Dans cet article, Jean-Marie CHOFFRAY (Professeur Ordinaire Honoraire d’Informatique Décisionnelle à l’Université de Liège, PhD-77, Management Science, Massachusetts Institute of Technology) introduit son recent article “Mille quatre cent milliards de dollars”.
L’événement fondateur du XXe siècle est la première guerre mondiale, conséquence de rivalités politiques et économiques entre les puissances de l’Alliance et celles de l’Entente. Dix millions de civils et de militaires meurent. Vingt millions sont blessés. Mais, pour la première fois, une institution internationale est créée dans le but de régler les différends internationaux : la Société des Nations (SDN).
L’événement fondateur du XXIe siècle pourrait être la production en 2009 du premier bloc de transactions du réseau Bitcoin et, accessoirement, l’échange du premier bitcoin. Aucun mort. Aucun blessé. Mais, pour la première fois, un réseau informatique décentralisé permet d’enregistrer irréversiblement et de certifier irrévocablement tous types de transactions entre des intervenants souhaitant garder l’anonymat. En termes simples, un bitcoin est une copie numérique exploitable – i.e. conservable et échangeable – d’une série (chaîne) complète et indestructible de transactions sécurisées. Leur nombre est exponentiellement limité dans le temps (le dernier exemplaire sera produit vers 2140) et dans l’espace (vingt et un millions au total). Le réseau Bitcoin est en quelque sorte la « Banque Centrale » d’un écosystème numérique multipolaire dont seuls les utilisateurs contrôlent le devenir. Personne ne peut prévoir la diversité des applications que cette technologie autorise, ni les transformations qu’entrainera sa diffusion dans les secteurs où la fiabilité et la validité de l’information et des connaissances sont essentielles. Sa capitalisation boursière le rendrait-elle indestructible ? Pour un investisseur averti : ignorer Bitcoin, c’est se tirer une balle dans le pied… Et, tout miser sur Bitcoin, c’est se tirer une balle dans la tête !
L’article a été rédigé en mars 2024 par Jean-Marie CHOFFRAY (Professeur Ordinaire Honoraire d’Informatique Décisionnelle à l’Université de Liège, PhD-77, Management Science, Massachusetts Institute of Technology).
In this article, Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023) gives a quick overview of Venture Capital.
What is Venture Capital?
Venture capital (VC) is a specialized form of financing where investors provide funds to startup or early-stage companies with high growth potential. This funding is crucial for startups to develop and expand their business operations. Venture capitalists not only provide financial support but also offer expertise and guidance to help these companies succeed. The goal of venture capital is to generate significant returns by investing in innovative businesses that have the potential to disrupt markets and achieve substantial growth.
VCs have five main functions:
They serve as financial intermediaries, channeling capital from investors into promising portfolio companies.
Their investments are directed towards private companies, making them illiquid assets.
VCs actively participate in the management and oversight of their portfolio companies, embodying active investors.
The primary objective of VCs is to maximize financial returns, typically through strategic exits like acquisitions or IPOs.
VCs prioritize investments in entrepreneurial ventures with substantial growth potential, aiming to foster internal growth and increase the likelihood of successful exits. These characteristics highlight the dynamic and strategic nature of venture capital investments, contributing to innovation and economic growth.
VCs vs others:
VCs differ from angel investors as they function as financial intermediaries rather than investing personal funds directly.
Unlike mutual or hedge funds, VCs invest specifically in private companies, placing them within the category of private equity and alternative investments.
While all VCs are private equity funds, the inverse isn’t true; not all private equity funds engage in venture capital.
VCs set themselves apart from crowdfunding platforms by actively participating in the companies they invest in, providing ongoing monitoring and management support.
How are VCs organized?
Venture capital firms are typically organized as limited partnerships, structured to facilitate investment activities while providing a degree of protection and incentive for both investors and managers. For investors this protection comes in the form of limited liability, meaning their risk of losing money is confined to their investment amount and they are not personally liable for the debts of the business. This allows them to invest in high-risk ventures with a capped downside. For managers the incentive is often structured as carried interest, a share of the profits of the investments, which aligns their financial interests with the success of the firm’s investments. This ensures that managers are motivated to select and nurture companies that will yield high returns, thereby directly linking their compensation to their performance in managing the venture capital firm’s portfolio.
Limited partnerships in venture capital consist of two main categories of partners. Firstly, there are limited partners, who contribute capital to the fund and bear limited liability. These investors can include wealthy individuals, banks, mutual funds, and other institutional investors. Secondly, there is the general partner, responsible for managing the fund’s operations and investments, and who assumes unlimited liability. Figures like Don Valentine, Ben Horowitz, and Peter Thiel are examples of notable general partners in the venture capital industry.
The lifespan of a typical limited partnership in venture capital is around ten years, during which investors’ capital is committed and cannot be withdrawn. General partners receive compensation in the form of a management fee and a share of the profits generated by successful investments, known as carried interest.
Limited partnerships offer tax efficiency, as they are not subject to corporate taxes, with partners instead paying taxes on their share of the profits. Additionally, distributions of securities to partners incur no immediate tax implications, with taxes only due upon the eventual sale of the securities.
This organizational structure provides a framework that incentivizes efficient investment management and aligns the interests of both limited and general partners in achieving successful outcomes.
Benefits of VC
Venture capital offers a range of benefits to both entrepreneurs and investors, fostering innovation, driving economic growth, and facilitating wealth creation. Firstly, venture capital provides crucial funding to startups and early-stage companies that may otherwise struggle to secure financing from traditional sources such as banks or public markets. This injection of capital enables entrepreneurs to pursue ambitious ideas and develop groundbreaking technologies, driving innovation across various industries. Moreover, venture capitalists often bring valuable expertise, networks, and mentorship to the table, helping startups navigate challenges, refine their business strategies, and accelerate their growth trajectory.
Secondly, venture capital plays a pivotal role in job creation and economic development. By supporting high-growth startups, venture capital investments fuel job creation, as these companies expand their operations, hire new talent, and contribute to local economies. Additionally, successful startups can spawn entire ecosystems of suppliers, service providers, and complementary businesses, further stimulating economic activity and driving regional prosperity.
Furthermore, venture capital investment offers attractive returns for investors willing to accept the inherent risks associated with early-stage ventures. While venture capital investments carry a higher risk of failure compared to traditional investments, they also offer the potential for substantial returns on successful exits, such as acquisitions or initial public offerings (IPOs). As a result, venture capital serves as a vital asset class for investors seeking diversification and opportunities for outsized returns in their investment portfolios.
VC Financing Cycle
The Venture Capital Financing Cycle delineates the sequential stages of funding that startups typically undergo, from inception to exit. This cycle starts with the Seed Stage, where initial capital is raised to prove concepts and build prototypes. As the startup matures, it may progress through various rounds of funding—Angel, Series A, Series B, and beyond—each designed to fuel growth, product development, market expansion, and operational scaling. The Bridge stage serves as a critical juncture for preparing more mature startups for substantial future rounds or positioning for exit strategies. The cycle culminates in the Pre-IPO and IPO Preparation stages, where companies ready themselves for public offering or seek acquisition opportunities, marking the exit phase. This framework not only structures the investment landscape but also maps the growth trajectory of startups. The VC financing cycle is emblematic of the symbiotic relationship between investors seeking to maximize returns and startups in need of capital to fuel their growth ambitions, fostering innovation and economic development within the broader ecosystem.
VCs financial performance in 2023
In 2023, the venture capital (VC) market experienced significant shifts, reflecting broader economic challenges and evolving investment trends. The year saw a considerable downturn in VC investments, dropping to the lowest levels in four years, with a year-over-year decrease of 35% from the already declining levels of 2022. The total amount raised by VC-backed startups barely surpassed $140 billion, influenced notably by a few mega-deals in the artificial intelligence (AI) sector. The decline was not just in the amount raised but also in deal volume across nearly all fund classes, reaching the lowest point in a decade. Later-stage investments saw the most significant reduction in dollar volume quarter-over-quarter, while Series A investments showed some resilience with a 9% increase.
The backdrop of economic headwinds, valuation concerns, and an overhang of more than 50,000 existing VC-backed startups created a challenging environment for new investments. VC fund formation also experienced a sharp decline, dropping 62% from the record year in 2022, although there was a slight uptick in the last quarter of the year. This situation has led to increased caution among venture capitalists, with a notable reluctance to engage in mega-round financing. Only 50 mega deals were recorded in the last quarter of 2023, marking the lowest total since 2017.
Despite these challenges, AI continued to garner significant attention and investment, driving many of the largest deals in the U.S. during the last quarter of 2023. This trend suggests that while the overall VC investment has declined, specific sectors, particularly those related to technological innovation and AI, continue to attract substantial interest and funding.
