Fama-MacBeth regression method: the stock approach vs the portfolio approach

December 12, 2022 by Youssef LOURAOUI

Fama-MacBeth regression method: the stock approach vs the portfolio approach

In this article, Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022) presents the Fama-MacBeth regression method used to test asset pricing models and addresses the difference when applying the regression method on individual stocks or portfolios composed of stocks with similar betas.

This article is structured as follow: we introduce the Fama-MacBeth testing method. Then, we present the mathematical foundation that underpins their approach. We conduct an empirical analysis on both the stock and the portfolio approach. We conclude with a discussion on econometric issues.

Introduction

Risk factors are frequently employed to explain asset returns in asset pricing theories. These risk factors may be macroeconomic (such as consumer inflation or unemployment) or microeconomic (such as firm size or various accounting and financial metrics of the firms). The Fama-MacBeth two-step regression approach found a practical way for measuring how correctly these risk factors explain asset or portfolio returns. The aim of the model is to determine the risk premium associated with the exposure to these risk factors.

As a reminder, the Fama-MacBeth regression method is composed on two steps: step 1 with a time-series regression and step 2 with a cross-section regression.

The first step is to regress the return of every stock against one or more risk factors using a time-series regression. We obtain the return exposure to each factor called the “betas” or the “factor exposures” or the “factor loadings”.

The second step is to regress the returns of all stocks against the asset betas obtained in the first step using a cross-section regression for different periods. We obtain the risk premium for each factor used to test the asset pricing model.

The implementation of this method can be done with individual stocks or with portfolios of stocks as proposed by Fama and MacBeth (1973). Their argument is the better stability of the beta when considering portfolios. In this article we illustrate the difference with the two implementations.

Fama and MacBeth (1973) implemented with individual stocks

We downloaded a sample of daily prices of stocks composing the S&P500 index over the period from January 03, 2012, to December 31, 2021 (we selected the stocks present from the beginning to the end of the period reducing our sample from 500 to 440 stocks). We computed daily returns for each stock and for the market factor retained in this study. To represent the market, we chose the S&P500 index, an important global stock benchmark capturing the US equity market.

The procedure to derive the Fama-MacBeth regression using the stock approach can be achieved as follow:

Step 1: time-series regression

We compute the beta of the stocks with respect to the market factor for the period covered (time-series regression). We estimate the beta of each stock related to the S&P500 index. The beta is computed as the slope of the linear regression of the stock return on the market return (S&P500 index return). This time-series regression is run on a subperiod of the whole period from January 03, 2012, to December 31, 2018.

Step 2: cross-sectional regression

Over a second period from January 04, 2019, to December 31, 2021, we compute the dynamic regression of returns at each data point in time with respect to the betas computed in Step 1.

With this procedure, we obtain a risk premium that would represent the relationship between the stock returns at each data point in time with their respective beta for the sample analyzed.

Test the statistical significance of the results obtained from the regression

Results in the time-series regression using the stock approach are statistically significant. As shown in Table 1, the p-value is in the rejection area, which implies that the factor that the market factor can be considered as a driver of return.

Table 1. Time-series regression t-statistic result.
img_SimTrade_Fama_MacBeth_cross_sectional_regression_stat_result Source: computation by the author.

However, when analyzed in the cross-section regression, the results are not statistically significant anymore. As shown in Table 2, the p-value is not in the rejection area. We cannot reject the null hypothesis (H0: non significance of the market factor). Market factor alone cannot explain the premium investors are considering.
This means that the market factor fails to explain properly the behavior of asset returns, which undermines the validity of the CAPM framework. These results are in line with the Fama-MacBeth paper (1973).

Table 2. Cross-section regression t-statistic result.
img_SimTrade_Fama_MacBeth_cross_sectional_regression_stat_result Source: computation by the author.

You can find below the Excel spreadsheet that complements the explanations covered in this part of the article (implementation of the Fama and MacBeth (1973) method with individual stocks).

Fama and MacBeth (1973) implemented with portfolios of stocks

Fama-MacBeth seminal paper (1973) was based on an analysis of the market factor by assessing constructed portfolios of similar betas ranked by increasing values. This approach helped to overcome the shortcoming regarding the stability of the beta and correct for conditional heteroscedasticity derived from the computation of the betas for individual stocks. They performed a second time the cross-sectional regression of monthly portfolio returns based on equity betas to account for the dynamic nature of stock returns, which help to compute a robust standard error and assess if there is any heteroscedasticity in the regression. The conclusion of the seminal paper suggests that the beta is “dead”, in the sense that it cannot explain returns on its own (Fama and MacBeth, 1973).

The procedure to derive the Fama-MacBeth regression using the portfolio approach can be achieved as follow:

Step 1: time-series regression

We first compute the beta of the stocks with respect to the market factor for the period covered (time-series regression). We estimate the beta of each stock related to the S&P500 index. The beta is computed as the slope of the linear regression of the stock return on the market return (S&P500 index return). This time-series regression is run on a subperiod of the whole period from January 03, 2012, to December 31, 2015. We build twenty portfolios based on stock betas ranked in ascending order. The betas of the portfolios are then estimated again on a subperiod from January 04, 2016, to December 31, 2018.

It is challenging to maintain beta stability over time. Fama-MacBeth aimed to remedy this shortcoming through its novel technique. However, some issues must be addressed. When betas are calculated using a monthly time series, the statistical noise in the time series is significantly reduced in comparison to shorter time frames (i.e., daily observation). When portfolio betas are constructed, the coefficient becomes considerably more stable than when individual betas are evaluated. This is due to the diversification impact that a portfolio can produce, which considerably reduces the amount of specific risk.

Step 2: cross-sectional regression

Over a second period from January 03, 2019, to December 31, 2021, we compute the dynamic regression of portfolio returns at each data point in time with respect to the betas computed in Step 1.

With this procedure, we obtain a risk premium that would represent the relationship between the portfolio returns at each data point in time with their respective beta for the sample analyzed.

Test the statistical significance of the results obtained from the regression

Results in the cross-section regression using the portfolio approach are not statistically significant. As captured in Table 3, the p-value is not in the rejection area, which implies that the factor is statistically insignificant and that the market factor cannot be considered as a driver of return.

Table 3. Cross-section regression with portfolio approach t-statistic result.
img_SimTrade_Fama_MacBeth_Portfolio_cross_sectional_regression_stat_result Source: computation by the author.

You can find below the Excel spreadsheet that complements the explanations covered in this part of the article (implementation of the Fama and MacBeth (1973) method with portfolios of stocks).

Econometric issues

Errors in data measurement

Because regression uses a sample instead of the entire population, a certain margin of error must be accounted for since the authors derive estimated betas for the sample.

Asset return heteroscedasticity

In econometrics, heteroscedasticity is an important concern since it results in unequal residual variance. This indicates that a time series exhibiting some heteroscedasticity has a non-constant variance, which renders forecasting ineffective because the time series will not revert to its long-run mean.

