larger return and less volatility. Recently, Faber (2006) proposed a very simple quantitative market-timing model. In words, it consists in portfolio composed by US assets, foreign assets, commodities, real estate and bonds in equal parts. The strategy is to study the trend of each element, maintaining the position the asset if the trend is growing. However, if the trend is going down we sell the asset and buy cash. We apply this strategy to a portfolio composed by US and European Stocks, bond fund and commodities using daily data. We show that even in the worst scenario the strategy produces a better portfolio than the stocks, bond funds and commodities, separately.