Why should I be interested in this post?
As an ESSEC students interested in finance, this post can be a useful resource due to its relevance in the financial sector. Understanding venture capital offers insights into alternative investments, career opportunities in private equity, and the dynamics of financing innovative startups, enriching your knowledge and potential career paths within the finance industry.
The article was written in March 2024 by Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023).
In this article, Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023) presents the top 5 Private Equity firms globally.
Introduction
In the dynamic landscape of finance, private equity firms wield significant influence driving innovation, growth, and value creation. These firms are renowned for their strategic investments and operational expertise, generating substantial returns for investors. In this post, we embark on a journey to uncover the top 5 Private Equity firms globally guided by specific metrics that underscore their reputation and success.
Methodology
To define the top 5 global Private Equity firms, we developed a methodology rooted in a detailed selection process and comprehensive data analysis. Given the vast landscape of private equity firms, our first step was to narrow down our focus by seeking rankings from reputable independent research institutes, such as Private Equity International and Forbes. These rankings served as a benchmark, helping us identify firms that consistently garnered recognition for their excellence within the industry.
From these rankings, we selected firms that appeared most frequently in the top 5, ensuring that our pool consisted of widely acknowledged and respected entities. This approach enabled us to narrow down our analysis to a manageable number of firms, facilitating a more in-depth assessment of their performance and standing.
With our selection criteria in place, we turned to publicly listed firms, as their annual reports provide accessible data crucial for our analysis. It is important to understand that being publicly listed means that the private equity firm is listed on stock exchanges, and anyone can buy shares in the company. However, this is a big difference from investing in private equity funds, where the capital raised is used to buy portfolio companies.
From this we obtained the 5 firms to rank:
Blackstone Inc.
KKR & Co Inc.
The Carlyle Group Inc.
Apollo Global Management, Inc.
TPG Inc.
To rank these firms, we will be guided by essential measurement metrics that illuminate their standing and impact within the industry. Our evaluation method hinges on key indicators, including Assets Under Management (AUM), fundraising totals, and performance metrics such as gross returns. From an investor’s perspective, this comprehensive approach ensures a deep understanding of each firm’s financial health, strategic positioning, and potential for generating future returns, allowing for informed decision-making in investment opportunities.
Let’s have a more in depth look at the metrics (criterion) used:
Fundraising Totals Over the Last 5 Years. This metric provides insight into each firm’s ability to attract capital from investors over an extended period, reflecting investor confidence and the firm’s fundraising track record.
Total Private Equity AUM (in 2023). Total AUM for the private equity segment in 2023 serves as a measure of the firm’s scale and market presence within the private equity industry.
Private Equity Portfolio Returns (gross returns 2023). This metric represents the firm’s performance in generating returns from its investments in corporate private equity, providing a measure of investment effectiveness and value creation.
For each criterion, we will assign ranks to each firm based on their performance relative to others, with 1 being the highest rank and 5 being the lowest. We will then calculate the average score for each company and rank them accordingly. Each criterion weights the same.
Blackstone
Logo of Blackstone.
Source: the company.
Fundraising Totals: 126bn$
AUM: 304bn$
Gross returns: 12.1%
KKR
Logo of KKR.
Source: the company.
Fundraising Totals: 104bn$
AUM: 176bn$
Gross returns: 16%
The Carlyle Group (CG)
Logo of the Carlyle.
Source: the company.
Fundraising Totals: 70bn$
AUM: 161bn$
Gross returns: 5%
Apollo Global Management.
Logo of Apollo Global Management.
Source: the company.
Fundraising Totals: 23bn$
AUM: 75.9bn$
Gross returns: 10.2%
TPG
Logo of TPG.
Source: the company.
Fundraising Totals: 55bn$
AUM: 97.8bn$
Gross returns: 14.1%
Conclusion
Once we consider all these elements, here are the ranks we obtain for each criterion and their average for each firm:
Therefore, our final ranking for the top 5 Private Equity firms globally in 2023 is:
Blackstone
KKR
TPG
The Carlyle Group
Apollo Global Management
Note: Blackstone is ranked first in more criteria/metrics compared to KKR, demonstrating superior performance across multiple dimensions, and affirming its position as the top-performing firm in the final ranking.
Why should I be interested in this post?
As an ESSEC student enrolled in the SimTrade course, delving into the realm of Private Equity could be of great interest to you. This post serves as an insightful exploration into the industry’s key players, offering valuable insights into their distinctive characteristics. It presents an opportunity to deepen your understanding of the sector and potentially discover your future employer among these influential firms.
The article was written in March 2024 by Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023).
My professional experience as a financial and accounting assistant at Professional Services
In this article, Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023) shares his professional experience as a financial and accounting assistant at Professional Services.
About the company
Professional Services was founded in 1986 by a team of professionals (lawyers, chartered accountants, and labor consultants), with the aim of providing services to businesses in the accounting, labor, administrative, tax, and corporate sectors. The mission is to offer entrepreneurs an integrated package of services capable of stimulating organizational transformations and facilitating the achievement of adequate levels of competitiveness. The target audience addressed by the Group primarily consists of Italian and foreign companies operating in the service sector and tertiary industries in general, as well as industrial, commercial, transportation, etc. With over thirty years of experience in the sector and an average annual group turnover of approximately €2,000,000, Professional Services can guarantee their clients the highest level of professionalism.
Logo of Professional Services.
Source: Professional Services.
As an assistant, I was part of the financial and accounting advisory department of Professional Services. In this department we were entrusted with critical responsibilities spanning the processing of accounting data and the provision of essential accounting and administrative services. The department served as the backbone of the organization, providing essential support across a spectrum of financial activities. We were responsible for maintaining accurate and up-to-date accounting records, ensuring the integrity of financial information. Moreover, we undertook the crucial task of preparing and analyzing financial statements, offering insights vital for informed decision-making. Additionally, the team managed various accounting and administrative services, including the maintenance of corporate books, providing corporate assistance, and overseeing the intricate landscape of taxation, encompassing value-added tax (VAT), personal income tax, corporate income tax, and regional tax on productive activities.
My internship
I had a 3-month internship at Professional Services as a financial and accounting assistant in 2023.
My missions
Over the course of these three months, my mission was to prepare and analyze the financial statements for our clients. I ensured that these statements were accurate and complied with relevant accounting standards, providing reliable insights for decision-making. This involved meticulously reviewing balance sheets, income statements, and cash flow statements for the given clients and reporting how these statements were in comparison to industry benchmarks. Moreover, I contributed to the maintenance of clients’ accounting records, assisting in the establishment of a comprehensive and organized financial record-keeping system. I did this through a software called Profis which helped by facilitating the compilation of balance sheets and declarations and performing tax simulations. Additionally, I handled various tasks related to invoicing, ensuring accurate processing and organization to facilitate smooth financial transactions for our clients. By fulfilling these responsibilities diligently, I aimed to support our clients in maintaining financial integrity, facilitating informed business decisions, and providing excellent service overall.
Required skills and knowledge
During this internship, I sharpened a combination of soft and hard skills that were indispensable for my position. Soft skills, such as effective communication, were essential. The ability to convey complex financial information clearly and succinctly to colleagues was crucial. Additionally, strong interpersonal skills facilitated collaboration within the team and ensured smooth workflow.
Attention to detail emerged as a critical soft skill, particularly when working with financial data and reports. The ability to meticulously analyze information and identify discrepancies was crucial for maintaining accuracy and reliability. Furthermore, time management skills were invaluable, as I often juggled various tasks and deadlines while prioritizing workload effectively.
On the hard skills front, proficiency in accounting principles and practices was fundamental. This included a thorough understanding of IFRS accounting regulations and principles, coupled with experience in financial statement preparation and analysis. Additionally, familiarity in applications such as a spreadsheet like Excel and an accounting software like Profis was essential. Mastery of Excel allowed me to manipulate and analyze financial data efficiently, while knowhow in Profis facilitated specific accounting operations and analyses required for the firm’s services.
Adaptability was also key, given the dynamic nature of the internship environment. The ability to quickly learn and adapt to new software and procedures ensured that I could contribute effectively to the team’s objectives. Overall, the combination of soft and hard skills enabled me to excel in my internship at Professional Services, providing me with invaluable experience and preparing me for future challenges in the field of finance and accounting.