Asset return autocorrelation

Standard errors in Fama-MacBeth regressions are solely corrected for cross-sectional correlation. This method does not fix the standard errors for time-series autocorrelation. This is typically not a concern for stock trading, as daily and weekly holding periods have modest time-series autocorrelation, whereas autocorrelation is larger over long horizons. This suggests that Fama-MacBeth regression may not be applicable in many corporate finance contexts where project holding durations are typically lengthy.

Why should I be interested in this post?

Fama-MacBeth made a significant contribution to the field of econometrics. Their findings cleared the way for asset pricing theory to gain traction in academic literature. The Capital Asset Pricing Model (CAPM) is far too simplistic for a real-world scenario since the market factor is not the only source that drives returns; asset return is generated from a range of factors, each of which influences the overall return. This framework helps in capturing other sources of return.

Useful resources

Academic research

Brooks, C., 2019. Introductory Econometrics for Finance (4th ed.). Cambridge: Cambridge University Press. doi:10.1017/9781108524872

Fama, E. F., MacBeth, J. D., 1973. Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy, 81(3), 607–636.

Roll R., 1977. A critique of the Asset Pricing Theory’s test, Part I: On Past and Potential Testability of the Theory. Journal of Financial Economics, 1, 129-176.

American Finance Association & Journal of Finance (2008) Masters of Finance: Eugene Fama (YouTube video)

About the author

The article was written in December 2022 by Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022).

Fama-MacBeth regression method: Analysis of the market factor

December 12, 2022 by Youssef LOURAOUI

In this article, Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022) presents the Fama-MacBeth two-step regression method used to test asset pricing models. The seminal paper by Fama and MacBeth (1973) was based on an investigation of the market factor by evaluating portfolios of stocks with similar betas. In this article I will elaborate on the methodology and assess the statistical significance of the market factor as a fundamental driver of return.

This article is structured as follow: we introduce the Fama-MacBeth testing method used in asset pricing. Then, we present the mathematical foundation that underpins their approach. I then apply the Fama-MacBeth to recent US stock market data. Finally, I expose the limitations of their approach and conclude to discuss the generalization of the original study to other risk factors.

Introduction

The two-step regression method proposed by Fama-MacBeth was originally used in asset pricing to test the Capital Asset Pricing Model (CAPM). In this model, there is only one risk factor determining the variability of returns: the market factor.

The first step is to regress the return of every asset against the risk factor using a time-series approach. We obtain the return exposure to the factor called the “beta” or the “factor exposure” or the “factor loading”.

The second step is to regress the returns of all assets against the asset betas obtained in Step 1 during a given time period using a cross-section approach. We obtain the risk premium associated with the market factor. Then, Fama and MacBeth (1973) assess the expected premium over time for a unit exposure to the risk factor by averaging these coefficients once for each element.

Mathematical foundations

We describe below the mathematical foundations for the Fama-MacBeth two-step regression method.

Step 1: time-series analysis of returns

The model considers the following inputs:

The return of N assets denoted by R_i for asset i observed over the time period [0, T].
The risk factor denoted by F for the market factor impacting the asset returns.

For each asset i (for i varying from 1 to N) we estimate the following time-series linear regression model:

Fama MacBeth time-series regression

From this model, we obtain the following coefficients: α_i and β_i which are specific to asset i.

Figure 1 represents for a given asset (Apple stocks) the regression of its return with respect to the S&P500 index return (representing the market factor in the CAPM). The slope of the regression line corresponds to the beta of the regression equation.

Figure 1. Step 1: time-series regression for a given asset (Apple stock and the S&P500 index).
Source: computation by the author.

Step 2: cross-sectional analysis of returns

For each period t (from t equal 1 to T), we estimate the following cross-section linear regression model:

Fama MacBeth cross-section regression

Figure 2 plots for a given period the cross-sectional returns and betas for a given point in time.

Figure 2 represents for a given period the regression of the return of all individual assets with respect to their estimated individual market beta.

Figure 2. Step 2: cross-section regression for a given time-period.

Source: computation by the author.

We average the gamma obtained for each data point. This is the way the Fama-MacBeth method is used to test asset pricing models.

Empirical study of the Fama-MacBeth regression

The seminal paper by Fama and MacBeth (1973) was based on an analysis of the market factor by assessing constructed portfolios of similar betas ranked by increasing values. This approach helped to overcome the shortcoming regarding the stability of the beta and correct for conditional heteroscedasticity derived from the computation of the betas for individual stocks. They performed a second time the cross-sectional regression of monthly portfolio returns based on equity betas to account for the dynamic nature of stock returns, which help to compute a robust standard error and assess if there is any heteroscedasticity in the regression. The conclusion of the seminal paper suggests that the beta is “dead”, in the sense that it cannot explain returns on its own (Fama and MacBeth, 1973).

Empirical study: Stock approach

We downloaded a sample of end-of-month stock prices of large firms in the US economy over the period from March 31, 2016, to March 31, 2022. We computed monthly returns. To represent the market, we chose the S&P500 index.

We then applied the Fama-MacBeth two-step regression method to test the market factor (CAPM).

Figure 3 depicts the computation of average returns and the betas and stock in the analysis.

Figure 3. Computation of average returns and betas of the stocks.
Source: computation by the author.

Figure 4 represents the first step of the Fama-MacBeth regression. We regress the average returns for each stock with their respective betas.

Figure 4. Step 1 of the regression: Time-series analysis of returns
Source: computation by the author.

The initial regression is statistically evaluated. To describe the behavior of the regression, we employ a t-statistic. Since the p-value is in the rejection area (less than the significance limit of 5 percent), we can deduce that the market factor can at first explain the returns of an investor. However, as we are going deal in the later in the article, when we account for a second regression as formulated by Fama and MacBeth (1973), the market factor is not capable of explaining on its own the return of asset returns.

Figure 5 represents Step 2 of the Fama-MacBeth regression, where we perform for a given data point a regression of all individual stock returns with their respective estimated market beta.

Figure 5. Step 2: cross-sectional analysis of return.
Source: computation by the author.

Figure 6 represents the hypothesis testing for the cross-sectional regression. From the results obtained, we can clearly see that the p-value is not in the rejection area (at a 5% significance level), hence we cannot reject the null hypothesis. This means that the market factor fails to explain properly the behavior of asset returns, which undermines the validity of the CAPM framework. These results are in line with Fama-MacBeth (1973).

Figure 6. Hypothesis testing of the cross-sectional regression.
Source: computation by the author.

Excel file for the Fama-MacBeth two-step regression method

You can find below the Excel spreadsheet that complements the explanations covered in this article to implement the Fama-MacBeth two-step regression method.

Limitations of the Fama-McBeth approach

Selection of the market index

For the CAPM to be valid, we need to determine if the market portfolio is in the Markowitz efficient curve. According to Roll (1977), the market portfolio is not observable because it cannot capture all the asset classes (human capital, art, and real estate among others). He then believes that the returns cannot be captured effectively and hence makes the market portfolio, not a reliable factor in determining its efficiency.

Furthermore, the coefficients estimated in the time-series regressions are sensitive to the market index chosen for the study. These shortcomings must be taken into account when assessing CAPM studies.

Stability of the coefficients

The beta of individual assets are not stable over time. Fama and MacBeth attempted to address this shortcoming by implementing an innovative approach.

