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Presentación

Carlos Andrés Zapata Quimbayo — Thu, 21 Mar 2024 00:00:00 -0500

Back to Structural Change and Industrial Policy

Luis Armando Blanco, Julián Marcel Libreros Amaya — Thu, 21 Mar 2024 00:00:00 -0500

Industrial policies to generate structural change in the economy are back in almost the entire world. Despite criticism and pessimism about its effectiveness, governments do have an explicit policy or not. This article reviews the controversy between different currents of economic thought. The thesis is that a modern industrial policy that does not imply a selection of winners is necessary. In Colombia, the “Productive Development Policy” (PDP) has come to the conclusion that structural change is only possible if productivity obstacles are solved based on regional productive vocations.

Application of the Hierarchical Equal Risk Contribution Model with Latin American ADRS

Daniel Aragón Urrego — Thu, 21 Mar 2024 00:00:00 -0500

The Hierarchical Equal Risk Contribution (HERC) approach, as proposed by Raffinot (2017, 2018), is introduced here. Similar to the model proposed by López de Prado (2016), it incorporates machine learning techniques for portfolio optimization, addressing certain limitations of the Mean-Variance model by Markowitz (1952). An application of the HERC model is conducted, considering Single and Ward linkage methods for hierarchical clustering of a set of assets traded on the NYSE, with companies located in Latin American countries. The results indicate that, for this set of assets, the Ward clustering and hierarchy method is characterized by being intra-country, resulting in a more compact number of clusters compared to the Single clustering method. Additionally, it demonstrates better performance, lower volatility, and a higher Sharpe ratio.

Application of stochastic optimal control theory to an investment-consumption problem

John Freddy Moreno Trujillo — Thu, 21 Mar 2024 00:00:00 -0500

The basic elements of deterministic and stochastic optimal control theory are presented. The application of Bellman’s principle of optimality in the stochastic context is described, along with the derivation of the Hamilton-Jacobi-Bellman equation. Using these tools, the investment-consumption problem of Merton is studied in detail.

Review of the Sustainability and Climate Change Initiatives Within the Line of Investment Portfolios

Oscar Eduardo Reyes — Thu, 21 Mar 2024 00:00:00 -0500

The intensity and frequency of climate disasters have been increasing dramatically over the past decade with a trend that also appears to continue. The costs associated with these events are also becoming increasingly higher. Furthermore, these types of climate disasters are assumed to be closely related to the climate change we are facing. Under this scenario, the financial sector plays a key role in the way we manage the actions against climate change. Thus, the higher the impacts of climate change, the faster the actions must be implemented. However, there is a lag between the priority of the need for actions and the actions we are implementing. Some standard risk approaches have been implemented, but there is still a remarkable difficulty in understanding and modeling the uncertainty of future impacts of climate change. In this context, other kind of efforts are necessary from a multidisciplinary perspective that aims to complement the actions against climate change in the fields of finance and investments. We provide a brief of the main existing initiatives but highlight how, although there are important and significant efforts at corporate level, the resulting initiatives are aspirational and voluntary, and thereupon, insufficient regarding the mentioned need. In this sense, the article seeks to pave the pathway towards the justification of the construction of investment portfolios with principles of environmental sustainability.

Optimal Early Termination in PPP Projects Based on Real Options Theory

Carlos Andrés Zapata Quimbayo, Carlos Armando Mejía Veja — Thu, 21 Mar 2024 00:00:00 -0500

Early termination is a contractual compensation mechanism implemented in PPP infrastructure projects where private investors have the right to abandon the project to mitigate risks such as traffic risk. In this paper we used the Real Options Theory to value early termination as an option to abandon a project where both the traffic risk and the compensation fee are modelled assuming correlated stochastic processes. The option pricing model was implemented with an analytical solution and results were compared with the Monte Carlo simulation technique. The results confirm the benefits that the contractual mechanism offers to private investors to mitigate risks, while at the same time improving a project’s value.