What I learned
In terms of knowledge, I learned a multitude of valuable lessons that have significantly contributed to my professional growth and development. Firstly, I gained hands-on experience in financial statement preparation and analysis, improving my skills in interpreting financial data and drawing meaningful insights to support decision-making processes. Through my work. An integral part of this experience was learning to meticulously review and reconcile accounts to ensure accuracy in financial reporting. By identifying and correcting discrepancies between the general ledger and subsidiary accounts, I helped maintain the integrity of financial statements. Additionally, I deepened my understanding of IFRS (International Financial Reporting Standards) accounting principles and regulations, which are crucial for ensuring transparency, accountability, and comparability of financial statements. By familiarizing myself with these principles, I was able to assist in preparing financial statements that met regulatory requirements, enhancing the credibility and reliability of our clients’ financial information.
Moreover, working with software applications such as Excel and Profis expanded my technical proficiency, allowing me to efficiently manipulate and analyze financial data. This experience has enhanced my ability to leverage technology to streamline processes and improve productivity in the workplace.
On a broader level, my internship at Professional Services provided me with invaluable exposure to the dynamics of the finance and accounting industry, in the sense that I gained insight into the day-to-day operations of a consultancy firm, including client interactions, and the importance of maintaining accuracy and integrity in financial reporting.
Furthermore, collaborating with colleagues from diverse backgrounds, such as with different experiences, educational backgrounds and different areas of expertise, has improved my communication and teamwork skills, fostering an appreciation for the importance of effective collaboration in achieving organizational goals.
Overall, my internship experience at Professional Services has equipped me with a comprehensive skill set, valuable insights, and a deeper understanding of the finance and accounting profession, laying a strong foundation for my future career aspirations.
Financial concepts related my internship
Financial Statement Analysis
Financial statement analysis involves evaluating a company’s financial performance and position by examining its income statement, balance sheet, and cash flow statement. In my role, I actively participated in the preparation and analysis of financial statements for clients, ensuring accuracy and compliance with accounting standards.
Financial Reporting Standards
Financial reporting standards refer to a set of guidelines and rules established by regulatory bodies or standard-setting organizations to govern the preparation and presentation of financial statements. These standards aim to ensure consistency, transparency, and comparability in financial reporting across different organizations and industries. In my role, I applied financial reporting standards to prepare and review clients’ financial statements and records, ensuring accuracy and transparency in reporting.
Taxation
Taxation includes corporate income tax, applied to business profits, and value-added tax (VAT), imposed on goods and services at each stage of production. Corporate income tax understanding involves knowledge of tax laws, deductions, and applicable rates. Similarly, understanding VAT requires knowledge of registration, taxable transactions, and applicable rates. Even though I was not directly involved, the team was responsible in accounting for VAT and corporate income tax for clients, ensuring compliance with relevant regulations.
Why should I be interested in this post?
An ESSEC student aspiring to pursue a career in finance would find my experience at Professional Services particularly compelling. By sharing my experience as a financial and accounting assistant, I aim to offer fellow ESSEC students a glimpse into the practical application of finance concepts in a professional setting, inspiring and informing their own career aspirations in the field.
The article was written in March 2024 by Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023).
In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024) explains the cryptocurrency Tether.
Historical context and background
Tether (USDT) emerged in July 2014 as a groundbreaking cryptocurrency designed to bridge the gap between traditional fiat currencies and the digital realm. Conceived by Brock Pierce, Craig Sellars, and Reeve Collins, Tether aimed to offer a stable alternative to the price volatility commonly associated with other cryptocurrencies like Bitcoin. Functioning as a stablecoin, Tether is pegged to the value of a fiat currency, primarily the US Dollar, maintaining a 1:1 ratio. This pegging mechanism provides a degree of price stability, making Tether an attractive option for traders and investors seeking to mitigate the risks inherent in the crypto market. Since its inception, Tether has grown to become one of the most widely used cryptocurrencies, playing a pivotal role in facilitating liquidity and serving as a gateway for funds within the broader digital asset ecosystem. Despite its popularity, Tether has faced scrutiny regarding its transparency and reserve backing, adding layers of complexity to its intriguing history within the crypto landscape.
Tether Logo
Source: Yahoo! Finance
Figure 1. Key Dates in Tether History
Source: Yahoo! Finance
Key features
Stability: Tether is designed to maintain a 1:1 peg with a fiat currency, typically the US Dollar. This pegging mechanism provides stability in value, reducing the volatility commonly associated with other cryptocurrencies.
Widespread Adoption: Tether is widely adopted across various cryptocurrency exchanges and platforms. Its broad acceptance makes it a popular choice for traders and investors.
Liquidity Provider: Tether serves as a crucial source of liquidity within the cryptocurrency market. Traders often use USDT as a safe haven during times of market turbulence.
Fast Transactions: Tether transactions are conducted on blockchain networks like Ethereum and Tron, enabling fast and efficient cross-border transactions compared to traditional banking systems.
Global Accessibility: Tether provides a borderless financial solution, allowing users to send and receive funds globally without the need for traditional banking intermediaries.
Smart Contract Compatibility: Tether is compatible with blockchain-based smart contracts, enabling developers to integrate it into decentralized applications (DApps) for various financial services.
Use cases
Trading Pairs: Tether is extensively used as a trading pair on cryptocurrency exchanges. It allows traders to quickly move in and out of positions while avoiding the market volatility associated with other digital assets.
Hedging: Investors often use Tether as a hedging tool to safeguard their portfolios against market fluctuations. By converting their holdings to USDT during uncertain times, investors can protect their capital.
Remittances: Tether facilitates cross-border remittances, offering a faster and potentially more cost-effective alternative to traditional money transfer services.
Stable Value Storage: Tether serves as a stable store of value, allowing users to preserve their wealth in a cryptocurrency that is less prone to price fluctuations compared to other volatile digital assets.
Decentralized Finance (DeFi): Tether is a common stablecoin used in decentralized finance protocols for lending, borrowing, and yield farming activities within the growing DeFi ecosystem.
Tokenized Assets: Tether is utilized to represent traditional assets in tokenized form on blockchain platforms, enabling fractional ownership and increased liquidity for real-world assets.
Controversy
While Tether has gained popularity for its stability and utility, it has also faced criticism and regulatory scrutiny, particularly regarding its reserve backing and transparency. The paper “Is Bitcoin Really Untethered?”, analyses Tether’s controversies revealing that the significant growth of Tether, the largest pegged cryptocurrency, may not solely be driven by organic investor demand but also by a scheme to artificially inflate cryptocurrency prices. By analyzing the blockchains of Bitcoin and Tether, the researchers found evidence suggesting that a major player on Bitfinex utilizes Tether to purchase large amounts of Bitcoin during price downturns, effectively supporting Bitcoin prices. This intervention is particularly pronounced near round-number price thresholds, indicating a strategic approach to price support. The data also suggests that Tether issuance correlates with a month-end need for dollar reserves, implying partial reserve backing. Overall, these findings lend support to the hypothesis that Tether’s growth is supply-driven and potentially manipulative.
Furthermore, the paper highlights the broader implications of these findings, suggesting that price manipulation in cryptocurrencies can have significant distortive effects beyond standard supply-and-demand dynamics. It highlights the need for external surveillance, monitoring, and regulatory frameworks in the cryptocurrency space, challenging the notion that innovative technologies alone can bypass the need for traditional oversight. The conclusion suggests that while cryptocurrencies offer new possibilities for financial innovation, they are not immune to the risks associated with dubious activities and speculative bubbles, which could ultimately lead to further price distortions and negative impacts on the market.
Technology and underlying blockchain
Tether (USDT), a the stablecoin, utilizes blockchain technology across various networks to provide a digital asset pegged to traditional fiat currencies. The Ethereum-based ERC-20 version is the most prevalent, benefiting from Ethereum’s widespread adoption and smart contract capabilities, making it a cornerstone for decentralized exchanges and DeFi applications. Tether also operates on the Tron blockchain (TRC-20), offering faster transactions and reduced fees, particularly appealing for high-frequency trading. Acknowledging the demand for scalability and cost-effectiveness, Tether has expanded to alternative blockchains like Binance Smart Chain and Solana. These adaptations highlight Tether’s commitment to meeting diverse market needs. Managed by Tether Limited, the stablecoin asserts stability through regular audits and claims of holding equivalent fiat reserves, although controversies have arisen regarding transparency. The dynamic interplay of Tether across various blockchains underscores its pivotal role in the evolving landscape of digital finance.
Supply of coins
The market supply of Tether (USDT), a leading stablecoin, plays a crucial role in the broader cryptocurrency ecosystem. Tether’s supply dynamics are intrinsically linked to its unique issuance mechanism. Tether Limited, the company behind USDT, mints new tokens by receiving equivalent amounts of fiat currency, primarily the US Dollar, in its reserves. This issuance process is supposed to ensure a 1:1 peg between USDT and the underlying fiat currency, promoting price stability.