When betas are computed using a monthly time-series, the statistical noise of the time series is considerably reduced as opposed to shorter time frames (i.e., daily observation).

Using portfolio betas makes the coefficient much more stable than using individual betas. This is due to the diversification effect that a portfolio can achieve, reducing considerably the amount of specific risk.

Conclusion

Why should I be interested in this post?

Useful resources

Academic research

Brooks, C., 2019. Introductory Econometrics for Finance (4th ed.). Cambridge: Cambridge University Press. doi:10.1017/9781108524872

Fama, E. F., MacBeth, J. D., 1973. Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy, 81(3), 607–636.

Roll R., 1977. A critique of the Asset Pricing Theory’s test, Part I: On Past and Potential Testability of the Theory. Journal of Financial Economics, 1, 129-176.

American Finance Association & Journal of Finance (2008) Masters of Finance: Eugene Fama (YouTube video)

Business Analysis

NEDL. 2022. Fama-MacBeth regression explained: calculating risk premia (Excel). [online] Available at: [Accessed 29 May 2022].

About the author

The article was written in December 2022 by Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022).

Women in Finance (Northeastern University)

December 8, 2022 by Aastha DAS

Women in Finance (Northeastern University)

In this article, Aastha DAS (ESSEC Business School, Bachelor’s in Business Administration, Exchange Student from Northeastern University) presents the “Women in Finance” association at Northeastern University.

Background on women in finance

In almost all industries around the world, women are underrepresented at the top, excluding few sectors like nursing and education. One industry where women are highly underrepresented is the financial services. The Deloitte Center for Financial Services revealed the statistic that of the largest financial institutions in the US, only six out of 107 are run by female CEOs in 2019. This can be attributed to how women and men start on par during the start of their careers in finance, but men are more motivated to grow in the ranks to the C-level executive (C like Chief Executive Officer, Chief Financial Officer, Chief Investment Officer, Chief Economist, etc.). There are significantly fewer precedents for women in high levels of finance making it difficult for aspiring women in finance to find role models and mentors to rely on as a guide, especially in venture and private equity.

Figure 1. Women in Finance 2022 semester recap.

Source: Northeastern University.

There is a growing rate of initiatives trying to bolster women into the industry with the gender gap reducing exponentially in MBA programs, yet women still only account for a small ratio of finance staff at top global business schools. Nonprofit organizations like “Girls Who Invest” help diversity initiatives support women to bring young women into the world of finance through internships and mentoring programs, providing them with the best possible foundation.

Women need these programs and mentors to show them that they are capable of getting through any hardship in the path of achieving C-level executive positions and success, starting from as young as high school. These programs help to spark interest in the field and show them that there is so much more to the industry than seen regularly by someone not as exposed to the different sectors.

One industry where women are highly underrepresented is the upper levels of financial services management and investment services with the Deloitte Center for Financial Services revealing the statistic that of the largest financial institutions in the US, only six out of 107 are run by female CEOs in the USA, based on a 2019 rate.

The unfortunate statistic of the “broken rung” describes how women in lower entry level positions are promoted into managerial and C-level positions at a significantly lower rate than men. The broken rung can be defined as women having misfortune in promotion and this creates a ripple effect with progressive organizational grades creating disproportionate levels of women in the organizational hierarchy, especially involving diversity in senior leadership.

Misconceptions also root from stereotypes discouraging women from entering the finance space under the belief that they do not necessarily have the work-life balance as men as they should have to take care of families while working fulltime, but this belief is changing as women in finance are supported and men are also bolstered to take more responsibility within the home.

Women in Finance at Northeastern University

At Northeastern University, I have been involved in Women in Finance (WiF) since my first year starting with being involved in the Peer Mentorship program and then also acting as a Peer Mentor in my sophomore year and being a mentee in the Alumni Mentorship program. I also enjoyed being a part of the E-Board at Women in Finance as a Research Associate in Spring 2022 as part of the Street Talk. I thoroughly enjoyed being on the Street Talk as I felt as I was able to give back to the Women in Finance community through the works of the team, creating new ideas for the initiative, while also having the pleasure of being on the E-Board and getting to know all the other members and creating connections with one another. I also enjoyed being a part of the Professional program as I got to gain much insight from my alumni mentor, where I learned more firsthand information about the field, I am interested in. This upcoming Spring 2023, I will be taking on the role of President for the organization to best represent the Women in Finance initiative at Northeastern.

Missions of the organization

There are several organizations at many universities encouraging women in the business world and even entrepreneurship, but few have separate organizations for finance which is what draws me to this. The Women in Finance Initiative at Northeastern University strives to continue to uphold WiF’s goal to “educate, empower, support, and mentor” students by offering interesting and engaging programming and events that help students navigate finance. As members of the board, representing the organization with many endorsers and supports, WiF hopes to help provide the resources and instill confidence in female students, so they are empowered to pursue strong co-ops, internships, and leadership opportunities. Specifically, helping equip students with the skills to be successful in finance roles is valuable. The Wall Street Prep Series is an excellent program for students the organization has created to allow enrollment into a financial basics course with access to the certificate to learn incredibly valuable skills that can set them apart in interviews and on the job. Likewise, the mentorship programs provide invaluable guidance for students, and even use it in interviews and resumes. Continuing these programs and working to develop new ones allows WiF to fulfill its goal to educate students, and in doing so, helps with students’ confidence. Providing support like this allows women to realize their potential, which is another overarching goal.

The organization also has its the Executive Speaker Series (ESS) is an opportunity for undergraduate women, open to an interdisciplinary audience, to learn the stories and wisdom from female executives. In the past this has included positions across the C-level: CEO, CFO, CIO, and Chief Economist. These executives have traditionally worked in either the finance industry or come from some studying or other background in finance to further inspire women pursuing a business degree, particularly in finance and/or accounting.

Figure 2. Women in Finance Executive Speaker Series (ESS).
Women in Finance speaker series
Source: Northeastern University.

Acquiring financial skills

As many women explore the world of finance, it is important to build technical skills, and this is where the workshops from WiF come to use. The goal of workshops and skill series this semester is to help build members’ technical skills for the purpose of interviewing for co-ops or full-time work. We want our members to be competitive as technical interviewing becomes more popular with higher level positions. Technical skills include but are not limited to financial modeling, investing, personal finance, excel, PowerPoint, and learning how to use Bloomberg. This Fall we are already committed to hosting a Bloomberg Education Series through Northeastern’s virtual terminals.

The opportunities like the NYC and Fidelity Treks are something that not many other organizations offer. Each spring Women in Finance offers educational and networking Treks to companies in both Boston and New York City. The Freshman NYC Trek is where students go on a 3-day trip to New York and can visit various firms to learn about various career paths with a focus on Investment Banking and Consulting. Virtual Treks and networking opportunities in the form of a career education series are also regularly offered. Career Education panels are programmed to include but are not limited to, a Private Equity Panel, a Corporate Finance Panel, a Navigating Investment Banking Panel, and a Restructuring Panel.

