Bernales, A., Reus, L., & Valdenegro, V. (2022). Speculative bubbles under supply constraints, background risk and investment fraud in the art market. J. Corp. Financ., 77, 101746.
Abstract: We examine the unexplored effects on art markets of artist death (asset supply constraints), collectors' wealth (background risk) and forgery risk (risk of investment fraud), under short-sale constraints and risk aversion. Speculative bubbles emerge and have the form of an option strangle (a put option and a call option), in which strike prices are affected by art supply constraints and the association of the artworks' emotional value with both collectors' wealth and forgery, while the options' underlying asset is the stochastic heterogeneous beliefs of agents. We show that speculative bubbles increase with four elements: art supply constraints; a more negative correlation between collectors' wealth and the artworks' emotional value; a more positive relationship between forgery and the artworks' emotional value; and more heterogeneous beliefs. These four sources of speculation increase the expected turnover rate; however, they also augment the variance of speculative bubbles, which generates price discounts (i.e. risk premiums) for holding artworks. Consequently, the net impact of speculation is not necessarily increased art prices. This study not only contributes to the art market literature, but also to studies about speculative bubbles in other financial markets under heterogeneous beliefs, short-sale constraints and risk-averse investors, since we additionally consider the simultaneous effect of asset supply constraints, investors' background risk and the risk of investment fraud.
|
Castaneda, P., & Reus, L. (2019). Suboptimal investment behavior and welfare costs: A simulation based approach. Financ. Res. Lett., 30, 170–180.
Abstract: We propose a representation of suboptimal investment behavior based on the stochastic discount factor (SDF) paradigm. Suboptimal investment behavior is rationalized as being the investor's optimal decision under a wrong SDF, while wealth trajectories and budget constraints are based on the true SDF. We develop a novel Monte Carlo simulation approach to compute the welfare costs for this suboptimal behavior. We study the suboptimal portfolio choice under CRRA preferences using two financial market models. The Monte Carlo simulation delivers comparable welfare losses to those computed in the original studies, which are based on partial differential equations (PDE) and – finite-difference schemes.
|
Reus, L. (2020). Efficient selection of copper sales contracts for small- and medium-sized mining. Manag. Decis. Econ., 41(4), 624–630.
Abstract: The purpose of this study is to generate efficient policies for the selection and postponement of copper sales contracts by a mining company. To do so, it uses a two-stage stochastic programming model that determines solutions considering different contract types, random prices, and risk aversion. The results show how it is possible for the selection to involve the lowest risk possible for different revenue levels required. During a period of high price volatility, an efficient solution may deliver an increase in monthly revenue of US$210,000 for a mining company that produces 50,000 tons per year, without any additional risk.
|
Reus, L. (2020). English as a medium of instruction at a Chilean engineering school: Experiences in finance and industrial organization courses. Stud. Educ. Eval., 67, 100930.
Abstract: Implementing English as a medium of instruction (EMI) in Latin American countries contributes to reducing language exchange isolation in the region and helps prepare higher education students for future labor opportunities. However, one of the main concerns around EMI is whether English instruction could negatively affect content acquisition. This paper examines if the performance of native Spanish speakers is affected by EMI. Specifically, it discusses experiences from finance and industrial organization courses given to industrial engineers at a Chilean university. The results of a multivariate analysis of tests and final grades show that performance differences can mainly be attributed to students� performance in previous courses; only on rare occasions do language, gender, and attendance explain performance differences.
|
|
Reus, L. (2019). Optimizing the equity reassignment process: A novel application for family businesses. Heliyon, 5(7), e02050.
|
Reus, L. (2019). Currency risk in foreign currency accounts for small and medium-sized businesses. J. Risk, 22(2), 59–78.