The market supply of Tether expands as demand for the stablecoin increases. Traders and investors often turn to USDT as a safe haven during times of high volatility, effectively increasing the circulating supply. This heightened demand results in additional Tether being issued to maintain the peg, thus influencing the overall supply in the market.
Monitoring Tether’s supply is of particular interest due to its significant impact on liquidity within the cryptocurrency space. An influx of USDT into the market provides traders with a reliable means to navigate price fluctuations without fully exiting the crypto market, enhancing liquidity and potentially mitigating market volatility.
Historical data for Tether
How to get the data?
The Tether is popular cryptocurrency on the market, and historical data for the Tether such as prices and volume traded can be easily downloaded from the internet sources such as Yahoo! Finance, Blockchain.com & CoinMarketCap. For example, you can download data for Tether on Yahoo! Finance (the Yahoo! code for Tether is USDT-USD).
Figure 1. Tether data
Source: Yahoo! Finance.
Historical data for the Tether market prices
Exploring the historical market price of Tether (USDT) unveils a wealth of insights into the cryptocurrency’s role and its impact on the broader market. The stability of Tether, designed to maintain a 1:1 peg with traditional fiat currencies, is reflected in its price history. Observing deviations from this peg over time provides a gauge of Tether’s effectiveness as a stablecoin. Moreover, fluctuations in Tether’s historical price serve as a barometer for market sentiment, indicating periods of increased demand for stability during cryptocurrency market volatility. Tether’s price movements also offer a lens into liquidity trends, showcasing its role in various financial activities within the crypto ecosystem. Crucially, analyzing Tether’s historical price can illuminate market responses to controversies, regulatory developments, and its correlation with other major cryptocurrencies. Understanding these dynamics is essential for investors and traders seeking to navigate the intricate landscape of digital assets and stablecoins.
Figure 2 below represents the evolution of the price of Tether in US dollar over the period Nov 2017 – Dec 2023. The price corresponds to the “closing” price (observed at 10:00 PM CET at the end of the month).
Figure 2. Evolution of the Tether price
Source: Yahoo! Finance.
R program
The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the Ethereum.
Data file
The R program that you can download above allows you to download the data for the Ethereum from the Yahoo! Finance website. The database starts on December, 2017.
Table 1 below represents the top of the data file for the Ethereum downloaded from the Yahoo! Finance website with the R program.
Table 1. Top of the data file for the Tether
Source: computation by the author (data: Yahoo! Finance website).
Python code
You can download the Python code used to download the data from Yahoo! Finance.
Python script to download Ethereum historical data and save it to an Excel sheet::
# Make sure you have the required libraries installed and adjust the “start_date” and “end_date” variables to the desired date range for the historical data you want to download.
Evolution of the Tether
Figure 3 below gives the evolution of the Tether on a daily basis.
Figure 3. Evolution of the Tether.
Source: computation by the author (data: Yahoo! Finance website).
Figure 4 below gives the evolution of the Tether returns from November 09, 2017 to December 31, 2022 on a daily basis.
Figure 4. Evolution of the Tether returns.
Source: computation by the author (data: Yahoo! Finance website).
Summary statistics for the Ethereum
The R program that you can download above also allows you to compute summary statistics about the returns of the Tether.
Table 4 below presents the following summary statistics estimated for the Ethereum:
The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.
The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.
Table 2. Summary statistics for Tether.
Source: computation by the author (data: Yahoo! Finance website).
Statistical distribution of the Tether returns
Historical distribution
Figure 5 represents the historical distribution of the Tether daily returns for the period from November 09, 2017 to December 31, 2022.
Figure 5. Historical Tether distribution of the returns.
Source: computation by the author (data: Yahoo! Finance website).
Gaussian distribution
The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from November 09, 2017 to December 31, 2022.
Figure 6 below represents the Gaussian distribution of the Tether daily returns with parameters estimated over the period from November 09, 2017 to December 31, 2022.
Figure 6. Gaussian distribution of the Tether returns.
Source: computation by the author (data: Yahoo! Finance website).
Risk measures of the Tether returns
The R program that you can download above also allows you to compute risk measures about the returns of the tether.
Table 3 below presents the following risk measures estimated for the Ethereum:
The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)
Table 5. Risk measures for the Tether.
Source: computation by the author (data: Yahoo! Finance website).
The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the XRP while the study of the right tail is relevant for an investor holding a short position in the XRP.
Why should I be interested in this post?
Tether is a compelling subject for students, especially those in finance, economics, business, and technology. Ripple’s focus on revolutionizing cross-border transactions and its unique blockchain technology offer insights into innovations in financial technology. Exploring Tether provides a deeper understanding of blockchain, cryptocurrency markets, stable coins, regulatory challenges, and the practical applications of decentralized systems. Students can gain valuable knowledge about market dynamics, investment opportunities, and the intersection of technology and finance by delving into the complexities of Tether and its impact on the financial industry.
In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024) explains the cryptocurrency XRP/Ripple.
Historical context and background
XRP, the digital currency associated with the Ripple network, emerged against the backdrop of a growing interest in blockchain technology and its potential applications beyond cryptocurrencies. The development of Ripple began in 2012 when Jed McCaleb, Chris Larsen, and Arthur Britto joined forces to create a decentralized digital currency system. Ripple Labs, the company behind XRP, aimed to address the inefficiencies in traditional cross-border payments by providing a fast and cost-effective alternative. Unlike Bitcoin, which relies on a proof-of-work consensus mechanism, Ripple utilizes a unique consensus algorithm called the Ripple Protocol Consensus Algorithm (RPCA). The XRP Ledger, the underlying technology, is designed to facilitate quick and secure transactions, making it particularly appealing for financial institutions. Over the years, Ripple has garnered both support and criticism within the crypto community due to its centralized nature and ongoing legal challenges. Nevertheless, its focus on facilitating seamless global transactions has positioned XRP as a significant player in the evolving landscape of digital assets.
XRP Logo
Source: Yahoo! Finance
Figure 1. Key Dates in XRP History
Source: Yahoo! Finance and other internet sources
Key features and use cases
Fast and Low-Cost Transactions: One of the primary features of XRP is its speed and cost-effectiveness. The XRP Ledger is capable of processing transactions in just a few seconds, making it significantly faster than traditional banking systems and some other cryptocurrencies. The low transaction fees associated with XRP contribute to its appeal for cross-border payments.
Liquidity and Scalability: XRP is designed to handle a high volume of transactions, providing liquidity for financial institutions. This scalability is crucial for the adoption of XRP in large-scale financial applications, including remittances and institutional transfers.
Interoperability: Ripple aims to facilitate interoperability between different financial systems. XRP can act as a bridge currency between fiat currencies, enabling seamless and efficient transactions across borders. This interoperability is particularly valuable in the context of global finance.
Decentralization with Unique Consensus Algorithm: While Ripple has faced criticism for some aspects of centralization, the XRP Ledger employs the Ripple Protocol Consensus Algorithm (RPCA) for transaction validation. This consensus mechanism is more energy-efficient compared to proof-of-work used by some other cryptocurrencies.
Partnerships with Financial Institutions: Ripple has formed partnerships with various financial institutions, including banks and payment service providers. The aim is to leverage XRP for real-time, cross-border payments, reducing settlement times and costs for these institutions.
Smart Contracts and Tokenization: Ripple has also explored adding smart contract functionality to the XRP Ledger, expanding its use cases beyond simple transactions. Additionally, the platform has the potential for tokenization of real-world assets, allowing for the representation of various assets on the blockchain.
Stability and Predictable Supply: XRP has a fixed supply of 100 billion tokens, with a portion held by Ripple Labs. This fixed supply aims to provide stability and predictability, which could be attractive for businesses and investors.
While XRP has faced regulatory challenges and debates about its decentralization, its unique features and focus on solving real-world financial issues position it as a cryptocurrency with substantial potential in the global financial landscape.
Technology and underlying blockchain
XRP, the cryptocurrency associated with the Ripple network, operates on a distinct technological framework, utilizing a consensus algorithm that sets it apart from traditional proof-of-work systems. At the heart of XRP’s technology is the XRP Ledger, a decentralized blockchain that enables fast and secure transactions. The unique consensus mechanism employed by Ripple is known as the Ripple Protocol Consensus Algorithm (RPCA). Unlike the energy-intensive mining processes seen in proof-of-work systems, RPCA operates on a consensus model that involves a network of independent validators reaching agreement on the order and validity of transactions. This consensus mechanism allows the XRP Ledger to achieve high throughput and swift confirmation times, making it well-suited for the efficient processing of cross-border payments and financial transactions. Additionally, the XRP Ledger supports the issuance of various tokens, potentially expanding its use cases beyond its native cryptocurrency. Despite debates about the decentralization of Ripple, the technology behind XRP continues to evolve, showcasing a commitment to addressing the challenges and opportunities in the rapidly evolving blockchain and cryptocurrency space. Additionally, the platform has explored the integration of smart contract functionality, opening possibilities for more complex and programmable transactions. The focus on scalability, interoperability, and speed positions XRP as a blockchain solution tailored for the demands of the global financial industry, particularly in the context of cross-border payments and remittances.