Looking forward

Continuing to develop more unique programming like those that draw more students to the organization helps keep our organization up to date with the everchanging markets and world of finance. In the long term, because of the value of those opportunities, WiF could even become a draw to the university of prospective students. Continuing to have corporate sponsors can help fund more events like the treks while also helping to potentially build out more co-op/internship experiences for students with our sponsors. Given how male-dominated finance is, Women in Finance at Northeastern is a safe space for women to explore the field and know their worth and to encourage them to pursue roles they otherwise many not and provide a supportive community for females in finance.

Moving forward, ensuring that Women in Finance can help many more generations of young woman aspiring to be in this sector and the business world, I hope to create more long-lasting connections for the organization to allow more diverse parts of the finance field. I also hope to ensure that each semester remains consistent with the past while maintaining a level of improvement if necessary.

Why should I be interested in this article?

It is worth reading this article because of the underrepresentation of women in the finance industry and how that is pivoting to change over time and the impact that women can make at a high level. It can be daunting to enter a field like this, especially with so many controversial opinions and stereotypes. I would not be where I am in my career with an Investment Banking internship, financial services co-op, and upcoming M&A solutions consulting internship in NYC without this organization and I owe it to Northeastern University’s Women in Finance Initiative for providing me with the resources, support, mentorship, and confidence to put myself where I may not have felt I belonged before. I am not a finance concentration or major at my university, yet I learned that anyone can go into a role of finance, and that one is not just constricted as it is an open playing field, as long as you apply yourself and find the path of finance you want to go through, by exposing yourself to the different opportunities in finance like investment banking, equity research, sales & trading, asset management, wealth management, venture capital, angel investing, private equity, hedge funds, global capital markets, and so many more untapped industries for women to climb the ranks in.

Useful resources

Women in Finance (Northeastern University)

Women in Finance – Program

Women in Finance (LinkedIn)

Women in Finance (Instagram)

Gender and Finance

About the author

The article was written in December 2022 by Aastha DAS (ESSEC Business School, Bachelor’s in Business Administration, Exchange Student from Northeastern University).

My experience as an investment banking analyst intern at G2 Capital Advisors

December 22, 2024December 8, 2022 by Aastha DAS

My experience as an investment banking analyst intern at G2 Capital Advisors

In this article, Aastha DAS (ESSEC Business School, Bachelor’s in Business Administration, Exchange Student from Northeastern University) shares her experience during a summer internship as an investment banking analyst at G2 Capital Advisors.

About the company

G2 Capital Advisors is a boutique, low-middle market investment bank which is sector-focused with an integrated and multi-product approach, creating an uncommon full-service product line. G2 provides unique solutions in the investment banking realm including specializing in buy-side and sell-side advisory, capital markets, and restructuring, with different teams allocated to each part of those practices. Most analysts specialize in one of the products while associates and vice presidents tend to cover more product lines while specializing a certain industry in the business practice, further supporting the C-Level executive heading their respective industry specialty group.

G2 Capital Advisors logo
Women in Finance
Source: G2 Capital Advisors.

G2 follows a unique business model in which their managing directors and leads of industry practices are from a background of sector success, and not necessarily banking careers, like Industrials & Manufacturing, Technology & Business Services, Consumer & Retail, and Transportation & Logistics. The culture and core values at G2 Capital Advisors revolve around dedication to their clients, to be able to provide the best possible, creative yet lucrative solutions for their issues. Their main business practice remains Restructuring and Investment Banking.

Through remaining tenacious in all their business processes, they are able to create a full-servicing bank which can provide accountability in an honest and respectful manner, further differentiating themselves.

My Internship

My Missions

I worked as an intern in the summer of 2022 for the Investment Banking practice at G2 Capital Advisors. I was mainly responsible for supporting the analysts and sometimes supported the associates in the buy-side and sell-side business practices. As the size of this boutique lower-middle market investment bank is a lot smaller than a lot of other banks, my experience was more unique than most investment banking summer analyst positions.

I got holistic views on the whole firm as I got experience in intensive levels in three of four of their business practices: Technology & Business Services, Consumer & Retail, and Transportation & Logistics, on both the buy-side and sell-side investment banking advisory. On the buy-side, I created extensive market maps for clients to source their clients and potential new acquisitions for them. Here I was also able to perform also as a research analyst for M&A and equity research on active advisory and restructuring deals throughout the summer by using Excel to curate and develop market maps, historical financial analysis, and prepare for engagement with clients. I was the forefront of the intern class through ensuring that all the submissions from the group were of top quality for all curated presentation materials including tailored pitch books, Confidential Information Memorandums, deal sheets, and teasers. This helped prepare me, the other interns, as well as the analysts and associates for client presentations, oftentimes doing more research than necessary, to stay ahead of competitors. I also aided in the company’s outreach initiatives through drafting many press releases and research presentations for transaction announcements and quarterly industry reports specifically for the Consumer & Retail and Transportation & Logistics business practices.

In my final weeks as an intern, I was able to generate my own comparables and financial models to aid associates for many ongoing deals. All the interns were also responsible for a research presentation of any of the business practices and I delivered a presentation on Consumer & Retail. In this presentation, I sourced new portfolio companies, hedge funds, and private equity firms for G2 to create connections with and evaluated the intrinsic value of creating relations with each of these different sub-sectors and companies and how it better aligns with G2’s goals to provide industry specialized support for clients. I have since gotten feedback from several of the managing directors and leads in the Consumer & Retail team that many of the suggested partnerships have rendered successful and are in process of deal-making with due diligence underway.

Required Skills and Knowledge

The Investment Banking sector at G2 Capital Advisors is arguably the most profitable business practice and there was a high learning curve to going into this internship. I had to quickly learn the sell-side and buy-side business practices to best support the analysts and associates so that we were able to deliver the best market maps and materials to the clients and our managing directors/deal managers. Along with the steep learning curve of investment banking concepts, I also had to adapt to the G2 form of financial modeling as I had learned it already from a club at my university called Bull & Bear Equity Research club. It is also necessary to develop and come prepared with many soft skills like humility, generosity to always give a helping hand, self-discipline, time management, conflict resolution, and high analytical/critical thinking. As an aspiring intern in the investment banking and advisory space, it is wise to stay up to date with financial news, so it is recommended to read/listen to news through podcasts like the NYTimes Daily, New York Times, Wall Street Journal, The Economist. Most higher-level executives are well versed with financial news and do not need to think twice about it and this is a good tactic to incorporate in beginner’s careers to ensure the interns are knowledgeable on all that is going on in the market, in light of any swift changes.

What I Learned

My internship at G2 Capital Advisors gave me a good understanding of the composition of the entire financial institution and the operation of the financial market as well as investment banking through allowing me to master my Excel capabilities, relationship building skills with clients and other employees, while learning technical skills as well like financial terms and everything that is necessary in the different advisory processes. The knowledge I had previously from taking microeconomics, macroeconomics, macroeconomic theory, financial management, Wall Street Prep, and financial accounting aided me in the internship to create a solidified foundation to grow in the industry. I also learned how lucrative a career in investment banking is because of how heavily technical it can get with developing models, but also how personable it can make you through creating special relationships with many different market leaders, clients, and investors, creating a well-rounded employee in the financial services space.