Abstract: This paper estimates the currency exposure before and after the hedging of active foreign currency (FC) accounts, using stochastic models for spot exchange rates and cashflow movements. It examines a simple hedging policy that is typically applied by small and medium-sized businesses that do not have the expertise or resources to execute sophisticated strategies. The performance of the policy is measured through the derivation of analytical expressions for its profit and loss (P&L): that is, the earnings resulting from the valuation of the FC accounts and of the forward contracts taken. The results for five currencies show that the policy reduces P&L volatility compared with that for an unhedged account, without necessarily reducing the mean P&L. The mean and volatility of the P&L are not sensitive to the maturity of the contracts, and the volatility is almost linearly related to the currency volatility.
|
Reus, L., Belbeze, M., Feddersen, H., & Rubio, E. (2018). Extraction Planning Under Capacity Uncertainty at the Chuquicamata Underground Mine. Interfaces, 48(6), 543–555.
Abstract: We propose an extraction schedule for the Chuquicamata underground copper mine in Chile. The schedule maximizes profits while adhering to all operational and geomechanical requirements involved in proper removal of the material. We include extraction capacity uncertainties due to failure in equipment, specifically to the overland conveyor, which we find to be the most critical component in the extraction process. First we present the extraction plan based on a deterministic model, which does not assume uncertainty in the extraction capacity and represents the solution that the mine can implement without using the results of this study. Then we extend this model to a stochastic setting by generating different scenarios for capacity values in subsequent periods. We construct a multistage model that handles economic downside risk arising from this uncertainty by penalizing plans that deviate from an ex ante profit target in one or more scenarios. Simulation results show that a stochastic-based solution can achieve the same expected profits as the deterministic-based solution. However, the earnings of the stochastic-based solution average 5% more for scenarios in which earnings are below the 10th percentile. If we choose a target 2% below the expected profit obtained by the deterministic-based solution, this average increases from 5% to 9%.
|
Reus, L., Carrasco, J. A., & Pincheira, P. (2020). Do it with a smile: Forecasting volatility with currency options. Financ. Res. Lett., 34, 10 pp.
Abstract: We show that traditional measures of curvature and symmetry of the “smiles” improve volatility predictions in forex markets. We consider post crisis data at a daily basis for seven currencies vis a vis the American dollar: The British pound, the Euro, the Australian dollar, the Japanese yen, the Brazilian real and the Mexican and Chilean peso. While our results are robust to the option currency and maturity, they are particularly strong for latin-American currencies and options with longer maturity. We find that the simultaneous inclusion of skewness and kurtosis to a forecasting model significantly improves its predictive accuracy.
|
Reus, L., & Fabozzi, F. J. (2021). Robust Solutions to the Life-Cycle Consumption Problem. Comput. Econ., 57, 481–499.
Abstract: This paper demonstrates how the well-known discrete life-cycle consumption problem (LCP) can be solved using the Robust Counterpart (RC) formulation technique, as defined in Ben-Tal and Nemirovski (Math Oper Res 23(4):769-805, 1998). To do this, we propose a methodology that involves applying a change of variables over the original consumption before deriving the RC. These transformations allow deriving a closed solution to the inner problem, and thus to solve the LCP without facing the curse of dimensionality and without needing to specify the prior distribution for the investment opportunity set. We generalize the methodology and illustrate how it can be used to solve other type of problems. The results show that our methodology enables solving long-term instances of the LCP (30 years). We also show it provides an alternative consumption pattern as to the one provided by a benchmark that uses a dynamic programming approach. Rather than finding a consumption that maximizes the expected lifetime utility, our solution delivers higher utilities for worst-case scenarios of future returns.
|
Reus, L., & Mulvey, J. M. (2016). Dynamic allocations for currency futures under switching regimes signals. Eur. J. Oper. Res., 253(1), 85–93.
Abstract: Over the last decades, speculative investors in the FX market have profited in the well known currency carry trade strategy (CT). However, during currencies or global financial crashes, CT produces substantial losses. In this work we present a methodology that enhances CT performance significantly. For our final strategy, constructed backtests show that the mean-semivolatility ratio can be more than doubled with respect to benchmark CT. To do the latter, we first identify and classify CT returns according to their behavior in different regimes, using a Hidden Markov Model (HMM). The model helps to determine when to open and close positions, depending whether the regime is favorable to CT or not. Finally we employ a mean-semivariance allocation model to improve allocations when positions are opened. (C) 2016 Elsevier B.V. All rights reserved.
|
Reus, L., Munoz, F. D., & Moreno, R. (2018). Retail consumers and risk in centralized energy auctions for indexed long-term contracts in Chile. Energy Policy, 114, 566–577.