Supply of coins
The supply dynamics of XRP, the native cryptocurrency of the Ripple network, play a crucial role in shaping its market characteristics. Unlike Bitcoin, which relies on a mining process to gradually release new coins into circulation, XRP was created with its entire supply generated at inception. XRP has a fixed maximum supply of 100 billion coins, a feature that distinguishes it from some other cryptocurrencies with potentially infinite supplies. Notably, a substantial portion of the XRP supply is held by Ripple Labs, the company behind the cryptocurrency. Approximately 55 billion XRP are held in escrow by Ripple Labs, the company behind the development of the Ripple protocol. This escrow mechanism is designed to release a specific amount of XRP into circulation each month, reducing the potential for market manipulation and ensuring a predictable supply trajectory.
This allocation has been a point of discussion and scrutiny within the crypto community, with debates surrounding the potential impact of such centralization on the coin’s decentralization ethos. Ripple has taken steps to address concerns, implementing strategies such as the escrow system, which locks a large amount of XRP in time-released contracts to be gradually released into circulation. The controlled release aims to provide transparency and mitigate concerns related to sudden market influxes. The fixed supply, along with Ripple’s strategic initiatives, contributes to the stability and predictability of XRP in the market, influencing investor perceptions and shaping the overall market dynamics of the cryptocurrency.
The XRP is popular cryptocurrency on the market, and historical data for the XRP such as prices and volume traded can be easily downloaded from the internet sources such as Yahoo! Finance, Blockchain.com & CoinMarketCap. For example, you can download data for XRP on Yahoo! Finance (the Yahoo! code for XRP is XRP-USD).
Figure 3. XRP data
Source: Yahoo! Finance
Historical data for the XRP market prices
Access to historical data on XRP, the cryptocurrency affiliated with Ripple, offers investors valuable insights and tools for decision-making. By analyzing past price trends and patterns, investors can better anticipate potential movements in XRP’s value, aiding in strategic buy or sell decisions. Historical data also serves as a record of XRP’s volatility, allowing investors to assess and manage risks effectively. Examining market sentiment during different periods provides a nuanced understanding of external factors that may impact XRP, such as regulatory developments or technological upgrades. Additionally, historical performance comparisons with other cryptocurrencies or traditional assets help investors evaluate XRP’s relative strength and potential for returns, informing optimal portfolio management. Event analysis around significant occurrences, such as partnerships or regulatory changes, assists in anticipating market reactions to future events. Furthermore, historical data aids in identifying market cycles, supporting investors in aligning their strategies with the prevailing market conditions. Recognizing key support and resistance levels based on historical prices enhances risk management by guiding entry and exit points. While historical data is a valuable tool, investors should blend it with current market analysis and fundamental factors for comprehensive decision-making, considering the inherent unpredictability of the cryptocurrency market.
Figure 4 below represents the evolution of the price of XRP in US dollar over the period Nov 2017 – Dec 2023. The price corresponds to the “closing” price (observed at 10:00 PM CET at the end of the month).
Figure 4. Evolution of the XRP price
Source: Yahoo! Finance
R program
The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the XRP.
Data file
The R program that you can download above allows you to download the data for the Ethereum from the Yahoo! Finance website. The database starts on December, 2017.
Table 3 below represents the top of the data file for the Ethereum downloaded from the Yahoo! Finance website with the R program.
Table 3. Top of the data file for XRP.
Source: computation by the author (data: Yahoo! Finance website)
Python code
You can download the Python code used to download the data from Yahoo! Finance.
Python script to download XRP historical data and save it to an Excel sheet::
# Make sure you have the required libraries installed and adjust the “start_date” and “end_date” variables to the desired date range for the historical data you want to download.
Evolution of the Ethereum
Figure 5 below gives the evolution of the Ethereum on a daily basis.
Figure 5. Evolution of the XRP.
Source: computation by the author (data: Yahoo! Finance website).
Figure 6 below gives the evolution of the Ethereum returns from November 09, 2017 to December 31, 2022 on a daily basis.
Figure 6. Evolution of the XRP returns.
Source: computation by the author (data: Yahoo! Finance website).
Summary statistics for the Ethereum
The R program that you can download above also allows you to compute summary statistics about the returns of the Ethereum.
Table 4 below presents the following summary statistics estimated for the Ethereum:
The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.
The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.
Table 4. Summary statistics for XRP
Source: computation by the author (data: Yahoo! Finance website).
Statistical distribution of the Ethereum returns
Figure 7 represents the historical distribution of the Ethereum daily returns for the period from November 09, 2017 to December 31, 2022.
Figure 7. Historical XRP distribution of the returns.
Source: computation by the author (data: Yahoo! Finance website).
Gaussian distribution
The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from November 09, 2017 to December 31, 2022.
Figure 8 below represents the Gaussian distribution of the XRP daily returns with parameters estimated over the period from November 09, 2017 to December 31, 2022.
Figure 9. Gaussian distribution of the XRP returns.
Source: computation by the author (data: Yahoo! Finance website).
Risk measures of the Ethereum returns
The R program that you can download above also allows you to compute risk measures about the returns of the Ethereum.
Table 5 below presents the following risk measures estimated for the Ethereum:
The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)
Table 5. Risk measures for the XRP.
Source: computation by the author (data: Yahoo! Finance website).
The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the XRP while the study of the right tail is relevant for an investor holding a short position in the XRP.
Why should I be interested in this post?
XRP, the cryptocurrency associated with Ripple, is a compelling subject for students, especially those in finance, economics, business, and technology. Ripple’s focus on revolutionizing cross-border transactions and its unique blockchain technology offer insights into innovations in financial technology. Exploring XRP provides a deeper understanding of blockchain, cryptocurrency markets, regulatory challenges, and the practical applications of decentralized systems. Students can gain valuable knowledge about market dynamics, investment opportunities, and the intersection of technology and finance by delving into the complexities of XRP and its impact on the financial industry.
Unifying Forces: Cross-Border AML Collaboration in Safeguarding Global Finances
In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents the cross-border collaboration of national entities to prevent money laundering.
Introduction
In an era marked by unprecedented global connectivity, the fight against financial crimes, particularly money laundering, has transcended national boundaries. The escalating sophistication of financial crimes, coupled with the interconnectedness of the global economy, has underscored the need for collaborative approaches to tackle money laundering.
Cross-border anti-money laundering (AML) collaboration involves the sharing of intelligence, resources, and best practices among nations, regulatory authorities, and financial institutions to effectively thwart illicit financial activities that transcend borders.
Money laundering rarely respects national borders. Criminal organizations exploit gaps in regulatory frameworks, leveraging multiple jurisdictions to obscure the origins of illicit funds. Cross-border collaboration is essential to address this globalized nature of financial crimes.
According to UNODC (United Nations Office on Drugs and Crime), the estimated amount of money laundered globally in one year is between 2 to 5% of global GDP, or between $800 billion to $2 trillion in current US dollars. Due to the clandestine nature of money-laundering, it is however difficult to estimate the total amount of money that goes through the laundering cycle.
Key Elements of Cross-Border AML Collaboration
Information Sharing
Collaborative platforms used by national entities enable countries to share vital information about suspicious transactions, emerging trends, and high-risk entities. Timely information exchange enhances the ability to detect and prevent money laundering activities.
Standardization of AML Practices
Establishing common standards for AML practices ensures consistency across borders. Harmonizing regulations and procedures facilitates smoother collaboration, reduces regulatory arbitrage, and creates a united front against money laundering.
For example, in cryptocurrency, the Travel Rule mandates global sharing of customer information during transactions, aligning with guidelines of the Financial Action Task Force on Money Laundering (FATF) for standardized anti-money laundering practices. This ensures consistency and strengthens defenses against illicit financial activities.
Mutual Legal Assistance Treaties
A Mutual Legal Assistance Treaty (MLAT) provides a legal framework for countries to request and provide assistance in legal matters, including the investigation and prosecution of money laundering. Strengthening and expanding these treaties contribute to more effective cross-border collaboration.
For instance, if Country A is investigating financial crimes and requires bank records from Country B, both nations, bound by an MLAT, can exchange information, and collaborate on the investigation, enhancing the effectiveness of their legal systems in combating transnational crimes.