Key Financial Concepts

Here are three useful financial concepts I learned in the Investment Banking department at G2 Capital Advisors.

Buy-side vs sell-side

Buy-Side – is the side of the financial market that buys and invests large portions of securities for the purpose of money or fund management.

Buy-Side – is the other side of the financial market, which deals with the creation, promotion, and selling of traded securities to the public.

M&A Sell-Side Advisory Process Explained

One of the most in-depth processes I learned was the Sell-side process for investment banking: Detailing my insight below

Process and Timeline

1. Winning the Mandate

a. Pitch
b. Engagement Review Memo
c. Engagement Letter Signing

2. Preparing for sale

a. Definite strategy (who, how much, what process)
b. Draft Teaser, Executive Summary, CIM
c. Kick-off Meeting
d. Organize Financials
e. Create Projections
f. Prepare non-disclosure agreement

3. Marketing

a. Launch process

i. Contact Buyers
ii. Receive preliminary bids
iii. Manage deal processes
iv. Send teaser and NDA
v. Investor meetings/emails
vi. Draft Letter of Interest bid
vii. Draft Management Presentation
viii. Set up data room and due diligence

b. Letter of Interest Bid Deadline

i. Receive final LOIs
ii. Board meetings
iii. Management presentation
iv. Negotiate with lead bidders
v. Execute LOI

4. Confirmatory Due Diligence

a. Enter into exclusivity agreement with one bidder post negotiation
b. Kick-off diligence meeting
c. Facilitate due diligence

5. Closing

a. Proceeds waterfall deliverables
b. Present finalized deal terms and fairness opinion
c. Get board approval
d. Signing and closing
e. Invoice deliverable sent
f. Transaction review memo

What is Restructuring?

Restructuring is a unique concept in investment banking which entails growth and special situations in and out of the court with both a debtor and creditor side, based on what is best fit for the firm. It helps provide clients with clear solutions to ensure sustainable long-term stability. This is usually a practice which is enacted, and advisors are called in when a company wants to change its structure completely or significantly in both financial and operational aspects, during times of financial pressures where clear restructuring of the business is necessary. It often involves revising debt options, operations, and forms of limiting financial detriment while still improving the firm.

A company will often use restructuring advisory when there is debt difficulty, especially regarding consolidating to pay their bondholders. It is also possible to incorporate operation restructure to help cut costs in payroll and/or in the size of assets through significant sales.

Internal restructuring often entails operations, processes, departments, supply chains, executive board, and even ownership change, further enabling the firm to grow profitable while growing. This is when investment banks come in to help with the negotiation of restructuring plans to input financial and legal advisors and potentially even gain aid from investors and appointing new CEOs to implement the new changes and propel the firm forward.

Merger & Acquisition Activism

Activism a particularly new space in the investment banking world but one worth keeping tabs on because of how much it changes and how volatile it can make certain deals. In activist investing, there is usually a sign of change occurring through a catalyst which prompts activist investors to reveal themselves. This is an investment strategy where an investor comes into and/or attempts to pursue poorly-run companies with share prices that have gone down recently, usually an investor which much potential. The activist investor usually takes in a large stake in the company which reveals their interest and pushes for changes because of their vast equity, in efforts to turnaround the company for the better. This hopefully results in price increases for the security.

It is necessary to stay weary of activist investors because they may not always have the company’s best interests at hand. For this reason, shareholder trust is a large factor for activist investors. Most of the most successful activist investors are public figures and not necessarily hedge funds. They often use aggressive and confrontational tactics to pressure the management teams of public companies. It is necessary to grow public and shareholder trust along with public attention to grow their platform to endorse the suggested recommendations.

Why should I be interested in this article?

It is worth reading this article because of the topic it discusses in the popular investment banking space. It is necessary to note how well-rounded investment banking can make an individual but also the uniqueness of this post entails how the experience was at a boutique low-middle market investment bank with full servicing to reveal how one smaller firm can do so much in efforts to create the most impactful and creative solutions to business issues and M&A deals.

Useful resources

G2 Capital Advisors

Financier Worldwide Magazine (June 2019) The rising influence of shareholder activism in M&A transactions: recent trends in the UK

About the author

The article was written in December 2022 by Aastha DAS (ESSEC Business School, Exchange Student from Northeastern University – Bachelor’s in Business Administration).

Why is Apple’s new iPhone 14 release line failing in the first few months?

December 8, 2022 by Aastha DAS

Why is Apple’s new iPhone 14 release line failing in the first few months?

In this article, Aastha DAS (ESSEC Business School, Bachelor’s in Business Administration, Exchange Student from Northeastern University) discusses events about Apple’s products, their impact on Apple’s share price and the link with market efficiency.

Brief reminder of the facts

On Tuesday October 18th, 2022, Apple stocks saw a downturn after the announcement of the limit of one of its iPhone suppliers for the newly released iPhone 14 Plus due to demand issues.

Figure 1. Event about Apple.

Source: Bloomberg.

With the new release, Apple took a large risk with eliminating certain failing lines like the “mini” model. Within the iPhone 14 range, the largest changes and upgrades were to the “Pro” models in hopes of diversifying its product line while pricing remained consistent in appropriate increases, as done in the past. Unfortunately, this has been highly unsuccessful with many reports revealing how the sales of the “iPhone 14” line have been subpar of expectations.

Impact on company

This is concerning for the company since Apple had increased its sales projections in the few weeks prior to the iPhone 14 family release in September as it does annually and many of its suppliers had already started making preparations for a 7% boost in orders after the release. This incident had direct financial consequences on the company as the stock immediately dropped by $4 from $145. There are mixed reports on consumers’ preferences to buy either the iPhone 14 Plus or iPhone 14 as preferences between the features and affordability of the two vary greatly. It is difficult for the company to gauge the fluctuations in demand, especially as the new iPhone 14 has not been doing as well as anticipated. This can also be attributed to the decrease in global demand because of surging inflation and the impending recession and war in Ukraine. The smartphone market is projected to decrease by 6.5% this year, 2022. Following an official announcement in a press release from Apple, the stock price immediately dropped in regard to the production halt for the iPhone 14 Plus at one of the plants in China. Apple shares fell 3.9% on the New York stock Exchange (NYSE) on Wednesday morning to $145.90. The shares are additionally also down about 18% this year in 2022, compared to a 23% drop in the S&P 500 Index. Still, many professionals state they are not surprised about this due to more preference toward the more premium models of the iPhone 14 family. The share price quickly leveled out but it revealed how volatile the stock is to the market and each decision they make.

Figure 2. Event about Apple.
Apple share price
Source: Google Finance.

Relations to market efficiency

Market efficiency involves a market where the current price of a stock/security quickly reflects information of that security and/or its respective company in a wholly rational manner.

