BM&F Bovespa A Nova Bolsa

Brazilian Stock Exchange
Almajali, Bastos-Moreira, Benavides, & Parikh
12/3/201
FIN3560
BRAZILIAN STOCK EXCHANGE
Omar Almajali Mauricio Bastos-Moreira Frederico Benavides Anshul Parikh
The authors of this paper hereby give permission to Professor Michael Goldstein to distribute this paper by hard copy, to put it on reserve at Horn Library at Babson College, or to post a PDF version of this paper on the internet.
I pledge my honor that I have neither received nor provided any unauthorized assistance during the completion of this work
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Table of Contents:
Executive Summary...1 Overview...2 Technology Impacts Exchanges..2 Demutualization Trend3 Functions...4 Roles4 Subsidiaries.4 Corporate Governance5 Investing7 Big Players..7 Foreign Investment..7 Trading Hours.9 Index9 Analysis...11 Novo Mercado...11 IBOV.11 Petrobras15 Conclusion.17 References...18 Exhibits20 1.0 1.3.20 2.0 2.8.21 3.0 3.6.29
Executive Summary: We begin our paper by disclosing some of the most important historical aspects and transitional phases that the BM&FBOVESPA went through since its establishment. BM&FBOVESPA, the largest securities market in Latin America, would not be in its superior position today if it was not for the milestones it has accomplished along the way. Some of these milestones include: the merging of BM&F and the Bovespa, altering the combined groups business model, undergoing demutualization, and creating a new market segment, Novo Mercado. Our paper also covers the several subsidiary groups that BM&FBOVESPA possesses in order to support its functionality such as: the BM&F bank, BM&F USA Inc. and the BSM. We further explore Bovespa by analyzing the exchanges big players, the requirements it imposes on foreign investors, and its trading hours. The Bovespa Index (Ibovespa or IBOV) is the main indicator of the stock markets weighted-average performance. Though the indicator is available to investors world-over, only few understand its composition; in this book report we include a detailed section on how this index is calculated. Political and financial deregulation have attributed to Brazils fast growing economy for the past two decades; however, there has been one specific implementation in the exchange that has drawn in foreign capital ranging from Europe to Australia. In this paper we prove that the initiation and implementation of the Novo Mercado, is a significant reason behind BM&Fs enhanced performance. This conclusion was supported by performing a return analysis on the exchange before and after the establishment of the Novo Mercado. BM&Fs exponential growth and success, though home grown, have international exposure due to the countrys large export of commodities. Therefore, we felt it would be worthwhile to explore ibovespas sensitivity relative to several international and national factors. In our analysis, w e attempted to understand, explain, and predict the indexs movements.
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Overview: BM&FBOVESPA S.A is a Brazilian company that operates as a securities, commodities, and futures exchange in Brazil. 1 It was formed in 2008 by the merger of Bovespa Holding S.A (Sao Paulo Stock Exchange) and the Brazilian Mercantile & Futures Exchange (BM&F).2 The rationale behind this merger was to combine the regions largest stock and derivatives exchange and take advantage of growth opportunities at a global scale while reducing costs. 3 The rise of global competition and technological advances during the 1990s cornered stock exchanges into rethinking their business models. It did so because it negatively affected the ways they generated revenue threatening their profitability. Prior to this period, an exchanges main sources of revenue were transaction fees, listing fees, membership fees, and sales of information services such as market data. However, with the major technological improvements investors were able to easily invest in foreign exchanges and obtain market data at considerably lower prices; thus, stock exchanges were forced to lower their fees in hopes to maintain business while branching out towards alternative sources of income. In order to best cope with the situation they shifted their focus towards trading commissions, which were not so negatively affected , and expanded their offering of products and services[,] such as: derivatives trading, and clearance and settlement services. Quickly it became clear that the key to an exchanges success in a globalized market place would be its ability to generate trading volume. This was the case because their revenue became much more dependent on trading commissions the more volume the greater the overall commission and the demand for the new products/services that are also positively related to the volume of trades. Therefore, it is not surprising that many exchanges sought out strategic alliances or joint ventures in attempts to be ahead of the competition. Moreover, this merging strategy was particularly important for exchanges in emerging markets, like Brazil, because it served as a means of ensuring survival since the ability of Brazils own blue chip companies to list on the New York and London
1 2
Bloomberg Business Week [# 1 on references page] BM&FBovespa Sobre a Bolsa [# 2 on references page] 3 Bloomberg [# 3 on references page]
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Stock Exchanges resulted in sharp declines in their overall trading volumes. The fierce competition truly pushed exchanges to adapt and as a result brought forth a trend of demutualization. 4 Demutualization is when a mutual company owned by its users/members converts into a company owned by shareholders.5 Besides focusing on increasing volume, stock exchanges had another critical challenge: efficiency. In the past, when there was limited competition, exchanges acted similar to monopolies where its members held all the power. Therefore, with the intensification of rivalry it was evident that this model became obsolete and unproductive. By demutualizing, an exchange generated capital to invest in technology and on the long-run was able to transfer the decision-making power to outside investors. And this mean[t] that the old consensus decision-making of the exchange members eventually would be supplanted by a professional management team presumably motivated by significant share ownership to increase efficiency and profits. 6 Consequently this process gave exchanges a much better chance of thriving in the new international trading scene. Following this trend Bovespa went through the demutualization, in May of 2007, just preceding its merger with BM&F. An interesting aspect of this demutualization is that the exchange not only went straight from a non-for-profit organization to a public held company, but also listed its stocks on Bovespa itself.7 Looking back we can confirm this was a very beneficial strategy for Bovespa. Today the exchange is Latin Americas largest public security-trading market, the second in the overall Americas, the 9th worldwide equity by volume market, and the 6th derivative exchange by contract volume. 8 + 9 Although these results are very impressive, it has not stopped BM&FBovespas management to constantly push for improvements/innovations in efforts to add more value to the company.
4 5
Reena Aggarwal Demutualization and Corporate Governance of Stock Exchanges [# 4 on references page] Investopedia Definition [# 5 on references page] 6 Reena Aggarwal Demutualization and Corporate Governance of Stock Exchanges [# 4 on references page] 7 Bovespa Holding Communication on Progress [# 6 on references page] 8 Markets Wiki [# 7 on references page] 9 World Federation of Exchanges PDF pg.6 [# 8 on references page]
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Functions: BM&FBOVESPA is the primary institution in Brazil that oversees and supports capital markets operations. The company develops, implements, and provides systems for trading as well as it offers recording, clearing, settlement, and risk management systems; custodian systems for agribusiness securities, gold, and other assets; and WebTrading, an environment of electronic trading. Furthermore it operates as a central securities depository, and licenses software and stock indices. Additionally, it provides securities and annuities listing, and market data vending. 10 In order to provide all of these services the Bovespa group manages a cluster of subsidiary companies where each company has been specifically designed to aid in an important aspect of the daily operations. For instance, the BM&FBOVESPA Bank performs custody and bookkeeping support for investment funds (including calculation of unit value); risk mitigation and operational support for market participants; and access to the Central Bank of Brazil for immediate settlement of transactions involving government bonds pledged as collateral to BM&FBOVESPA. Besides these services, it is directly involved in providing service to non-Brazilian residents investors (individuals). These services range from legal and tax representation, and foreign exchange to providing information to the investors. Another important subsidiary is BM&F USA Inc., which has its office representing the group in New York City. They offer infra-structure and support to foreign investors, but more on a corporate level rather than an individual one. Also, the office in New York is in charge of building relationships with foreign regulatory, governmental agencies, and exchanges with the goal of analyzing potential attractive opportunities. 11 Last but not least, there is BM&FBOVESPA Supervisao de Mercado (BSM) which is a not-for-profit association in charge of supervision and regulation of all activities and agents in the market. 12 Given the nature of its activities, BSM is a functionally autonomous and financially independent entity. This truly helps promote its transparency and affirm the unbiased of its due diligence while monitoring the market. One of the, if not