Technological Integration
Leveraging technology, such as advanced analytics and artificial intelligence, facilitates the identification of patterns indicative of money laundering. Shared technological solutions enhance the efficiency of AML efforts across borders.
Joint Investigations
Cross-border collaboration allows for joint investigations involving law enforcement agencies from multiple countries. This coordinated approach increases the chances of uncovering complex money laundering schemes and holding perpetrators accountable.
Role of FATF in Cross-Border AML Collaboration?
Established in 1989, the Financial Action Task Force on Money Laundering (FATF) is a professional association comprising member countries and jurisdictions committed to combating money laundering and terrorist financing. This intergovernmental organization sets international standards, develops policies, and conducts assessments to promote effective Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) measures worldwide.
Key Contributions of FATF in Cross-Border AML:
Setting International Standards: FATF establishes and updates a set of AML and CTF standards, commonly known as the FATF Recommendations. These standards provide a unified foundation for countries to strengthen their legal, regulatory, and operational frameworks against money laundering and terrorist financing.
Mutual Evaluations: FATF conducts regular mutual evaluations, wherein member countries assess each other’s compliance with FATF Recommendations. This process fosters transparency and accountability, encouraging nations to enhance their AML and CTF efforts.
Issuing Public Statements: When a country is identified as having deficiencies in its AML/CTF framework, FATF issues public statements, creating international awareness. This mechanism encourages corrective actions and bolsters cross-border cooperation to address vulnerabilities.
International Cooperation and Information Sharing: This collective effort strengthens the ability to identify and combat transnational financial crimes.
Benefits and Challenges
As technology continues to advance, collaborative efforts are poised to become more sophisticated, providing an even greater advantage in the ongoing battle against money laundering. Cross-border AML collaboration offers numerous benefits, including enhanced detection capabilities, stronger deterrence against financial crimes, and the establishment of a more resilient global financial system.
Though there are several benefits for the cross-border AML collaboration, it is also quite challenging to find good solutions.
Differing Legal Frameworks
Varied legal frameworks across countries pose challenges. Establishing common principles and encouraging mutual recognition of legal systems can help address disparities.
Cultural and Language Barriers
Cultural and language differences can impede effective collaboration. Training programs and cultural awareness initiatives foster better communication and understanding among collaborating entities.
Data Privacy Concerns
Data privacy regulations can hinder information sharing. Implementing robust data protection measures and ensuring compliance with privacy laws are crucial for overcoming this challenge.
Why should I be interested in this post?
If you decide to work in the realms of finance, international law, or even within a multinational corporation, understanding the intricacies of cross-border collaboration in Anti-Money Laundering (AML) becomes a must. This knowledge not only ensures regulatory compliance for businesses operating across borders but also provides professionals with insights into legal frameworks, treaties, and diplomatic efforts that underpin a secure and stable global financial landscape.
Market Consensus Based on Financial Analysts’ Forecasts
In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explains what is the market consensus based on financial analysts’ forecasts.
Introduction
Market consensus represents the average derived from the individual predictions made by financial analysts who closely monitor and analyze corporate and market conditions. In the context of financial analysts’ forecasts, the consensus refers to the collective expectation or average prediction of a group of analysts regarding the future performance of a firm measured by sales and profits, of a financial asset such as a stock, commodity, or currency.
Few examples of market consensus based on financial analysts forecast would be:
Forecasts for economic indicators such as GDP growth, inflation rates, or unemployment levels. It is derived from the aggregated predictions of various analysts, providing a consensus viewpoint on the expected direction or magnitude of economic changes.
Forecasts of the future exchange rates between currencies such as the euro/dollar rate. If multiple analysts predict the exchange rates for the Euro to U.S. Dollar, the market consensus would be an average or median of these forecasts, indicating the collective expectation for the currency pair.
Forecasts of price targets for stocks based on the projections of future performance. If a market stock is covered by multiple analysts, the market consensus price target would be the average of those figures, giving investors a benchmark for assessing the stock’s anticipated value.
Forecasts of the company’s earnings per share (EPS). The market consensus, in this case, would be the average or median of these individual EPS predictions, representing the collective expectation of analysts regarding Company’s earnings.
Forecasts of commodity prices such as oil, gold, or agricultural products. The market consensus for a commodity’s future price is determined by averaging or considering the median of these individual forecasts, reflecting the consensus view on the commodity’s likely trajectory.
Key participants
Financial analysts
Talk about financial analysts: who are they?where do they work?
To determine the market consensus for Apple Inc. (AAPL), one would typically aggregate and analyze the forecasts and estimates provided by sell-side financial analysts who cover the company. These analysts regularly publish their projections for key financial metrics such as revenue, earnings per share (EPS), and other performance indicators.
Market consensus firms
Market consensus firms specialize in producing market consensus based on financial analysts’ forecasts and opinions. These firms aggregate and analyze data from multiple analysts to provide a consensus view on various financial metrics such as earnings estimates, revenue projections, and target prices for individual stocks and broader market indices.
Some prominent firms that offer market consensus based on financial analysts’ input include:
FactSet: FactSet aggregates and standardizes data from various sources, including sell-side analysts, to provide consensus estimates for earnings, revenue, and other financial metrics. Their platform offers detailed consensus estimates for individual companies, sectors, and industries.
Refinitiv (formerly Thomson Reuters): Refinitiv offers consensus estimates and forecasts compiled from sell-side analysts’ research reports. Their platform provides consensus data on earnings, revenue, and other key financial metrics for equities, fixed income, and commodities.
IBES by Refinitiv: IBES (Institutional Brokers’ Estimate System) is a leading database of consensus estimates and analyst recommendations. It offers comprehensive coverage of earnings estimates, revenue projections, and other financial metrics for thousands of companies globally.
Data providers
Companies that provide financial data and analytics services play a crucial role. They compile and disseminate information about analysts’ forecasts, making it accessible to various participants in the financial ecosystem.
Bloomberg is a prominent example here, its terminal, a widely used platform in the financial industry, aggregates and delivers a vast array of financial data, including analysts’ predictions and consensus estimates. It also exemplifies how data providers contribute to the transparency and accessibility of financial analysts’ forecasts.
Investors
Investors rely on the forecasts and predictions made by financial analysts to make informed investment decisions. The market consensus provides investors with a collective viewpoint, helping them assess potential risks and returns.
Their role is pivotal in the financial markets, and they interact with market consensus in several ways like decision making, portfolio construction, risk assessment, performance evaluation, communication with shareholders, etc.
Traders
Traders are individuals or entities that actively buy and sell financial instruments, such as stocks, bonds, currencies, or commodities, with the aim of making short-term profits. Traders can be categorized into various types, including day traders, swing traders, and algorithmic traders, each with a different time horizon and approach to the market.
There are various types of traders, each with different strategies, time horizons, and goals. Few examples of them would be day trader, swing trader, Algo trader, position trader, scalper, options trader, forex trader and commodity trader.
Process for building a market consensus
Building a market consensus involves aggregating the predictions and expectations of various financial analysts, experts, and stakeholders regarding the future performance of a financial instrument, economic indicator, or asset.
There are certain steps we typically follow in this process:
Data collection of forecasts: Financial analysts, often employed by brokerage firms, investment banks, or independent research firms, conduct in-depth analyses of specific assets, companies, or economic indicators. They generate individual forecasts based on factors such as earnings projections, economic data, and market trends.
Analyst Ratings and Recommendations: Analysts may assign ratings (e.g., buy, hold, sell) and provide recommendations for investors. These ratings and recommendations reflect their views on the expected performance of a particular asset. These assessments contribute to the overall market consensus.
Normalization: Before computing the consensus, the data may undergo normalization to ensure consistency across different analysts’ estimates. This step involves adjusting for any variations in reporting standards, accounting methods, or other factors that could affect the comparability of estimates.
Weighting: Some consensus providers may apply weighting to analysts’ estimates based on factors such as historical accuracy, reputation, or coverage universe. Weighting ensures that more accurate or influential analysts have a greater impact on the consensus.
Calculation: The market consensus is calculated by averaging the aggregated forecasts and estimates from all contributing analysts. This average represents the consensus view of analysts regarding the expected performance of the company or market index for the specified period.
Dissemination: The computed consensus estimates are then disseminated to clients through various channels, such as financial data platforms, research reports, and market data terminals. Clients use this information to assess market expectations, benchmark against their own forecasts, and make investment decisions.
Tracking and Updates: Market consensus providers continuously track and update the consensus estimates as new information becomes available. This includes incorporating revisions to analysts’ forecasts, earnings announcements, and other relevant developments that may impact the consensus view.