There are many ways to evaluate a market’s efficiency, even as novice market watchers, starting with reevaluating the lag in the time that information is released regarding a security to when it is reflected in the security’s price. The changes in price are usually a product of announcements that are novel and unexpected which can be compared to the press release by Apple to limit the supply chain of its iPhone 14 production as this is uncommon for the company to do, so soon after the company’s fall release, as it does annually. It also relates to a company’s share price in relation to its earnings per share outcomes and the share price growing following the EPS, in an efficient market, as EPS growth reveals positive growth for long-term investors, and it is still optimistic to observe that Apple has managed to grow EPS by 28%/year over the past three years. This restores faith in the stock as though it has proven to be volatile, it regulates itself and has clearly been on the rise in a long-term perspective, revealing sustainable growth. A real positive is seen with Apple’s similar EBIT margins to 2021 as revenue grew by 12% to $388B USD.

At this point in time, the Apple security can be seen as semi-strong efficiency. This can be attributed to how public Apple is with there being much historical market data and public information like company accounts, hundreds of reports on the renowned company which regularly are reflected in the company’s stock price.

Figure 3. Apple financial statistics.

Source: Forbes Digital Covers.

Why did I choose this event?

I chose this event as a financial event of Apple’s stock taking a downturn dip because it reveals much about the smartphone and personal electronics market despite being a quite small event in the trajectory of its iPhone releases. This shows how smartphones will also suffer from raising inflation and the Ukrainian-Russia war despite popular demand and so-called need for smartphones like the iPhone. I am also an avid consumer of Apple products and find it interesting how emotional many stakeholders are based on how they react to even the smallest aspects of its product line. It reveals how despite the rationality of the market being beneficial, human beings chose to act on fear and precautionary measures to ensure that they will be safer rather than opting in favor of risk, within reason.

Why should you be interested in this topic?

There are many reasons why it is important to stay on top of the regular markets and this article discusses a company which is regularly changing in the markets. As a SimTrade student, or anyone interested in financial markets, market efficiency is a key aspect to refer to when making financial decisions and trading. It is worthwhile to consider companies with strong efficiency and those which do not, allowing a broader outlook into how they might function. It is necessary to see if there is a possibility of beating the market because any information available to a trader is already involved in the market price so it is difficult to beat it for the higher returns.

Useful resources

SimTrade course Market information

Yahoo! Finance (October 25, 2022) Here’s Why We Think Apple (NASDAQ:AAPL) Is Well Worth Watching

Apple Newsroom (November 6, 2022) Update on supply of iPhone 14 Pro and iPhone 14 Pro Max

Bloomberg (September 28, 2022) Apple Ditches iPhone Production Increase After Demand Falters

About the author

The article was written in December 2022 by Aastha DAS (ESSEC Business School, Bachelor’s in Business Administration, Exchange Student from Northeastern University).

A quick review of the M&A – Real Estate job…

December 5, 2022 by Louis DETALLE

A quick review of the M&A – Real Estate job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains how is working as an M&A Analyst in Real Estate any different from being a general M&A.

Let’s recall what M&A is and then, we will assess how working in the Real Estate sector makes it different

M&A (Mergers & Acquisitions) is a profession that advises companies wishing to develop their external growth, i.e. growth through the acquisition of another company or through a merger with it. M&A mandates are therefore carried out on the side of the company that wishes to acquire another company, “buy-side”, or on the side of a company that wishes to be acquired, “sell-side”.

Therefore, an analyst in M&A with a Real Estate focus will only work on Real Estate-related topics. For example, clients may be property managers, real estate companies, property developers or hotel groups. By the same logic, the subjects encountered and studied in the M&A pitches will be centered around the real estate sector. These include shopping centers, entire housing estates, office towers, hotel chains and their hotel stock.

What does an analyst in M&A – Real Estate work on?

The tasks of an M&A analyst are diverse and include, for example, drawing up a business plan, modelling different scenarios and strategies in Excel, and drafting information memorandums (IMs) on the various deals in progress. With a real estate asset that you are trying to value for instance, the case scenarios that you will anticipate, will describe the possibility that you do not receive 100% of the rent, but perhaps only 30% for the first 6 months of the project.

All these skills on the real estate sector are cumulated to the ones you acquire as an M&A analyst and are then widely used for the mergers and acquisitions of companies, in the development of their external strategy, in their financial evaluation or in the analysis of databases.

Again, the financial analysis tools for the real estate sector are not the same and are specific to Real Estate. For example, analysts will focus on the possibility that rents for a property will not come in and will try to estimate whether the estimated average occupancy rate is realistic. When valuing by stock market or transactional comparables, the comparables used will be functions of the capitalization rate and not EBITDA or EBIT multiples.

What are the main exits for an M&A Analyst of the Real Estate sector?

There are a lot of opportunities, but of course largely limited to the real estate sector. This is because there are many different jobs and companies in the real estate world: asset managers, real estate companies, real estate management of a large company, etc. It is also possible to join the real estate teams of a private equity fund in order to move to the investor side.

Resources

Youtube Interview with a Deloitte Manager in M&A Real Estate

BNP Paribas Real Estate – Presentation of all Real Estate jobs

About the author

The article was written in December 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick review of Wealth Management’s job…

December 5, 2022 by Louis DETALLE

A quick review of Wealth Management’s job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what an Wealth Manager works on, on a daily basis.

What does Wealth Management consist in?

Private banking is a specialized advisory service offered by financial institutions to individual or institutional clients with substantial financial resources and assets. The clients targeted by this type of activity may be company directors such as Bernard Arnault or François Pinault. Clients may also be wealthy families who maintain and grow their assets through the solutions offered by private bankers.

To do this, institutions that practice private banking employ various experts who cover all the issues related to the optimization of an estate: private bankers, tax lawyers, asset managers and notaries.

What does a Wealth Manager work on?

As stated above, the Wealth Manager should be able to propose a property investment (such as the Pinel Law in France for example), an investment in traditional life insurance or even an investment in a private equity management company. The diversity of investment products can be very great, and it is therefore important for the Wealth Manager to understand his client’s needs in order to offer him the solution that is best suited to his needs.

This is particularly true in an independent wealth management firm but much less so in a division of a large bank with wealth management activities. Indeed, in an independent asset management firm, fund managers will have to invent new investment solutions. The private bank employees of a large bank, on the other hand, will only be able to offer products created by the bank to which they are attached.

For this reason, wealth management work varies greatly depending on the type of structure in which the wealth manager works. Indeed, the proportion of “commercial” work will be much greater for a “non-independent” private banker, since he or she will not be as involved in the construction and development of the solutions proposed. For independent private banks, the work of creating investment solutions and finding investment opportunities will logically be more significant.

What are the different levels of clients that wealth managers can deal with?

In this respect, four main levels of segmentation of high-net-worth clients can be distinguished, hierarchized according to the thresholds of assets managed by the firm or the private bank.

Upper Affluent : The Upper Affluent have assets between €100,000 and €1,000,000. In order to develop their wealth, these clients mainly turn to the so-called premium investment offers of retail banks or small independent wealth management firms.

High Net Worth Individuals (HNWI): High Net Worth Individuals (HNWI) have assets of up to €5,000,000. HNWIs generally make up a large proportion of the client base of both independent and non-independent private banks.

Very High Net Worth Individuals (Very HNWI): These are individuals with an estimated wealth of between €5,000,000 and €30,000,000. This very wealthy clientele is generally advised by the wealth management departments of independent private banks and private banks attached to the network banks. It should be noted that this type of individual constitutes the so-called “premium” clients of these departments.