10 11
Bloomberg Business Week [# 1 on references page] BM&FBovespa Sobre a Bolsa [# 2 on references page] 12 BSM webpage [ # 10 on references page]
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the most, important function of BSM is its supervision of corporate governance requirements through its surveillance board. 13 Corporate governance is a system by which companies are directed and monitored, concerning Shareholders, the Board, Directors, Independent Audit and Fiscal Council. 14 This system is very important because it is the main way companies guarantee a certain level of security to investors. A company following good corporate governance practices transmits a message of integrity and fairness, of being transparent with regard to all transactions; thus, demonstrating a sense of responsibility towards the stakeholders by clearly showing a commitment to conducting business in an ethical manner. 15 In Brazil, the implementation of good corporate governance principles has always been a challenge. The prevalence of family owned companies, limited capital pulverization, and low percentage of shareholders with voting rights are characteristics that lead to an adverse environment for governance practices. 16 Bovespas management understood that governance was an issue that needed to be fixed in order to make the exchange a safer and more attractive option to investors. In life, and in financial markets, every single action one takes is subject to risks. In markets there are two main types of risks: systematic and unsystematic risks. Systematic risks are the overall market risks that cannot be avoided (significantly reduced) but only hedged. Whereas, unsystematic are specific risks that can be avoided through diversification. To better explain their difference lets imagine a scenario: Joe takes the bus from Boston to New York to visit his family during thanksgiving break. However, before he purchased his ticket he checked if the vehicle had passed the states inspection. During this trip Joe is exposed to all the systematic risks any person would be while on board of a motor vehicle. For instance, he runs the risk of a collision or a tire blow-out, yet because the bus passed the states inspection the odds of it suffering a system malfunction are slim to none. Hence, similar to this oversimplified example, Bovespa acts as the government setting safety requirements for vehicles
13 14
BM&FBovespa Corporate Governance Paper [# 11 on references page] BM&FBovespa website [# 12 on references page] 15 The Economic Times [# 13 on references page] 16 Azevedo Sette Advogados [# 14 on references page]
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(companies) so that passengers (investors) can be safe while travelling (investing). In other words Bovespa only wants investors to have the regular unavoidable risks of investing in a capital market. The way the group decided to do that is very clever and interesting. Since Bovespa is not the Brazilian government it has no authority to obligate companies to comply with governance laws. Therefore there is a high risk for Bovespa to lose its listed companies if it decided to impose sudden strict regulations on them. Moreover, knowing that volume is crucial for the exchanges financial health, this was certainly not an option. To bypass this obstacle, BM&F created a different listing segment with requirements for admission and continued membership. This is when the Novo Mercado was born (December 2000). Novo Mercado is a listing segment designed for shares issued by companies that voluntarily undertake to abide by corporate governance practices and transparency requirements in additional to those already requested by the Brazilian Law and CVM (Brazilian Securities and Exchange Commission). It was designed to further the rights of the investors and their ability to make educated decisions by requiring companies to regularly disclose accurate, trustworthy, and relevant information. To be admitted and maintain its membership in the Novo Mercado a company must: maintain a minimum free float (= or > 25%) of capital; provide tag along conditions to all investors; establish two-year unified mandate for entire Board of Directors, which must have at least 5 members (20% shall be Independent); disclose an annual balance sheet according to US GAAP or IFRS standards; Improve quarterly reports with consolidated financial statements and special audit revision; Comply with disclosure rules of the exchange; Obligated to hold a tender offer by the economic value criteria if delisted from Novo Mercado. 17 Moreover, other segments were created besides the Novo Mercado: level 1, level 2, and Bovespa Mais. These new segments have different requirements in order to offer investors and companies more options. Level 1 and Level 2 require lower levels of corporate governance and hence is tailored to companies that do not want to comply with Novo Mercados strict requirements. Bovespa Mais, on the other hand, is a segment that mostly mimics the Novo Mercado, but is designed to facilitate the access of
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BM&FBovespa webpage [# 15 on references page]
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small and medium companies into the capital markets. The idea behind this new segment is to eventually drive the companies listed in Bovespa Mais to transfer to Novo Mercado once they are more established and thriving. Investing in Bovespa: Brazil is the largest economy in Latin America and with it comes some of the most thriving companies in the entire southern hemisphere. One of the largest companies in the Bovespa is Petrobras, a semipublic energy company headquartered in Rio de Jainero. It was created in 1953 as a legal monopoly in the oil industry and in 1997 became a semipublic company. Petrobras gives a significant output of 2 million oil barrels a day and it is a world leader in the development of advanced technology for deepwater water oil production.18 In Brazil there is also the largest financial conglomerate in Latin America: Banco Ita. This holding company is headquartered in So Paulo where it focuses mainly on financial services, such as commercial and corporate banking. Banco Ita also offers insurance, assets management, and capitalization plans.19 They have 456 billion Brazilian Reais of assets as of 2011 and 14.5 million clients. Not only does Brazil have the largest oil company and bank in Latin America, but also the largest mining company: Companhia Vale do Rio Doce. Vale S.A. is the worlds second largest mining company, leader in iron-ore production and second biggest nickel producer. It was founded in 1942 by the Brazilian government; however Vale was privatized right around the same time Petrobras was (1997).20 These big companies, along with the Brazilian economy, thrived even further when foreign investments started to flourish in Brazil. Brazil has one of the most liberal investment climates for outside investors. Non-resident investors, both individuals and legal entities, can invest in most of the financial and capital market instruments available to resident investors, without any restrictions. International investors have two options for foreign investors to invest in the Brazilian stocks. The first option is to go straight to the place of action by investing in stocks listed on the Brazilian stock exchange. The second option is to try
18 19
Petrobras [# 16 on references page] The Brazil Business [# 17 on references page] 20 Brazil [#18 on references page]
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the offshore investment route available in the form of American depository receipts (ADRs), Global depository receipt (GDRs), exchange-traded funds (ETFs) and mutual funds focused on Brazil or Latin America. Furthermore, Investors desiring a shorter route can use the option of operating as participants ("passengers") in collective accounts registered in the name of some other investor."21 Regardless of any scenario, non-resident investors have to abide by specific admission rules in order to start initiating investments in the Bovespa. According to the CMN (Brazilian Monetary Council) Resolution 2689, since international investors are not established or resident in the country, it is necessary to hire an institution to act as Legal Representative which would be responsible to present all the registration information of the investor to the Brazilian Authorities. The role of a legal representative can be done by any financial institution authorized by the Central Bank22. In addition, a Fiscal Representative must be appointed who would be responsible for taxes and fiscal issues on behalf of the investor before the Brazilian Authorities (usually their legal representative). Next, a Custodian must be hired to be responsible for keeping physical records of all investor documents and must present them to the Brazilian authorities whenever required.
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These sets of documents include Statues of the investor,
minutes of meetings that nominated the responsible for trading, registry documents of the company and others according to the Custodian compliance rules. Several financial institutions are authorized by the CVM and Central Bank to perform the custodian activities while act as investor's legal and fiscal representatives too. After these contracts with the legal representative, the tax representative and the custodian bank have been established; they must be signed and submitted to the Brazilian Securities Commission. This process could be also handled by the legal representative. The registration with the CVM is usually made electronically and it will then provide the legal representative with a tax code (CNPJ) within 24 hours
21 22
Investopedia [#19 on references page] BM&FBOVESPA How to invest [#20 on references page] 23 BM&FBOVESPA Getting started [#21 on references page]