It’s important to note that while market consensus based on financial analysts’ estimates provides valuable insights into market expectations, it is not a guarantee of future performance. Investors should consider various factors, conduct their own analysis, and exercise judgment when making investment decisions. Additionally, consensus estimates are subject to revisions over time as new information emerges and analysts update their forecasts.
The market consensus is key to understand how financial markets work, how stock market prices react to the announcements of profits by firms or economic indicators.
Quality of the market consensus
Behavioral Influences
Beyond numbers and charts, market consensus is deeply influenced by human behavior. Emotions, biases, and psychological factors play a significant role in shaping consensus views.
Behavioral finance studies, backed by statistical evidence, highlight how psychological biases such as herding, overreaction, and anchoring contribute to the formation and evolution of consensus views.
Talk about Dot bubble of the 2000s
The late 1990s saw the widespread adoption of the internet for both commercial and personal use. In 2000, the stock market experienced a significant downturn. Dot-com stocks, in particular, faced sharp declines, wiping out substantial market capitalization. The Dot-Com Bubble refers to the rapid rise, speculative frenzy, and subsequent collapse of stock prices of many internet-based companies in the late 1990s and early 2000s.
Example: market consensus for Apple
The prevailing market sentiment toward Apple Inc. (AAPL) is generally optimistic, according to analyst assessments. As reported by Stock Analysis, the consensus among 32 analysts places the average price target for Apple’s stock at $203.25. The range spans from a low estimate of $120 to a high estimate of $250. Based on this average target, a potential increase of approximately 11.48% is anticipated from the current stock price of $182.32. Notably, analysts collectively advocate a “Buy” rating for Apple.
Yahoo Finance offers in-depth projections for Apple’s financial performance, encompassing estimates for earnings and revenue across upcoming quarters and years. For the ongoing quarter concluding in March 2024, analysts predict an average earnings per share (EPS) of $1.51, accompanied by revenue estimates averaging $91.02 billion. These forecasts align with a broader outlook suggesting a growth trajectory for Apple, with both EPS and revenue anticipated to expand in the subsequent years.
For those seeking more comprehensive analyses and real-time updates on Apple’s stock performance, as well as expert opinions from analysts, a direct visit to Yahoo Finance and Stock Analysis is recommended.
Why should I be interested in this post?
In essence, this article provides a perspective on market consensus based on financial analysts. For a student who would like to work in finance (either in the corporate world or the financial sector), it is important to know about the market consensus as it relates to both the corporate world and financial markets.
In this article, Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025) introduces the method to evaluate stocks called “multiples valuation”.
How much should a stock be worth?
Valuing stocks is a complex yet essential endeavor for investors seeking to make informed decisions in the financial markets. Knowing if you are paying a fair price or if you are over or under paying for a stock is every investors question. Of course, a decision on whether investing or not in a company comes after a long due diligence of valuating the financials of the company, following their reports, and many more actions to ensure you are buying something of value. Some investors call this method “value investing”, when the investor value a stock above the actual price, it is said that the type of investing is “value”, trying to take advantage of the differential between the actual price and the theoretical price. And when they buy a stock for a competitive advantage that is not expected in the near future to concede, it is usually called “growth investing”. Although some famous investors disagree in these definitions, they are used frequently in the financial language.
While there is no one-size-fits-all approach to valuing stocks, investors often turn to a range of methodologies, one of which is multiples analysis. By examining multiples such as price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S), and many more, investors gain insights into how the market values a company relative to its earnings, assets, or revenue. In this article we will try to shine a light on this valuating method and walk through the benefits and limitations the method has.
Multiples valuation method
Multiples valuation method involves analyzing one or more multiples, such as the price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) ratios, among others. Each multiple provides a unique perspective on how the market values a company relative to its earnings, assets, or revenue.
The price-to-earnings (P/E) ratio, for instance, compares a company’s stock price to its earnings per share (EPS), indicating how much investors are willing to pay for each dollar of earnings generated by the company. A low P/E ratio may suggest that the stock is undervalued, while a high P/E ratio could indicate overvaluation.
One key aspect of this method is that it is usually compared against the ratios of companies within the same industry. It is from the investor’s criteria to decide which filters to apply for deciding against what companies the objective should be compared with, but usually it should be on the same market, region can also be an important factor, and also the size.
There are many sources of information to consult the information from, many of them free. This platform simplifies the valuation by providing not only the information, but in some cases, the ability to connect through an API and do the consulting automatically through a query. In the next image is shown an example from Capital IQ, one of the most prestigious information sources in the financial world, about Walmart and some recommendations from the platform of similar companies in the market to facilitate the calculation.
Walmart’s comparison.
Source: Capital IQ.
Calculations
Calculating multiples involves straightforward mathematical formulas that utilize key financial metrics derived from a company’s financial statements. If we use the case for P/E, then we would need to divide the “Market price per share” with the “Earnings per share”. After getting the ratio, let’s say of Walmart, the next step is to get the median P/E for the “similar” companies that the investor decided to compare the company with. With these two values the investor can start seeing a trend on where the company is positioned versus their competitors. The next step is to calculate the price per share of Walmart using the P/E of the similar companies, and see the comparison between the price with the original P/E versus the “mean” of similar companies.
Example: Walmart
This section will be dedicated to illustrate the method explained earlier using Walmart as an example and Capital IQ as the source of information. The first step is to consult the key financials as shown in the next picture.
Walmart’s key financials.
Source: Capital IQ.
Next, compute the information with the comparable companies suggested by Capital IQ. Important to note that the companies can be added or withdrawn according to everyone’s own criteria.
Comparable analysis.
Source: Capital IQ.
After retrieving all the information, the next step is to do the calculations explained earlier in the document. The mean EV/EBITDA ratio for the comparable companies and then recalculate the price of Walmart’s stock using the mean EV/EBITDA ratio.
Mean EV/EBITDA ratio.
Source: Capital IQ.
Valuation of Walmart’s stock.
Source: Capital IQ.
In this case, we see an underappreciation of Walmart’s stock, this doesn’t mean that anyone shouldn’t buy stocks of the company, is just the perspective of the valuation method, and also it is not an investing advice.
Conclusions
The multiples valuation method provides investors with a valuable framework for assessing the worth of a stock by comparing it to similar companies within the same industry. By using this method, investors gain insights into how the market values a company relative to its earnings, assets, or revenue.
However, it’s important to recognize the limitations of this approach. Multiples analysis relies heavily on historical financial data and may not fully capture future growth prospects or qualitative factors such as industry dynamics and competitive positioning. Additionally, multiples are subject to fluctuations in market sentiment and may not always reflect the intrinsic value of a company accurately.
Despite these limitations, multiples analysis remains a widely used and valuable tool in the arsenal of investors. When applied judiciously and supplemented with thorough research and analysis, multiples can provide valuable insights into a company’s valuation and help investors identify potential investment opportunities.
Why should I be interested in this post?
This post is with the only intention for educational purposes. Targeting people who are interested in knowing more about valuation methods for stocks. In any way this article pretends to be an investment advice and/or suggestion. Any decision should be taken under personal responsibility and with their respective due diligence previous to the decision.
Chastenet E. and A. Marion (2015) Valuation Using Industry Multiples: How to Choose the Most Relevant Multiples, Business Valuation Review, 34(4): 173-183.
Schueler A. (2020) Valuation with Multiples: A Conceptual Analysis, Journal of Business Valuation and Economic Loss Analysis, 15(1) pp. 20190020.
About the author
The article was written in March 2024 by Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025).
Explanations for the recent changes in the Mexican economic landscape
In this article, Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025) shares his thoughts about the different financial instruments recently available in Mexico that have been changing the economic landscape for the country and their residents in the recent years. He especially explains the role of high interest rates, new digital banks, and nonbanking financial instruments in Mexico’s recent booming economy, sharp Mexican peso appreciation, and strong increase in its GDP.
Interest rates in Mexico
For the last couple of years, the world has lived an era of high interest rates, mainly derived from the high inflation we got out of the pandemic and the war in Ukraine. Since then, the priority of most of the central banks of the world has been to cool down the economy and bring down inflation. Mexico has not been the exception. Mexico’s interest rates have been between 10% and 11% in the past three years. Some economists may consider this level -dangerously- high, but the country has seen mostly benefits like increasing peso’s appreciation, and a strong growth in the national GDP, from this level of interest rates than negative outcomes, and most important, Mexico’s government has been able to maintain the interest rates under a “controlled” level.
Evolution of Mexico’s interest rates.
Source: Trading Economics.