The “above €30 million”: The most affluent individuals (with assets of over €30,000,000) are the main clients of family offices. They are external organizations of individuals related to a single family and advise them on all aspects of their wealth management. Family offices employ people who are often experienced and have a wide range of skills.

Resources

Article about the different jobs that exist in the management of financial resources: asset management, wealth management, family office…

Youtube Top 20 Wealth Manager Interview Q&A

Youtube Natixis wealth management department’s website

About the author

The article was written in December 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

What are green bonds?

December 5, 2022 by Louis DETALLE

What are green bonds?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what are the different green bonds and what are they used for.

Green bond

A green bond is a debt security, often issued by a company or public entity on the market to enable it to finance projects related to the ecological transition. These securities function in the same way as traditional bonds, characterized by an interest rate, a repayment schedule, etc. However, green bonds are specific in that the projects financed by this type of bond must be oriented towards preserving the environment. From 2013 onwards, the green bond market has experienced very strong growth worldwide: almost $275 billion of broadly defined green bonds were issued between 2013 and 2017, including over $100 billion in the last year. In 2021, global green bond sales reached a record $513 billion, according to Bloomberg. Despite this explosion of green bonds, the craze for this type of bonds is to be qualified as they remain very marginal compared to conventional bonds, especially in the current context of the war in Ukraine.

What are the main green bond issuers?

Green bonds issuers can consist mainly of states and governments. For example, Europe has an important place in this market: almost 45% of green bond issues in 2019 were denominated in euros, compared to 26% in dollars. Indeed, France was the first country to issue a significant size of green bond, followed closely by Germany, Belgium, Ireland and the Netherlands. 225 billion in green bonds as part of the European recovery plan.

Outside Europe, the US and China are the largest issuers of green bonds. They account for almost 32% of such issues.

On the other hand, green bonds issuers can also consist of large companies. In France, Suez (the water and waste group) issued a first green bond for €2.6 billion in May 2022. This transaction met with strong demand as it was oversubscribed by about 2.9 times by 200 European institutional investors, the group said in a statement. In the meantime, large companies, particularly in the energy sector, have also launched green bond issues with, in France, Engie, EDF or in real estate with the Icade group. The SNCF also issued a green bond in 2016, becoming the first railway infrastructure manager in the world to adopt such an approach. 900 million euros were issued in the first year, then 1 billion in 2017, the largest green issue for a French company, and 500 million in 2019.

US companies have been slower to embrace green bonds, but with a total of $30 billion in green bonds issued in the first 10 months of 2019, US corporate green bond issuance has jumped by 60%. PepsiCo has obtained 1 billion dollars from investors for its inaugural operation in 2019. These 30-year green bonds will be used to finance projects that reduce the use of non-recycled plastic in the manufacture of bottles, limit the consumption of water in its production processes and, more generally, reduce its carbon footprint. The UDR real estate group is one of the recent issuers. In February 2019, it was telecoms giant Verizon that raised $1 billion, attracting eight times more demand than supply.

How are the green bonds regulated?

In the European Union, the regulation of European green bonds is still at the draft stage. The EU is taking further steps to implement its strategy on financing sustainable growth and energy transition.

The EU Permanent Representatives have given the green light to the Council’s position on a proposal to create European green bonds. The regulation concerned sets out uniform requirements for bond issuers who wish to use the name “European Green Bond” or “EuGB. For the latter, the main interest is that this regulation would provide a registration system and a monitoring framework for European green bond issuers.

Environmentally sustainable bonds are one of the main instruments for financing investments in green technologies, energy and resource efficiency, and sustainable transport and research infrastructure. The Council announced that it is ready to enter into negotiations with the European Parliament in order to reach agreement on a final version of the text that will have to be accepted by all Member States.

Outside the EU, in the US, China and elsewhere, green bond regulation is still in its infancy. This raises a major concern: actors can issue green bonds without using the funds for environmental purposes. For example, according to the Climate Bonds Initiative, only half of China’s green bonds comply with international standards. It is precisely for this reason that regulations are more necessary than ever to avoid a green bond fashion

Resources

French State’s Website about green bonds

An article by BNP Paribas about the EU regulation on ESG criterias

An article by Les Echos on how the US are defining new regulations in order to fight the plague of greenwashing

About the author

The article was written in December 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

A quick review of the corporate lawyer’s job…

December 5, 2022 by Louis DETALLE

A quick review of the corporate lawyer’s job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what a corporate lawyer works on, on a daily basis.

How a corporate lawyer is different from any other lawyer?

A corporate lawyer (also called a business lawyer) is first and foremost a lawyer, so he has studied law. However, he specializes in commercial and company law. He can also add banking law, tax law, industrial property law, mergers and acquisitions or stock exchange law to his skills.

Unlike the classical lawyer in the common sense of the term, the corporate lawyer works in a law firm or directly with a large company, advising it on all legal aspects of its activities. They only plead in cases of litigation, whereas a lawyer specialized in criminal law will plead much more often and in various criminal cases.

What does a corporate lawyer work on?

The tasks of a corporate lawyer are varied and depend on the specialty he or she practices within a business law firm. Indeed, the latter may have a dominant advisory role, i.e., he will accompany corporate clients on all their issues such as company takeovers, share transfers, debt issues… On the other hand, the corporate lawyer may also work with a litigation focus, i.e., he will specialize in defending the interests of his clients when they are the target of a lawsuit, or when they sue a third party. In any case, the corporate lawyer is a genuine advisor. The corporate lawyer must lead his clients to make the best strategic choice for them and must defend their interests against the opposing party.

The daily advisory missions of the corporate lawyer

In relation to corporate clients, the business lawyer will have to participate in his clients’ projects by ensuring that they respect a well-adapted legal framework. This will be an important part of the lawyer’s work to ensure that the client is not in conflict with the law and the regulations specific to its sector. The corporate lawyer will also need to assist clients in M&A transactions in the same way that an investment banker will. In this respect, the corporate lawyer will participate in the negotiations on the amount of the transaction and will pay particular attention to the various clauses and legal documents relating to the transaction. Whether it is the drafting of a Non-Disclosure Agreement, a Letter of Intent, a Non-Binding Offer or the signing of the Share Purchase Agreement, the business lawyer will have to supervise all these legal documents in order to protect his client as best as possible. The business lawyer will also have to assist his clients in the drafting and supervision of the various contracts relating to the company’s partners.

The punctual litigation missions of the corporate lawyer

On the other hand, the corporate lawyer will be responsible for advising and representing his clients in possible litigation. This will consist of determining the rights and duties of his clients in case of litigation and pleading in court if necessary. This aspect of a business lawyer’s work may seem less recurrent, but it is nonetheless crucial because it is precisely when a client is being sued that he or she needs the business lawyer most.

How to become a corporate lawyer?

In France, after a baccalaureate, the future corporate lawyer must enroll in a law faculty to obtain at least a Master 1 or a Master of Law. Afterwards, they can specialize in business law and obtain a Master 2 in business law, financial law, or tax law. They can also choose to continue their studies at a university abroad or take a master’s degree at a business school, which they will enter by admission based on their qualifications.