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after the request. Finally, the foreign investor must register with a local brokerage house in Brazil for execution services. 24 The trading hours for equity markets in the Bovespa starts with the pre-opening at 9:45 till 10:00 am. This pre-opening is dedicated for brokers to insert orders (no order is executed before the preopening). Moreover, it is used for the calculation of the theoretical opening price.25 The market officially opens at 10:00am and it closes at 5:00pm, during this time there is a continuous trading session for all listed securities. There is also a closing call that extends from 4:55 to 5:00 for shares included in the exchanges index portfolio, ETFs and other stocks. This closing call also applies to the options on the IBrX-100 portfolio (top 100 stocks traded on the Bovespa). In addition, the closing call period for ETFs is extended by 2 minutes after the end of the last stock closing call. There is an after-market period where trades can occur after the regular market has closed, and that is from 5:30pm to 7:00pm. During the aftermarker hours only shares included in the IBOVESPA and the IBrX-100 portfolios can be traded.26
The Bovespa Index, IBOV for short, is the main indicator of the Brazilian stock markets average performance. Its function is to accurately reflect the variation of the most traded and relevant stocks listed in the exchange. Its value is the current value in Brazilian currency, of a theoretical stock portfolio. Moreover, this portfolio was constituted in 1968 when the IBOV was first implemented and no additional investment has been made since this date, apart from the reinvestment of the distributed benefits (such as dividends, subscription rights and stocks bonuses). is build.
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Another very interesting aspect of the IBOV is how this portfolio
24 25
BM&FBOVESPA Opening an account [#22 on references page] BM&FBOVESPA Operational manual procedure [#23 on references page] 26 BM&FBOVESPA Operational manual procedure [#23 on references page] 27 Bovespa Index: [# 27 on references page]
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In order for a listed company to be part of the portfolio it must, in the past 12 months, have met all of these three criteria: 1. Be traded on at least 80% of trading sessions; 2. Have an average daily participation volume 0.1% of Bovespas overall daily average volume; 3. Be in the 80% IN group. The first two criteria take care that the stock is liquid and actively contributing to the exchange. The third criterion ensures the portfolio is constituted of relevant stocks ( 80%) of the index. To select these companies Bovespa uses a geometric average to define each companys Index of Negotiability (IN). To calculate the IN one must multiply the ratios of the company to overall market # of trades and company to overall market volume (gross transaction value); then take the square root of the result. Once this is calculated Bovespa lists each company by decreasing (largest to smallest) order and selects the top 80% IN to be part of the portfolio. After that it adjusts the base to figure out how many shares of each company the portfolio will have. For instance, Company A has an IN of 10% of the overall market but it composes 12.5% of the portfolio (10/100 = 10% and 10/80 = 12.5%). Moreover, Bovespa reevaluates the portfolio three times per year (every 4 months) and makes sure that the index value is not subjected to discontinuity. It does so by allowing flexibility in calculating the quantity/portion each company makes up in the portfolio. It also has rules for adjustments set up for specific cases such as mergers, IPOs, spinoffs, and other relevant situations. 28 Bellow you can see a visual representation of the IN and base Adjustment formulas:
AND:
Source: http://www.monitorinvestimentos.com.br/ver_artigo.php?id_artigo=397
28
Monitor Investimentos [# 28 on references page]
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Statistical Analysis:
Novo Mercado (New Market): The investor friendly rules of the Novo Mercado were set in full function at the start of 2002, which has had a positive impact on the Brazilian financial markets in its ability to draw in foreign investment. Exhibit 1.1 displays returns for the most recent decade of returns; the Bovespa is compared to the S&P 500 (US) which shows the mighty growth in the emerging economy versus the mature North American one. The Bovespas total return at the close of 2011 was up over 300.0% for the decade as opposed to its American rival, which was only up 9.5%. Additionally, the five largest companies by weight on the ibovespa had a range of returns from 11.2% to 1060.4%.
Brazils Petroleo Brasilerio SA, better known as Petrobras, is one of the strongest performing stocks and is considered to be a national blue chip for investors. In comparison to its multinational rivals, the company is tracked across two decades divided by the implementation of the new market rules in the beginning of 2002. For the 10 years prior there was an astronomical return of above 4000.0% (see Exhibit 1.2); however, the currency gain went from 0.19 Reals to 6.39 Reals. Its competitors performed well during this time period too, specifically Shell and BP which had returns of 339% and 293%, respectively. The explosive growth, however, was during the past decade in which (see Exhibit 1.3) Petrobras grew its share price by 236% from 6.39 Reals to 21.49 Reals. The only other company to see higher numbers was CNOOC, another BRIC nation with strong backing from the Chinese state. IBOV: We decided to explore what factors would cause the Bovespa Index, ibovespa, to appreciate or depreciate. After researching Brazils economy we found out that South Americas largest country and economy was influenced by several factors. In the early part of the 2000s, Brazil had one of the fastest growing GDP supported by local industries that in turn have drawn attention from foreign investors world
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round.29 There are approximately 11 ETFs that track the Bovespa on the New York Stock Exchange; additionally several of Brazils largest companies have co-listings in the form of ADRs on the New York Stock Exchange30. With heightened international importance, we wanted to test out if the ibovespa appreciated or depreciated more in line with national factors versus international factors. We chose a set of 17 factors that included both national and international factors and ran several regressions. The national factors included the Brazilian Real vs. US Dollar exchange rate(BRL-USD <Currency>), Iron Ore & Concentrates priced in Reals, Soy Beans priced in Reals, Sugar Cane priced in Reals, the Brazil Reference Rate (BZTRTRD) and the Brazil CPI Inflation Index (BZPIIPCY)31. The International factors include the S&P 500 (SPX), Dow Jones Industrial Average (DJIA), West Texas Intermediate sweet crude (WTI), MSCI India Index (MXIN), MSCI China Index (MXCN), MSCI Russia Index (MXRU), and the Gold Spot Price (XAU-USD).32 Starting with the national factors, we will now present why each factor was included in the regression. The foreign exchange rate between the BRL-USD is an important factor because Brazil is rich in natural resources and we wanted to see the impact of large exports to the rest of the world and the fluctuation of the home currency upon the national index. Iron Ore & Concentrates account for approximately 15% of the Brazilian economy as of Q1 2012 and therefore is a significant factor in our regression.33 Brazil is one of the worlds top producers of soy beans and related soy products, and for the local economy are accounts for 5.4% of exports as of Q1 2012.34 Another commodity in which Brazil ranks number one in the world is for producing raw sugar cane; it accounts for 6.4% of the countrys exports.35 Moving towards financial indicators, the countrys reference rate is another important factor because it serves as the prime rate in which Brazils Central Bank lends to 20 of the countrys largest
29 30
Seeking Alpha [#25 on reference page] Seeking Alpha [# 25 on references page] 31 Index Mundi [#26 on references page] 32 The quotes in brackets are the Bloomberg standard ticker symbols for the respective security/index/commodity
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banks. Finally, the CPI inflation rate is another factor that will be included in the regression because it helps to track price levels in the country, which had suffered record levels of hyper-inflation in the 1980s. Morgan Stanley Capital International (MSCI) helps to track many of the worlds indices and tracking Brazil is no exception. The country has had one of the best returning indices in the world and is part of the BRIC nations (Brazil, Russia, India and China). The US has two major benchmark indices that are followed world over by investors, the S&P 500 and the DJIA. The first tracks approximately 500 of the largest companies in the US markets, while the latter tracks the top 30 blue chip companies of the US, which historically has been paying high dividends (with the exception of technology companies). Oil and gas play a large part in international trade, and with Brazil being one of the worlds largest consumers and producers of natural gas and oil, it is important to see how the West Texas Intermediate sweet crude fares as a factor. The WTI is lighter and contains less sulfur than other rival oil types such as the BRENT, and is used by more industries. The MSCI indices of China, India, and Russia are vital in the regression because they are also members of the BRIC emerging economies which have experienced high growth over the last decade; therefore it is a natural fit for inclusion in the regression. Since the 2007 global financial crisis, global investors have flocked to gold as a safe heaven, making it more valuable per ounce than platinum; with Brazil facing hyper-inflation in the past, gold is an important component to this regression. After selecting the variables we obtained the historical data to run our statistical analysis. It is important to point out that our model is based on monthly data (beginning of 2002 to the end of 2011). We decided to do this in order to have the ability to use our model to forecast IBOVs values for year to date 2012 and compare it to the actual market values. Firstly, we started by running a best subset regression analysis of the IBOV versus all 17 variables. As seen in exhibit 2.2, by performing this analysis we were able to identify a set of eight variables that best correlate with the index. We feel confident that these eight variables are the best options for our model because they combined have a very strong R-squared adjusted of 98.3, the smallest Mallows Cp value of 7.6, and are aligned with the
