Estrada, Javier
As investors everywhere lose money to the financial crisis, many are wondering whether large catastrophic market swings, known as “black swans,” could ever be predicted with any degree of accuracy. IESE Prof. Javier Estrada considers the impact of outliers in emerging markets and finds that they can have a massive impact on the long term performance of investors’ portfolios.
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Estrada, Javier
Variance is a widely used measure of risk, and mean-variance optimization is a technique widely used to make portfolio decisions. Semivariance is a measure of risk at least as plausible as variance, and yet mean-semivariance optimization is not very widely used by institutional investors. Part of the reason is that it often involves the use of obscure numerical algorithms. Prof. Javier Estrada proposes a simple and accurate heuristic to optimize portfolios on the basis of mean and semivariance, which aims to put this technique within the reach of all investors familiar with mean-variance optimization.
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Estrada, Javier
Index performance represents a key part of passive and active investment approaches, either through providing the portfolio to invest in, or through setting a standard to measure performance of actively managed funds. However, recent studies on U.S. equity portfolios indicate that superior returns can be obtained by basing index composition on fundamental measures of value, such as dividend or book value, rather than traditional cap-weighted approaches. IESE Prof. Javier Estrada evaluates whether fundamental index funds can provide superior performance in an international context, and determines which portfolio selection strategies are the most effective.
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Estrada, Javier
Highly improbable events do happen, and the financial markets are not immune. Few were prepared for the violent market downturns in Asia and Europe on January 21 of this year, with the FTSE 100 index, for example, experiencing its worst one-day drop since the attacks of September 11, 2001. Startled traders were given hair-raising flashbacks to other infamous Black Mondays. The paper "Black Swans and Market Timing: How Not to Generate Alpha" by IESE Prof. Javier Estrada examines how unexpected outliers can impact performance in the long term. Is it possible to predict events like the kind recently witnessed, or is that like gambling in Vegas?
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Estrada, Javier
Though the valuation of stocks and equity markets is not simple, most practitioners like simple models. And many use the Fed model to determine whether the stock market is mispriced. In the paper "The Fed Model: The Bad, the Worse, and the Ugly," IESE Financial Management Professor Javier Estrada argues that - even though it's well known and widely used - the Fed model is flawed. He explains why the model is not a rational explanation of stock market prices and backs up his argument with evidence from 20 countries.
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Estrada, Javier
Finance is still one of the least hospitable terrains in the economic landscape. Technical jargon and the lack of a good general map make it challenging ground. The new book "Finance in a Nutshell" by IESE professor Javier Estrada provides the missing guide. Lively and practical, the book combines theory with real-world cases to illustrate the basic concepts of finance. Each chapter is complemented by notes and exercises based on an Excel spreadsheet. A desktop companion for practitioners, academics, students and most any manager, "Finance in a Nutshell" is a compendium of financial concepts and techniques that will help the reader to operate successfully in a complicated and uncertain world.
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Estrada, Javier; Kritzman, M.; Myrgren, S.; Page, S.
Business barriers in Europe are coming down - and fast - and the world?s financial market must adjust. International investment banks, investors and portfolio managers are all grappling with the same question: When it comes to investing in Europe, should we focus on picking stocks from industries or from countries? In the paper, "Countries Versus Industries in Europe: A Normative Portfolio Approach," Javier Estrada of IESE, Mark Kritzman of Windham Capital Management, and Simon Myrgren and Sébastien Page of State Street Associates band together to address this important question. Thanks to integration, industry experience, it seems, has become more valuable than country expertise.
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Estrada, Javier; Serra, A.P.
In order to evaluate projects, value firms, optimize capital structures and implement investment strategies, companies and investors need to know the risk variables that ultimately determine expected returns. While in developed markets there is at least a "model to beat," the CAPM, in emerging markets there is no standard, widely accepted way of estimating required returns on equity. In the article "Risk and Return in Emerging Markets: Family Matters," Javier Estrada of IESE Business School and Ana Paula Serra of CEMPRE, Faculdade de Economia do Porto, perform a statistical and economic analysis of the risk-return relationship in emerging markets. Their purpose is to compare the performance of three families of risk/return models usually considered separately in the literature: traditional, factor, and downside risk.
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Estrada, Javier
How do you value Internet companies? How do you measure their risk? In his research paper "The Cost of Equity of Internet Stocks: A Downside Risk Approach", IESE Professor Javier Estrada focuses on the semideviation - which captures the downside volatility that investors want to avoid but gives no weight to the upside volatility to which they want to be exposed - as a plausible measure of risk and a determinant of the required return of Internet stocks. The paper is a "consistency check"on the ability of the semideviation to explain the required return of assets with non-normal distributions, such as Internet stocks and emerging markets.
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Estrada, Javier
In the world of finance, risk is a slippery concept. Theorists continually debate the best way to measure the risk of an asset in a diversified portfolio. For years, the most widely accepted measure has been the asset´s beta, which stems from an equilibrium in which investors display mean-variance behavior (MVB). But investors identify risk with downside potential, which leads to an alternative behavioral model based on downside risk called mean-semivariance behavior (MSB). Javier Estrada explores the idea.
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