Abstract: Centralized energy auctions for long-term contracts are commonly-used mechanisms to ensure supply adequacy, to promote competition, and to protect retail customers from price spikes in Latin America. In Chile, the law mandates that all distribution companies must hold long-term contracts – which are awarded on a competitive centralized auction – to cover 100% of the projected demand from three to fifteen years into the future. These contracts can be indexed to a series of financial parameters, including fossil fuel prices at reference locations. Drawing from portfolio theory, we use a simple example to illustrate the difficulties of selecting, through the current clearing mechanism that focuses on average costs and individual characteristics of the offers, a portfolio of long-term energy contracts that could simultaneously minimize the expected future cost of energy and limit the risk exposure of retail customers. In particular, we show that if the objective of the regulator is to limit the risk to regulated consumers, it could be optimal to include contracts that would not be selected based on individual characteristics of the offers and a least-cost auction objective, but that could significantly reduce the price variance of the overall portfolio due to diversification effects between indexing parameters.
|
Reus, L., Pagnoncelli, B., & Armstrong, M. (2019). Better management of production incidents in mining using multistage stochastic optimization. Resour. Policy, 63, 13 pp.
Abstract: Among the many sources of uncertainty in mining are production incidents: these can be strikes, environmental issues, accidents, or any kind of event that disrupts production. In this work, we present a strategic mine planning model that takes into account these types of incidents, as well as random prices. When confronted by production difficulties, mines which have contracts to supply customers have a range of flexibility options including buying on the spot market, or taking material from a stockpile if they have one. Earlier work on this subject was limited in that the optimization could only be carried out for a few stages (up to 5 years) and in that it only analyzed the risk-neutral case. By using decomposition schemes, we are now able to solve large-scale versions of the model efficiently, with a horizon of up to 15 years. We consider decision trees with up to 615 scenarios and implement risk aversion using Conditional Value-at-Risk, thereby detecting its effect on the optimal policy. The results provide a “roadmap” for mine management as to optimal decisions, taking future possibilities into account. We present extensive numerical results using the new sddp.jl library, written in the Julia language, and discuss policy implications of our findings.
|
Reus, L., & Prado, R. (2022). Need to Meet Investment Goals? Track Synthetic Indexes with the SDDP Method. Comput. Econ., 60(1), 47–69.
Abstract: This work presents a novel application of the Stochastic Dual Dynamic Problem (SDDP) to large-scale asset allocation. We construct a model that delivers allocation policies based on how the portfolio performs with respect to user-defined (synthetic) indexes, and implement it in a SDDP open-source package. Based on US economic cycles and ETF data, we generate Markovian regime-dependent returns to solve an instance of multiple assets and 28 time periods. Results show our solution outperforms its benchmark, in both profitability and tracking error.
|
Villena, M. J., & Reus, L. (2016). On the strategic behavior of large investors: A mean-variance portfolio approach. Eur. J. Oper. Res., 254(2), 679–688.
Abstract: One key assumption of Markowitz's model is that all traders act as price takers. In this paper, we extend this mean-variance approach in a setting where large investors can move prices. Instead of having an individual optimization problem, we find the investors' Nash equilibrium and redefine the efficient frontier in this new framework. We also develop a simplified application of the general model, with two assets and two investors to shed light on the potential strategic behavior of large and atomic investors. Our findings validate the claim that large investors enhance their portfolio performance in relation to perfect market conditions. Besides, we show under which conditions atomic investors can benefit in relation to the standard setting, even if they have not total influence on their eventual performance. The 'two investors-two assets' setting allows us to quantify performance and do sensitivity analysis regarding investors' market power, risk tolerance and price elasticity of demand. Finally, for a group of well known ETFs, we empirically show how price variations change depending on the volume traded. We also explain how to set up and use our model with real market data. (C) 2016 Elsevier B.V. All rights reserved.
|