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parsimony principle. Then, once we were able to identify these variables we ran a second multiple linear regression paying particular attention to variance inflation factors (VIF). The reasoning behind this is that VIF accounts for the co-linearity between variables and this negatively influences our model. Using the common statistical rule of thumb, VIF < 5, we continued with our analysis; meaning we eliminated the highest variable falling in the category of VIF<5 and ran another multi-linear regression. This process took place continuously until we got all of these invalid variables out of the way. So as seen in exhibit 2.3 we eliminate Gold due to its incredibly high VIF of 17.845. Then we ran a third regression shown in exhibit 2.4 and eliminated MSCI India with a VIF of 16.348. In the fourth regression displayed by exhibit 2.5 we took out the foreign exchange rate between US and Brazil because of its VIF of 5.840. Then we ran a fifth regression where finally all of our variables had a VIF < 5. Nevertheless, we were not done yet because in this latest regression we examined that the S&P500 variable possessed a p-value > .05. Therefore, it proved to be statistically insignificant to our model and we eliminated it and ran a sixth and final regression with the remaining four variables. This final regression presented in exhibit 2.6 provided us with an equation for forecasting the indexs value: IBOV = - 2461 + 257 WTI Oil + 2168 MSCI China + 106 Iron Ore - 23546 Brazil Reference Interest Rate. After obtaining it we analyzed each variable and the weights set to them to make sense of our model. It is very understandable why WTI Oil has a correlation with the IBOV. Petrobras is one of the biggest companies listed in Bovespa and a change in the world prices of oil definitely affects its price and subsequently the index value. Moreover, China is a big importer of Brazilian commodities so it makes sense that whenever China is doing well it will import more from Brazil hence appreciating the IBOV. Due to its size and importance the large weight set to China by our model is quite logical. Actually this is supported through the fact that as China has been slowing down recently we have seen depreciation in IBOVs value. Also, as we mentioned earlier Iron Ore accounts for about 15% of Brazils economy and a change in its value should have an impact in the index. The last variable in our model is Brazils Reference Interest Rate. It is very consistent and interesting to see that an increase in interest
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rates would lower the indexs value. This should be true because as interest rates rise the overall cost of capital rises which in turn make investing riskier and lower the index. Finally, after we were satisfied with our model we ran it forecasting IBOV and comparing it to the actual 2012 values. Referring to Exhibit 2.8 we can see a table of values with our forecasts and the graphical representation of them. The first thing to notice in our forecast is that although it is often correlated it over predicts IBOVs value. This is very relevant because although the general movement is similar our predictions were always at least 1% up to 12% higher than the actual values. We feel that the main explanation behind this is that Interest Rates are not behaving normally. Our model is based on historical data and the current extremely low levels of interests rate could not have been predicted based on past events. As a result our model has the tendency of taking this as a sign of positive market conditions that should propel the IBOV. Nevertheless, it fails to acknowledge the insecurity capital markets are facing globally. Investors are not sure of what is going to happen and because of that are not acting like they normally would. The perfect example of this would be how US 10 year treasury notes have an YTM of only1.76%. This is extremely low and astonishing that people are willing to lose money (rates lower than inflation) in order to obtain security. Petrobras: Petrobras is easily one of the most identifiable companies in Brazil as it had one of the largest share offerings in the early part of this decade; the semi-public company managed to raise over $70B Dollars in 2010.36 Although there is government ownership in the company, it is the second largest member on the ibovespa by weight, second only to Vale SA. In this regression, we wanted to explore Petrobras movement in relation to other large national companies and other multinational oil companies; we also wanted to find a regression model that would aid in predicting the share price of Petrobras and understanding whether it moves more accordingly to other Brazilian or international oil powerhouses. In order to keep a common denominator, all companies
36
PetroBras [#27 on references page ]
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used in this regression were priced in US dollar; the companies were either US listed companies or American Depository Receipts (ADR) which allows foreign companies to attract international money using the greenback as a common currency. Ultimately taking data from 2002 (the implementation of the Novo Mercado) to 2011 on a monthly basis, we wanted to test the regression model to see how well it fits against the actual results of 2012 up to October 31st last price of Petrobras. The companies used in this regression were Vale SA, OGX, Banco Bradesco, BP PLC (British Petroleum), Exxon Mobil, CNOOC (China National Offshore Oil Corporation), Royal Dutch Shell and Chevron Corporation. The initial regression run was a best subset which helped to identify stronger factors from weaker ones. As per Exhibit 3.1, there were several companies removed after an Adjusted R-Sq of 83.7%, a Mallows Cp of 3.2 and a low standard deviation of 2.7288 resulted in Vale SA, Ita, BP PLC, Exxon Mobil and Chevron as better representations of Petrobras ADR price movements. The next step was to run a regression checking for VIF factors above five so as to avoid co-linearity. Exhibit 3.2 shows the improved regression with a higher R-Sq(adj) of 89.1%; however, Chevron had a high VIF of 17.119 and was subsequently removed. Exhibit 3.3, showed a dip in the R-Sq(adj) value and additionally the colinearity of Vale required it to be removed. Exhibit 3.4 shows a high p-value of BP PLC which was greater than 0.05 was subsequently removed to see if the model would strengthen. Exhibit 3.5, results in the equation: Petrobras = -11.7+1.34(ITAU)+0.329(Exxon) Taking the regression equation from above, we next went to see how well this equation was able to serve as a predictor of future end-month values of Petrobras. Exhibit 3.6 depicts the regressions attempt to predict the future values of the Petrobras. Ultimately, our regression model was weak as it only had an R-Sq(adj) value of 80.1%. Additionally, the model over predicted the price on every occasion and is thus not a good fit for predicting the price of Petrobras in international markets. It is clear that there are more factors that affect the oil companies stock price that we do not have a way to factor in such as investor sentiment and outlook. These unidentifiable factors are likely to be due to the slowing of the Brazilian economy and the effects of the post financial market meltdown that began in 2007. The model, however, is not all bad because there is a
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relationship that is not accountable quantitatively. Even though the model over-predicts the value of Petrobras, it moves in line with Ita, the countrys largest bank by assets, and additional research shows that Petrobras is a big client of Ita.37 Therefore, the larger weight placed on Ita is not a definitive factor but a good indication of the performance of Petrobras as its stock price moves with the performance of the regression equation noted above. Conclusion: The Brazilian Stock exchange has underwent major structural and regulatory changes in the past 20 years. These changes have positioned the exchange as a strong and attractive option to investors around the world. The Novo Mercado, supported by great returns after its introduction, has definitely been a big contributor to the exchanges success thus far. Nevertheless, as shown by our quantitative analysis it does not completely ensure future results. This holds true because Brazils performance is directly correlated to international factors such as other partners performances (ex: China & US) and commodities values (Iron Ore and Oil). Moreover, it currently faces as any other exchange in the world the challenges of global financial instability. Therefore, we believe that in order to maintain or even improve its current position Bovespa will need to continue pushing transparency in its markets and hope for a strong countrys performance. Our reasoning is that investors are very skeptical and reluctant to take risks; which explains to an extend why our current models tend to over predict values.
37
Bloomberg Terminal: <ITUB4 BS <Equity>> -> Supply Chain Analysis -> Petrobras
-17-
REFERENCES: 1. Bloomberg Business Week:

http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=21953226
2. BM&FBovespa Sobre a Bolsa:

http://www.bmfbovespa.com.br/pt-br/intros/intro-sobre-a-bolsa.aspx?idioma=pt-br
3. Bloomberg:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNzQELxR42ms&refer=latin_am erica
4. Reena Aggarwal Demutualization and Corporate Governance of Stock Exchanges:

http://www.set.or.th/setresearch/files/demutualization/ResearchPaper_2002_Reena.pdf
5. Investopedia Definition:
http://www.investopedia.com/terms/d/demutualization.asp#axzz2DJEHqzk7 Bovespa Holding Communication on Progress: http://www.unglobalcompact.org/system/attachments/3061/original/COP.pdf?1262614370
6. Markets Wiki:
http://www.marketswiki.com/mwiki/BM%26FBOVESPA World Federation of Exchanges PDF pg.6: http://www.worldexchanges.org/files/file/stats%20and%20charts/2011%20WFE%20Market%20 Highlights.pdf
7. BM&FBOVESPA Bank website:

http://www.bmfbovespa.com.br/BancoBmfbovespa/Nonresident/en-us/about-us.asp
8. BSM webpage:
http://www.bovespasupervisaomercado.com.br/QuemSomos.asp
9. BM&FBovespa Corporate Governance Paper

http://ri.bmfbovespa.com.br/upload/portal_investidores/pt/governanca_corporativa/estatutos_polit icas/CA-28-Annex1_CG_Guidelines.pdf
10. BM&FBovespa Website:

http://www.bmfbovespa.com.br/en-us/markets/equities/companies/corporategovernance.aspx?idioma=en-us
11. The Economic Times:

http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporategovernance-satyam-books-fraud-by-satyam-founder
12. BM&FBovespa website:

http://www.bmfbovespa.com.br/cias-listadas/EmpresasListadas/BuscaEmpresaListada.aspx?indiceAba=2&seg=NM&Idioma=en-us
-18-
13. Azevedo Sette Advogados:

http://www.azevedosette.com.br/en/noticias/corporate_governance_in_brazil_and_the_bovespa_n ew_market/338
14. Petrobras: http://www.petrobras.com/en/about-us/ 15. The Brazil Business:

http://thebrazilbusiness.com/article/the-10-major-brazilian-banks
16. Brazil:
http://www.brazzil.com/pages/p18jun97.htm
Investopedia:
http://www.investopedia.com/articles/stocks/10/investing-in-brazil.asp#axzz2DgUMZobv
17. BM&FBOVESPA How to invest:

http://www.bmfbovespa.com.br/en-us/intros/intro-how-to-invest.aspx?idioma=en-us
18. BM&FBOVESPA Getting started:

http://www.bmfbovespa.com.br/en-us/international-investors/getting-started-with-bvmf/gettingstarted-with-bvmf.aspx?Idioma=en-us
19. BM&FBOVESPA Opening an account:

http://www.bmfbovespa.com.br/en-us/international-investors/opening-an-account/opening-anaccount.aspx?Idioma=en-us
20. BM&FBOVESPA Operational manual procedures:

http://www.bmfbovespa.com.br/en-us/download/Operational-Procedure-Manual-Bovespa-Segment.pdf
21. Seeking Alpha A Forecasting Analysis on the BOVESPA

http://seekingalpha.com/article/265224-a-forecasting-analysis-of-the-bovespa-part-1
22. Index Mundi World Commodity Prices

www.indexmundi.com
23. Bloomberg Standard ticker symbols via the Terminal 24. PetroBras: http://www.petrobras.com.br/pt/ 25. Supply Chain Analysis Bloomberg Terminal 26. Bloomberg Terminal: <ITUB4 BS <Equity>> -> Supply Chain Analysis -> PetroBras 27. Bovespa Index:
http://www.bmfbovespa.com.br/indices/ResumoIndice.aspx?Indice=Ibovespa&Idioma=en-us
28. Monitor Investimentos:

