This paper proposes the use of a portfolio optimization methodology which combines features of equilibrium models and investor’s views as in Black and Litterman (1992), and also deals with estimation risk as in Michaud (1998). In this way, our combined methodology is able to meet the needs of practitioners for stable and diversified portfolio allocations, while it is theoretically grounded on an equilibrium framework. We empirically test the methodology using a comprehensive sample of developed countries fixed income and equity indices, as well as sub-samples stratified by geographical region, time period, asset class and risk level. In general, our proposed combined methodology generates very competitive portfolios when compared to other methodologies, considering three evaluation dimensions: financial efficiency, diversification, and allocation stability. By generating financially efficient, stable, and diversified portfolio allocations, our methodology is suitable for long-term investors such as Central Banks and Sovereign Wealth Funds.

We study a large-scale Brazilian loan subsidy program to expand long-term credit. The government subsidizes banks’ funding costs for lenders, who then allocate credit to firms at regulated interest rates below a maximum ceiling. We propose and test a mechanism allowing banks to circumvent the rate caps and capture part of the subsidy. We show that when issuing a subsidized loan, lenders with market power use a cross-product pricing strategy, whereby they increase the price of other products to the same client. Our results have important policy implications for the design and effectiveness of government interventions in credit markets.

This paper studies the links between competition in the lending market and spreads of bank loans in Brazil. Empirical evidence from private banks shows a positive relationship between market power, measured by the Lerner index, and the cost of finance, measured by loan spreads over the treasury curve. Moreover, information acquired through relationship lending is used differently by private and state-owned banks. On the one hand, private banks engage in a strategy of first competing fiercely for clients by offering a lower loan interest rate and later increasing rates as the relationship with the firm evolves, consistent with the holdup problem. On the other hand, state-owned banks reduce the spreads as they deepen their relationship with the firm, consistent with sharing of the informational benefits from their relationship.