The strategy of Mexico’s Central Bank has been very clear: to stay above the interest rates of the U.S.A. The benefits of staying above the interest of the USA’s is to target the remittances (money, mainly US Dollars, sent to Mexico, by migrant workers to their families), an objective that due the geographical conditions become very relevant. According to Statista, remittances represent a 4% of their GDP, either if it’s from migrant workers sending money to their families, or foreign investors trying to take advantage of the high interest rates in the country. “CETES” (Certificados de la Tesorerís de la Federación) is one of the most attractive instruments for foreign investments, because of the security CETES represent by being an instrument issued by the Mexican government, in the form of bonds mainly, with a return rate oscillating between 10%-12%.
CETES.
Source: S&P Dow Jones indices.
Digital Banks
There’s a recent uptrend in Latin America, but specially in Mexico of digital banks. In the last couple of years, we’ve seen multiple companies trying to gain market share, derived from the massive success of the Brazilian “unicorn” start-up Nu bank. In Mexico, the number of digital banks is starting to get closer to the traditional banks. Just in the last years, digital banks like Klar, Ualá, Hey Banco, RappiPay, among many others have entered the Mexican market with the objective to compete for market share with Nu bank.
Apart from the many benefits and functionalities that digital banks provide, better than the traditional banks, they’ve tried to attract more customers by trying to take advantage by offering the customers the possibility of investing their money inside their organization by adding a tool to their services called a “SOFIPO”, which will be explained further in the article. The return offered by each SOFIPO will depend on each institution issuing the instrument, but it will be mainly linked to the interest rate in the country. As we mentioned before, we are in a high interest rate season, which has turned into a “bidding war” for digital banks to offer better returns. As of February 2024, Nu bank offers one of the highest with 15%, Klar 14%, Hey Banco 11%, Ualá 15%.
The Mexican peso appreciated against the dollar in 2023 by 14%, reaching an eight-year low. Important to note that all these attractive financial instruments joined with a strong benefit from the world’s leading trends like nearshoring, have made Mexico become one of the best performing countries in terms of economy in the past few years and also one of the most attractive to invest in.
Mexican peso.
Source: Yahoo finance.
¿What is a SOFIPO?
Acronym for “Sociedad Financiera Popular” (Popular Financial Society), are defined as financial institutions -nonbanking- regulated by the CNBV (Comisión Nacional Bancaria y de Valores en México). They offer a wide variety of financial instruments such as personal loans, credits, financing for small companies, and more. The intention of why this instruments (SOFIPO’s) were created is mainly to open the financial services to a broader public and/or have more inclusion when it comes about investing, credits, and more.
Conclusions
There is no doubt that Mexico has a good advantage when it comes to macroeconomic trends, mainly due its geographical position. But recently, they have been able to complement the attractiveness with financial instruments and rates extremely attractive to the foreign audience and the local one. The challenge lies in keeping under control the high interest rates, even though inflation is not in double digits anymore, the benefits that the actual rates have brought to the country have been substantial, besides as the original plan is to follow with a margin the decisions of the U.S.A., there is no decision yet to bring down the rates. Not everything is positive with this financial conditions, the cost of debt in the country is very high at the moment, which will slow down the sales of houses and cars.
Why should I be interested in this post?
This post is with the intention to shine a light on potential advantages and trends that are happening in one of the most attractive countries, financially and economically speaking in the world. In any way this article pretends to be an investment advice and/or suggestion. Any decision should be taken under personal responsibility and with their respective due diligence previous to the decision.
The article was written in March 2024 by Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025).
In this article, Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025) shares his professional experience as a Data Analyst and Data Management in CEMEX.
About the company
CEMEX is one of the leaders in building materials in the world. Their main products are cement, concrete, and aggregates (building materials in general). Based in Mexico, CEMEX reported a $15bn USD revenue in 2022, representing a 12% increase from the previous year. The company’s sales distribution, with cement, leading at 42%, followed by concrete at 33%, aggregates at 14%, and urban development at 11%, illustrates a balanced yet strategic emphasis on its core products and services.
Geographically, CEMEX’s influence spans major regions, with a substantial presence in Mexico, the USA, Europe, Asia, the Middle East, South America, and the Caribbean. Its operational footprint includes 64 cement plants, 1348 ready-mix concrete facilities, 246 quarries, 269 distribution centers, and 68 marine terminals, showcasing its capacity to serve a global clientele effectively.
At their beginnings, the company started with a single plant in Hidalgo, Mexico, called “Planta Hidalgo” under the direction of Mr. Lorenzo Zambrano, founder and CEO. Ever since then, the company adopted a philosophy of growing by acquisition. Great financial ratios, high volume of sales related to a big percentage of market share in Mexico, allowed CEMEX to do key strategic acquisitions throughout the next years that catapulted CEMEX into the international markets. Even with the financial crisis in 2008, they have been resilient and survived a big economic turmoil thanks to their high-quality products, service and cutting-edge advancements in digitalization, supply chain and data management.
Logo of the company
Source: CEMEX.
At the beginning of my career in the company, I started inside a program called “Digital Professionals in Development” (DPiD) which aimed to train and prepare 100 recently graduates to help the company boost the digital transformation in a period where CEMEX was going through a major digital transition of the commercial customer experience. Inside the program, I started as a Data Scientist inside the Global Data Analytics department, which allowed me to understand the different schemes of work, the hierarchical processes, capabilities and scope of the company and the institutional tools.
After working for the Global Data Analytics, another area that I’ve had experience, and where I’ve spent most of my time with, is the Commercial Development Area. Here, the intention is to keep the company at the state of the art in the commercial practices and keeping up with the technological trends of the world. My main duties have been regarding Data Management, on the development and management of advanced data analytics projects and master data quality, everything under the commercial umbrella.
My expertise at Data Management
Advanced Analytics
The way Advanced Analytics topics are managed is in a scheme by projects and in a cross-functional mode with other areas of the company like data architecture, supply chain, and more. According to the needs, or trends that anyone in the company points out, we assess the feasibility and benefit of approaching a new idea.
Some of the topics that we’ve been approaching have to do with increasing sales, enhance customer experience, increase Net Promoter Score (NPS), and improve the digital experience. One of the main projects that we’ve been developing is aligned with the retention of customers by predicting with service variables, historic volume trends, and machine learning the probability of a customer leaving the company. This effort requires to align with sales people of the different regions to set thresholds for the service variables and come to an agreement, consume information from the correct architecture source, and do the development of the machine learning model. As a final product, we’ve got the model embedded in a dashboard that the sales people can consult at any time, joined by monthly alerts sent to their email and their Customer Relationship Management (CRM) account.
Data Quality
Within the area, we’re managing the quality of the commercial information by managing and implementing actions to improve their completeness and accuracy. We acknowledge the importance of a high-quality level of information. Understanding that high data quality is the base of a successful forecast, project improvements, and in general for a company to become data driven.
As expected with a company that has presence in many regions of the world, the amount of information and different types of it can be overwhelming, a prioritization and starting point had to be put in place in order to overcome the overwhelming amount of information. Naturally, the first step was to define the attributes, and fields to be measured. After doing so, we had a clear picture of pain points throughout the regions and we prioritize the remediation of them. Lastly, as we don’t want to be continuously doing the cleaning effort, we want to maintain as much as possible the incoming information clean, in order to do so, it is necessary to put entry point validations to only allow clean information to come into the systems.
Required skills and knowledge
It is necessary to have the “hard skills” to work with the institutional tools, in CEMEX’s case, it is needed to know SQL, Power Bi, and Python (and/or R). Apart from the “hard skills” just mentioned, it is also necessary for “soft skills” to be known and/or developed, which would be to coordinate different areas and teams to work together, frequent results report, presentations to stakeholders, agile methodology to follow the progress of the project, and more.
What I learned
My main takeaways that I’ve had working at these projects is the importance of coordination with other areas, the help and expertise that you can get from relying with people with more experience would be as a shortcut for a lot of problems that may arise. Always ask for help whenever you feel that you might be stuck with an issue and be open to receive new ideas.
Financial concepts related my internship
EBITDA/Debt ratio
As mentioned earlier, part of the company’s philosophy is to grow by acquisition, hence the EBITDA/Debt ratio is crucial in order to get debt with lower interest rates, as the ratio is part of the key financials that banks and rating entities take into account when analyzing a company.
Return on Assets (ROA)
This financial indicator measures a company’s efficiency in generating profits from its assets. It is calculated by dividing the company’s net income by its average total assets. In other words, ROA indicates how effectively a company is utilizing its assets to generate earnings.
Why should I be interested in this post?
This post is with the intention that any student or alumni can have a glimpse of the structure of my professional experience in a company that is based in a different continent and would probably help them compare and see the main differences and similitudes between what is being done in Europe against what is being done in Mexico.
The article was written in March 2024 by Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025).