Once they have their master’s degree, the future business lawyer will have to join a regional center for professional training of lawyers or CRFPA to obtain the certificate of aptitude for the profession of lawyer or CAPA, commonly known as the “bar exam” and become a business lawyer.

Resources

An comprehensive interview of a corporate lawyer

Youtube Conference Business Lawyer: between myths and realities

About the author

The article was written in December 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Forex exchange markets

December 2, 2022 by Nakul PANJABI

Forex exchange markets

In this article, Nakul PANJABI (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2024) explains how the foreign exchange markets work.

Forex Market

Forex trading can be simply defined as exchange of a unit of one currency for a certain unit of another currency. It is the act of buying one currency while simultaneously selling another.

Foreign exchange markets (or Forex) are markets where currencies of different countries are traded. Forex market is a decentralised market in which all trades take place online in an over the counter (OTC) format. By trading volume, the forex market is the largest financial market in the world with a daily turnover of 6.6 trillion dollars in 2019. At present, it is worth 2,409 quadrillion dollars. Major currencies traded are USD, EUR, GBP, JPY, and CHF.

Players

The main players in the market are Central Banks, Commercial banks, Brokers, Traders, Exporters and Importers, Immigrants, Investors and Tourists.

Central banks

Central banks are the most important players in the Forex Markets. They have the monopoly in the supply of currencies and therefore, tremendous influence on the prices. Central Banks’ policies tend to protect aggressive fluctuations in the Forex Markets against the domestic currency.

Commercial banks

The second most important players of the Forex market are the Commercial Banks. By quoting, on a daily basis, the foreign exchange rates for buying and selling they “Make the Market”. They also function as Clearing Houses for the Market.

Brokers

Another important group is that of Brokers. Brokers do not participate in the market but acts as a link between Sellers and Buyers for a commission.

Types of Transactions in Forex Markets

Some of the transactions possible in the Forex Markets are as follows:

Spot transaction

As spot transaction uses the spot rate and the goods (currencies) are exchanges over a two-day period.

Forward transaction

A forward transaction is a future transaction where the currencies are exchanged after 90 days of the deal a fixed exchange rate on a defined date. The exchange rate used is called the Forward rate.

Future transaction

Futures are standardized Forward contracts. They are traded on Exchanges and are settled daily. The parties enter a contract with the exchange rather than with each other.

Swap transaction

The Swap transactions involve a simultaneous Borrowing and Lending of two different currencies between two investors. One investor borrows the currency and lends another currency to the second investor. The obligation to repay the currencies is used as collateral, and the amount is repaid at forward rate.

Option transaction

The Forex Option gives an investor the right, but not the obligation to exchange currencies at an agreed rate and on a pre-defined date.

Peculiarities of Forex Markets

Trading of Forex is not much different from trading of any other asset such as stocks or bonds. However, it might not be as intuitive as trading of stocks or bonds because of its peculiarities. Some peculiarities of the Forex market are as follows:

Going long and short simultaneously

Since the goods traded in the market are currencies themselves, a trade in the Forex market can be considered both long and short position. Buying dollars for euros can be profitable in cases of both dollar appreciation and euro depreciation.

High liquidity and 24-hour market

As mentioned above, the Forex market has the largest daily trading volume. This large volume of trading implies the highly liquid feature of Forex Assets. Moreover, Forex market is open 24 hours 5 days a week for retail traders. This is due to the fact that Forex is exchanged electronically over the world and anyone with an internet connection can exchange currencies in any Forex market of the world. In fact for Central banks and related organisations can trade over the weekends as well. This can cause a change in the price of currencies when the market opens to retail traders again after a gap of 2 days. This risk is known as Gapping risk.

High leverage and high volatility

Extremely high leverage is a common feature of Forex trades. Using high leverage can result in multiple fold returns in favourable conditions. However, because of high trading volume, Forex is very volatile and can go in either upward or downward spiral in a very short time. Since every position in the Forex market is a short and long position, the exposure from one currency to another is very high.

Hedging

Hedging is one of the main reasons for a lot of companies and corporates to enter into a Forex Market. Forex hedging is a strategy to reduce or eliminate risk arising from negative movement in the Exchange rate of a particular currency. If a French wine seller is about to receive 1 million USD for his wine sales then he can enter into a Forex futures contract to receive 900,000 EUR for that 1 million USD. If, at the date of payment, the rate of 1 million USD is 800,000 EUR the French wine seller will still get 900,000 EUR because he hedged his forex risk. However, in doing so, he also gave up any gain on any positive movement in the EUR-USD exchange rate.

Useful resources

Academic resources

Solnik B. (1996) International Investments Addison-Wesley.

Business resources

DailyFX / IG The History of Forex

DailyFX / IG Benefits of forex trading

DailyFX / IG Foreign Exchange Market: Nature, Structure, Types of Transactions

About the author

The article was written in December 2022 by Nakul PANJABI (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2024).

Fama-MacBeth regression method: the stock approach vs the portfolio approach

Introduction

Fama and MacBeth (1973) implemented with individual stocks

Step 1: time-series regression

Step 2: cross-sectional regression

Test the statistical significance of the results obtained from the regression

Fama and MacBeth (1973) implemented with portfolios of stocks

Step 1: time-series regression

Step 2: cross-sectional regression

Test the statistical significance of the results obtained from the regression

Econometric issues

Errors in data measurement

Asset return heteroscedasticity

Asset return autocorrelation

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Academic research

About the author

Introduction

Mathematical foundations

Step 1: time-series analysis of returns

Step 2: cross-sectional analysis of returns

Empirical study of the Fama-MacBeth regression

Empirical study: Stock approach

Excel file for the Fama-MacBeth two-step regression method

Limitations of the Fama-McBeth approach

Selection of the market index

Stability of the coefficients

Conclusion

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Academic research

Business Analysis

About the author

Women in Finance (Northeastern University)

Background on women in finance

Women in Finance at Northeastern University

Women in Finance at Northeastern University

Missions of the organization

Acquiring financial skills

Looking forward

Why should I be interested in this article?

Useful resources

Related posts on the SimTrade blog

About the author

My experience as an investment banking analyst intern at G2 Capital Advisors

About the company

My Internship

My Missions

Required Skills and Knowledge

What I Learned

Key Financial Concepts

Buy-side vs sell-side

M&A Sell-Side Advisory Process Explained

Process and Timeline

What is Restructuring?

Merger & Acquisition Activism

Why should I be interested in this article?

Related posts on the SimTrade blog

Useful resources

About the author

Why is Apple’s new iPhone 14 release line failing in the first few months?

Brief reminder of the facts

Impact on company

Relations to market efficiency

Why did I choose this event?

Why should you be interested in this topic?

Useful resources

Related posts on the SimTrade blog

About the author

A quick review of the M&A – Real Estate job…

Let’s recall what M&A is and then, we will assess how working in the Real Estate sector makes it different

What does an analyst in M&A – Real Estate work on?

What are the main exits for an M&A Analyst of the Real Estate sector?

Related posts on the SimTrade blog

Resources

About the author

A quick review of Wealth Management’s job…