http://www.monitorinvestimentos.com.br/ver_artigo.php?id_artigo=397
-19-
Exhibit 1.0: Total Returns of the Novo Mercado (The New Market)
Exhibit 1.1:
Name Bovespa Brasil Sao Paulo Stock Exchange Index S&P 500 Index Petroleo Brasileiro SA Vale SA Itau Unibanco Holding SA OGX Petroleo e Gas Participacoes SA Banco Bradesco SA Price App Tot Ret Entry Price Exit Price Entry Mkt Val Exit Mkt Val Capital Gain Tot Gain 317.9988% 317.9988% 13,577.57 56,754.08 135,775,700.00 567,540,800.00 431,765,100.00 431,765,100.00 9.5394% 33.3427% 1,148.08 1,257.60 6.39 4.48 6.40 12.25 5.50 21.49 37.82 33.99 13.62 11,480,800.00 6,394.00 4,475.00 6,400.00 12,250.00 15,308,807.44 32,503.07 51,926.24 44,979.21 13,620.00 1,095,200.00 15,096.00 33,345.00 27,590.00 1,370.00 3,828,007.44 26,109.07 47,451.24 38,579.21 1,370.00 18,496.15
236.0963% 408.3370% 745.1397% 1060.3629% 431.0938% 602.8001% 11.1837% 11.1837%
459.0909% 672.5872%
30.75 2,750.00 21,246.15 12,625.00 December 31st, 2001 through December 31st, 2011
Exhibit 1.2:
Name Petroleo Brasileiro SA BP PLC Exxon Mobil Corp CNOOC Ltd Royal Dutch Shell PLC Chevron Corp
Price App 3195.8763% 182.9506% 158.2332% 22.2962% 253.2143% 159.7391%
Tot Ret Tot DPS Entry Price 4107.4097% 0.78 0.19 293.5309% 9.67 16.44 261.3222% 7.94 15.22 23.7876% 0.02 1.20 339.8703% 4.80 8.05 270.3607% 10.85 17.25
Exit Price Entry Mkt Val Exit Mkt Val Capital Gain 6.39 1,940.00 81,623.75 62,000.00 46.51 164,375.00 646,866.34 300,725.00 39.30 15,218.80 54,988.90 24,081.20 1.47 1,202.00 1,487.93 268.00 28.45 8,054.60 35,429.79 20,395.40 44.81 17,250.00 63,887.22 27,555.00
December 31st, 1991 through December 31st, 2001
Tot Gain 79,683.75 482,491.34 39,770.10 285.93 27,375.19 46,637.22
Exhibit 1.3:
Name Petroleo Brasileiro SA BP PLC Exxon Mobil Corp CNOOC Ltd Royal Dutch Shell PLC Chevron Corp Price App 236.0963% -8.1058% 115.6743% 823.8095% -1.0545% 137.4735% Tot Ret Tot DPS Entry Price 408.3370% 7.14 6.39 34.4044% 20.72 46.51 170.0621% 13.55 39.30 1205.2630% 2.54 1.47 56.3747% 10.54 28.45 232.4097% 21.50 44.81 Exit Price Entry Mkt Val Exit Mkt Val Capital Gain 21.49 63,940.00 325,030.65 150,960.00 42.74 465,100.00 625,114.68 -37,700.00 84.76 39,300.00 106,134.41 45,460.00 13.58 1,470.00 19,187.37 12,110.00 28.15 28,450.00 44,488.61 -300.00 106.40 44,805.00 148,936.16 61,595.00
December 31st, 2001 through December 31st, 2011
Tot Gain 261,090.65 160,014.68 66,834.41 17,717.37 16,038.61 104,131.16
-20-
Exhibit 2.0: IBOVs Analysis
Exhibit 2.1:
Source: Economic Complexity Observatory, MIT Media Lab and the Center for International Development at Harvard
University. http://atlas.media.mit.edu/ Author: R Haussman, Cesar Hidalgo, et. al. Creative Commons Attribution-Share alike 3.0 Unported license. See permission to share at: http://atlas.media.mit.edu/about/permissions/
Taken from: http://en.wikipedia.org/wiki/File:Brazil_Export_Treemap.jpg
-21-
Exhibit: 2.2
Best Subsets Regression: IBOV versus BRL/USD, S&P500 USD, ...
Response is IBOV B r a z i l R e f e r e n c e I n t e r e s t R a t e
Vars 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13
R-Sq 83.3 83.2 93.2 92.6 96.4 95.9 97.3 97.1 97.7 97.7 98.2 98.1 98.3 98.3 98.4 98.4 98.4 98.4 98.5 98.5 98.5 98.5 98.5 98.5 98.5
R-Sq(adj) 83.2 83.0 93.1 92.5 96.3 95.8 97.2 97.0 97.6 97.6 98.1 98.0 98.2 98.2 98.3 98.2 98.3 98.3 98.3 98.3 98.3 98.3 98.3 98.3 98.3
Mallows Cp 1043.3 1053.5 356.4 398.7 140.0 173.4 80.2 94.5 49.9 54.4 22.5 24.7 11.3 13.6 7.6 11.9 7.8 8.4 9.0 9.3 10.1 10.9 12.0 12.1 14.0
S 8303.8 8340.3 5311.9 5545.7 3904.4 4155.3 3406.6 3533.1 3118.0 3161.6 2824.6 2848.7 2688.3 2714.8 2632.3 2683.1 2622.8 2630.4 2624.7 2628.5 2626.2 2635.4 2636.8 2638.3 2649.2
S & P B 5 R 0 L 0 / U U S S D D X
D J I A
M S C W I T I C h O i i n l a
M M S S C C I G I I o r R l o I u d n n s d s U O i i S r a a D e X X X X X X X X X
S S u o g y a r B e C a a n n s e
I n f l a t i o n
X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
X X X X X X X X X X X X X X X X X X X X
X X X X X X X X
X X X X X X X X X X X X X X X X X X X X X X X X X X X X
X X X X X X X X X X X X X X X X X X X X X X X X
X X X X X X X X X X X X X
X X X X X X X X
-22-
Exhibit: 2.3
Regression Analysis: IBOV versus BRL/USD, S&P500 USD, ...
The regression equation is IBOV = 40198 - 9094 BRL/USD - 16.5 S&P500 USD + 207 WTI Oil + 1136 MSCI China + 766 MSCI India - 6.11 Gold USD + 94.1 Iron Ore - 12653 Brazil Reference Interest Rate Predictor Constant BRL/USD S&P500 USD WTI Oil MSCI China MSCI India Gold USD Iron Ore Brazil Reference Interest Rate S = 2632.29 R-Sq = 98.4% Coef 40198 -9094 -16.493 207.24 1136.2 766.2 -6.115 94.12 -12653 SE Coef 4441 1046 2.274 20.66 226.1 132.1 2.536 16.31 3400 T 9.05 -8.69 -7.25 10.03 5.03 5.80 -2.41 5.77 -3.72 P 0.000 0.000 0.000 0.000 0.000 0.000 0.018 0.000 0.000 VIF 5.997 3.020 5.223 12.175 16.552 17.845 13.275 2.383
R-Sq(adj) = 98.3%
Analysis of Variance Source Regression Residual Error Total DF 8 111 119 SS 48049590619 769115160 48818705778 MS 6006198827 6928965 F 866.82 P 0.000
Source BRL/USD S&P500 USD WTI Oil MSCI China MSCI India Gold USD Iron Ore Brazil Reference Interest Rate Unusual Observations Obs 65 70 77 78 95 96 117 119 BRL/USD 1.92 1.74 1.63 1.60 1.76 1.74 1.88 1.81 IBOV 52268 65318 72593 65018 67044 68588 52324 56875 Fit 45928 69565 64188 61449 60361 62463 58791 55095
DF 1 1 1 1 1 1 1 1
Seq SS 40610580318 85761653 2550845178 3625690582 599639253 245545588 235578816 95949230
SE Fit 700 1259 931 1302 538 499 810 1306
Residual 6341 -4247 8405 3568 6684 6126 -6466 1780
St Resid 2.50R -1.84 X 3.41R 1.56 X 2.59R 2.37R -2.58R 0.78 X
R denotes an observation with a large standardized residual. X denotes an observation whose X value gives it large leverage.
-23-
Exhibit: 2.4
The regression equation is IBOV = 37564 - 8748 BRL/USD - 15.8 S&P500 USD + 192 WTI Oil + 1016 MSCI China + 802 MSCI India + 59.6 Iron Ore - 12396 Brazil Reference Interest Rate Predictor Constant BRL/USD S&P500 USD WTI Oil MSCI China MSCI India Iron Ore Brazil Reference Interest Rate S = 2688.27 R-Sq = 98.3% Coef 37564 -8748 -15.773 192.30 1015.9 801.5 59.573 -12396 SE Coef 4396 1058 2.303 20.13 225.2 134.0 7.959 3471 T 8.54 -8.27 -6.85 9.55 4.51 5.98 7.48 -3.57 P 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.001 VIF 5.884 2.967 4.754 11.581 16.348 3.030 2.380
R-Sq(adj) = 98.2%
Source BRL/USD S&P500 USD WTI Oil MSCI China MSCI India Iron Ore Brazil Reference Interest Rate Unusual Observations Obs 65 70 72 77 78 95 96 117 BRL/USD 1.92 1.74 1.78 1.63 1.60 1.76 1.74 1.88 IBOV 52268 65318 63886 72593 65018 67044 68588 52324 Fit 46221 69315 68913 63689 60968 60875 62311 59720
DF 1 1 1 1 1 1 1
Seq SS 40610580318 85761653 2550845178 3625690582 599639253 444609003 92179802
SE Fit 704 1282 975 927 1314 504 506 728
Residual 6047 -3998 -5027 8903 4049 6170 6278 -7395
St Resid 2.33R -1.69 X -2.01R 3.53R 1.73 X 2.34R 2.38R -2.86R
-24-
Exhibit: 2.5

