A demand based portfolio choice model

• Grant number: 23/05812-5
• Support Opportunities: Scholarships in Brazil - Doctorate (Direct)
• Start date: August 01, 2023
• End date: July 31, 2025
• Field of knowledge: Applied Social Sciences - Economics
• Principal Investigator: Marcelo Fernandes
• Grantee: Mauricio Ferraresi Junior
• Host Institution: Escola de Economia de São Paulo (EESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil

Abstract

What would have been the impact of a demand shock by Petrobras' share, which hit the portfolios under Banco Itaú's management in each period, on Vale's share price? What would have been the impact on the price of Petrobras' shares? An asset demand system is a matrix of numbers capable of representing these impacts due to managers portfolios in the Brazilian market. A liquidity matrix for a set of assets. These impacts that managers can cause on purchases are information that does not exist in the Brazilian market today. This research project aims to identify a demand system for stocks in the Brazilian market. The proposal is to identify a liquidity matrix for the managers of the Brazilian market. Each element of this matrix is the asset price elasticity of the manager's demand for the asset. The sum of all the liquidity matrices of the managers would be an aggregate liquidity matrix of the assets. It would be possible to obtain liquidity matrices for the 92 assets that make up the market portfolio today. These matrices by managers are defined in this project by the stock demand system. The motivation of this project is that the managers of the Brazilian market do not have a number that quantifies their cross-exposures with other managers because of the portfolios' positions of each one. The risk assessments of market participants are not considering the quantitative importance of managers' portfolios in market prices given certain market conditions. In times of systemic crisis, a currently underestimated risk is implied due to the exposure of managers' portfolios. Without correctly identifying the cross-price elasticity of demand between stocks in the market, it is impossible to reflect on the counterfactual possibilities in the stock movement. A demand system, correctly identified, will allow better risk management given the portfolios of market participants. (AU)