The regression equation is IBOV = 33724 - 9294 BRL/USD - 8.93 S&P500 USD + 191 WTI Oil + 2148 MSCI China + 74.3 Iron Ore - 13421 Brazil Reference Interest Rate Predictor Constant BRL/USD S&P500 USD WTI Oil MSCI China Iron Ore Brazil Reference Interest Rate S = 3074.00 R-Sq = 97.8% Coef 33724 -9294 -8.926 191.18 2148.4 74.318 -13421 SE Coef 4973 1205 2.284 23.02 139.2 8.654 3964 T 6.78 -7.71 -3.91 8.31 15.43 8.59 -3.39 P 0.000 0.000 0.000 0.000 0.000 0.000 0.001 VIF 5.840 2.234 4.753 3.387 2.740 2.375
R-Sq(adj) = 97.7%
Source BRL/USD S&P500 USD WTI Oil MSCI China Iron Ore Brazil Reference Interest Rate Unusual Observations Obs 65 70 77 78 95 96 99 117 BRL/USD 1.92 1.74 1.63 1.60 1.76 1.74 1.78 1.88 IBOV 52268 65318 72593 65018 67044 68588 70372 52324 Fit 45386 72958 65329 63810 60854 61912 64272 58776
DF 1 1 1 1 1 1
Seq SS 40610580318 85761653 2550845178 3625690582 769714846 108321737
SE Fit 789 1289 1013 1401 577 574 557 813
Residual 6883 -7640 7263 1208 6191 6676 6099 -6452
St Resid 2.32R -2.74RX 2.50R 0.44 X 2.05R 2.21R 2.02R -2.18R
-25-
Exhibit: 2.6
Regression Analysis: IBOV versus S&P500 USD, WTI Oil, ...

The regression equation is IBOV = 398 - 3.41 S&P500 USD + 272 WTI Oil + 2215 MSCI China + 100 Iron Ore - 23897 Brazil Reference Interest Rate Predictor Constant S&P500 USD WTI Oil MSCI China Iron Ore Brazil Reference Interest Rate S = 3780.81 R-Sq = 96.7% Coef 398 -3.415 272.40 2214.9 100.101 -23897 SE Coef 3025 2.669 25.17 170.9 9.817 4580 T 0.13 -1.28 10.82 12.96 10.20 -5.22 P 0.896 0.203 0.000 0.000 0.000 0.000 VIF 2.015 3.758 3.374 2.330 2.096
R-Sq(adj) = 96.5%
Source S&P500 USD WTI Oil MSCI China Iron Ore Brazil Reference Interest Rate Unusual Observations Obs 9 65 70 78 93 95 96 117 S&P500 USD 815 1531 1549 1280 1057 1096 1115 1131 IBOV 8623 52268 65318 65018 61518 67044 68588 52324 Fit 16050 44077 73579 64365 53870 59471 61087 60260
DF 1 1 1 1 1
Seq SS 11786040814 26578933487 6319216569 2115805139 389129789
SE Fit 792 947 1583 1721 767 674 693 971
Residual -7427 8192 -8261 653 7648 7573 7502 -7936
St Resid -2.01R 2.24R -2.41RX 0.19 X 2.07R 2.04R 2.02R -2.17R
-26-
Exhibit: 2.7
Regression Analysis: IBOV versus WTI Oil, MSCI China, ...

The regression equation is IBOV = - 2461 + 257 WTI Oil + 2168 MSCI China + 106 Iron Ore - 23546 Brazil Reference Interest Rate Predictor Constant WTI Oil MSCI China Iron Ore Brazil Reference Interest Rate S = 3791.27 R-Sq = 96.6% Coef -2461 256.90 2168.0 105.592 -23546 SE Coef 2045 22.13 167.4 8.853 4585 T -1.20 11.61 12.95 11.93 -5.14 P 0.231 0.000 0.000 0.000 0.000 VIF 2.888 3.220 1.885 2.088
R-Sq(adj) = 96.5%
Source WTI Oil MSCI China Iron Ore Brazil Reference Interest Rate Unusual Observations Obs 70 78 93 95 96 112 117 WTI Oil 94 140 70 77 80 114 79 IBOV 65318 65018 61518 67044 68588 66133 52324 Fit 73698 63501 53343 59026 60698 73746 60490
DF 1 1 1 1
Seq SS 38278926565 5700810236 2806843910 379142597
SE Fit 1584 1588 649 579 625 957 957
Residual -8380 1516 8175 8018 7891 -7614 -8165
St Resid -2.43RX 0.44 X 2.19R 2.14R 2.11R -2.08R -2.23R
-27-
Exhibit: 2.8
IBOV Date
1/31/2012 2/29/2012 3/30/2012 4/30/2012 5/31/2012 6/29/2012 7/31/2012 8/31/2012 9/28/2012 10/31/2012
Actual
63072.31 65811.73 64510.97 61820.26 54490.41 54354.63 56097.05 57061.45 59175.86 57068.18
Prediction
64679.419 67325.396 66881.618 70280.536 62825.527 63348.492 64277.903 63246.525 62995.69 63721.892
Difference
-1607.1093 -1513.6663 -2370.6475 -8460.2756 -8335.1168 -8993.8618 -8180.8531 -6185.0751 -3819.8304 -6653.7119
WTI
96.83 104.82 96.92 98.87 82.93 83.21 87.21 95.07 90.69 80.24
MSCI China
13.23 13.81 13.67 14.71 13.87 13.91 14.35 13.77 14.58 15.44
Iron Ore
140.35 140.4 144.66 147.65 136.27 134.62 127.94 107.8 99.47 113.95
Interest Rate
0.055 0.084 0.023 0.009 0.023 0.000 0.014 0.000 0.000 0.000
IBOV = - 2461 + 257 WTI Oil + 2168 MSCI China + 106 Iron Ore - 23546 Brazil Reference Interest Rate
IBOV Index
75000
70000
65000
60000
55000
50000
Actual
Prediction
-28-
Exhibit 3.0: Petrobras Analysis
Exhibit 3.1
Best Subsets Regression: PetroBras versus Vale, Itau, ...
Response is PetroBras 32 cases used, 88 cases contain missing values B a n c o B r a d V I e a t O s l a G c e u X o C h e v r o n X X X X X X X X X X X X X X X X X X X X X X X X X X X X
Vars 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9
R-Sq 57.6 28.8 71.7 68.5 83.3 80.4 85.1 85.1 86.4 86.1 86.9 86.6 87.0 87.0 87.0 87.0 87.0
R-Sq(adj) 56.2 26.5 69.7 66.3 81.6 78.3 82.9 82.9 83.7 83.4 83.8 83.4 83.2 83.1 82.5 82.4 81.7
Mallows Cp 44.0 92.8 22.1 27.5 4.3 9.2 3.2 3.2 3.2 3.6 4.2 4.7 6.1 6.1 8.0 8.1 10.0
S 4.4784 5.8023 3.7227 3.9285 2.9056 3.1499 2.7947 2.7949 2.7288 2.7548 2.7273 2.7543 2.7763 2.7778 2.8294 2.8354 2.8917
B P E x P x L o C n X
C N O O C
S h e l l
X X X X X X X X
X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
X X X X X X X X X X X X X
-29-
Exhibit 3.2
Regression Analysis: PetroBras versus Vale, Itau, BP PLC, Exxon, Chevron
The regression equation is PetroBras = 1.48 + 1.32 Vale + 0.382 Itau - 0.0253 BP PLC + 0.667 Exxon - 0.651 Chevron 118 cases used, 2 cases contain missing values Predictor Constant Vale Itau BP PLC Exxon Chevron Coef 1.476 1.3187 0.3825 -0.02527 0.6672 -0.65057 SE Coef 3.221 0.1744 0.2701 0.06052 0.1089 0.09987 T 0.46 7.56 1.42 -0.42 6.12 -6.51 P 0.648 0.000 0.160 0.677 0.000 0.000 VIF 15.621 15.353 1.875 13.981 17.119
S = 5.55705
R-Sq = 89.6%
R-Sq(adj) = 89.1%
Analysis of Variance Source Regression Residual Error Total Source Vale Itau BP PLC Exxon Chevron DF 1 1 1 1 1 DF 5 112 117 SS 29835.5 3458.6 33294.1 MS 5967.1 30.9 F 193.23 P 0.000
Seq SS 27884.6 4.2 556.4 79.8 1310.5
Unusual Observations Obs 65 69 70 77 78 80 81 107 Vale 22.7 33.9 37.7 39.8 35.8 26.5 19.1 31.7 PetroBras 27.040 37.750 47.815 70.500 70.830 52.740 43.950 32.440 Fit 38.357 52.382 58.976 55.360 48.324 38.862 29.701 44.898 SE Fit 0.964 1.529 1.766 1.724 1.843 0.755 1.123 1.405 Residual -11.317 -14.632 -11.161 15.140 22.506 13.878 14.249 -12.458 St Resid -2.07R -2.74R -2.12R 2.87R 4.29R 2.52R 2.62R -2.32R
R denotes an observation with a large standardized residual.
-30-
Exhibit 3.3
Regression Analysis: PetroBras versus Vale, Itau, BP PLC, Exxon
The regression equation is PetroBras = - 8.64 + 1.18 Vale - 0.027 Itau + 0.142 BP PLC + 0.108 Exxon 118 cases used, 2 cases contain missing values Predictor Constant Vale Itau BP PLC Exxon Coef -8.642 1.1813 -0.0275 0.14232 0.10771 SE Coef 3.299 0.2024 0.3071 0.06404 0.07834 T -2.62 5.84 -0.09 2.22 1.37 P 0.010 0.000 0.929 0.028 0.172 VIF 15.392 14.520 1.536 5.291
S = 6.49651
R-Sq = 85.7%
R-Sq(adj) = 85.2%
Analysis of Variance Source Regression Residual Error Total Source Vale Itau BP PLC Exxon DF 1 1 1 1 DF 4 113 117 SS 28525.0 4769.1 33294.1 MS 7131.2 42.2 F 168.97 P 0.000
Seq SS 27884.6 4.2 556.4 79.8
Unusual Observations Obs 69 77 78 80 81 89 90 93 Vale 33.9 39.8 35.8 26.5 19.1 19.1 17.6 23.1 PetroBras 37.750 70.500 70.830 52.740 43.950 44.030 40.980 45.900 Fit 50.772 57.615 52.557 39.066 29.047 28.093 26.104 33.093 SE Fit 1.763 1.974 2.016 0.882 1.308 0.809 1.022 1.483 Residual -13.022 12.885 18.273 13.674 14.903 15.937 14.876 12.807 St Resid -2.08R 2.08R 2.96R 2.12R 2.34R 2.47R 2.32R 2.02R
-31-
Exhibit 3.4
Regression Analysis: PetroBras versus Itau, BP PLC, Exxon
The regression equation is PetroBras = - 15.0 + 1.49 Itau + 0.134 BP PLC + 0.238 Exxon Predictor Constant Itau BP PLC Exxon Coef -14.978 1.4942 0.13383 0.23797 SE Coef 3.475 0.1825 0.07209 0.08445 T -4.31 8.19 1.86 2.82 P 0.000 0.000 0.066 0.006 VIF 4.145 1.542 4.986
S = 7.31514
R-Sq = 81.8%
R-Sq(adj) = 81.3%
Analysis of Variance Source Regression Residual Error Total DF 3 116 119 SS 27824.2 6207.3 34031.5 MS 9274.7 53.5 F 173.32 P 0.000
Source Itau BP PLC Exxon
DF 1 1 1
Seq SS 26404.9 994.4 424.9
Unusual Observations Obs 73 74 77 78 79 80 Itau 16.9 18.4 22.3 18.5 19.4 17.3 PetroBras 55.480 58.670 70.500 70.830 55.910 52.740 Fit 39.439 41.946 49.220 42.893 41.318 37.584 SE Fit 1.231 1.185 1.522 1.296 1.014 0.952 Residual 16.041 16.724 21.280 27.937 14.592 15.156 St Resid 2.22R 2.32R 2.97R 3.88R 2.01R 2.09R
-32-
Exhibit 3.5
Regression Analysis: PetroBras versus Itau, Exxon
The regression equation is PetroBras = - 11.7 + 1.34 Itau + 0.329 Exxon Predictor Constant Itau Exxon Coef -11.657 1.3401 0.32945 SE Coef 3.010 0.1643 0.06929 T -3.87 8.16 4.75 P 0.000 0.000 0.000 VIF 3.289 3.289
S = 7.39124
R-Sq = 81.2%
R-Sq(adj) = 80.9%
Analysis of Variance Source Regression Residual Error Total Source Itau Exxon DF 1 1 DF 2 117 119 SS 27640 6392 34031 MS 13820 55 F 252.97 P 0.000
Seq SS 26405 1235
Unusual Observations Obs 73 74 77 78 79 80 103 105 120 Itau 16.9 18.4 22.3 18.5 19.4 17.3 22.4 24.2 18.6 PetroBras 55.480 58.670 70.500 70.830 55.910 52.740 36.400 36.270 24.850 Fit 39.497 41.706 47.516 42.121 40.790 37.850 38.010 41.104 41.140 SE Fit 1.244 1.190 1.226 1.240 0.983 0.950 2.041 2.201 1.092 Residual 15.983 16.964 22.984 28.709 15.120 14.890 -1.610 -4.834 -16.290 St Resid 2.19R 2.33R 3.15R 3.94R 2.06R 2.03R -0.23 X -0.69 X -2.23R
-33-
Exhibit 3.6
PetroBras ADR price for 2012

60.00 50.00 40.00 30.00 20.00 10.00 0.00
Actual
Predicted
-34-

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Almajali, Bastos-Moreira, Benavides, & Parikh

BRAZILIAN STOCK EXCHANGE

Omar Almajali Mauricio Bastos-Moreira Frederico Benavides Anshul Parikh

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BM&FBovespa webpage [# 15 on references page]

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These sets of documents include Statues of the investor,

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Another very interesting aspect of the IBOV is how this portfolio

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Monitor Investimentos [# 28 on references page]

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PetroBras [#27 on references page ]

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REFERENCES: 1. Bloomberg Business Week:

2. BM&FBovespa Sobre a Bolsa:

4. Reena Aggarwal Demutualization and Corporate Governance of Stock Exchanges:

7. BM&FBOVESPA Bank website:

9. BM&FBovespa Corporate Governance Paper

10. BM&FBovespa Website:

11. The Economic Times:

12. BM&FBovespa website:

Brazilian Stock Exchange

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13. Azevedo Sette Advogados:

14. Petrobras: http://www.petrobras.com/en/about-us/ 15. The Brazil Business: