Otávio Moreno Bitu

I am a PhD candidate in Finance at London School of Economics (LSE). I hold a BSc in Economics from the Sao Paulo School of Economics, an MSc in Finance and Economics from the LSE, and an MRes in Finance from the LSE. Prior to starting my PhD, I was a Policy Analyst at the Bank of England, and an Investment Analyst at a hedge fund in Brazil. My research interests are asset pricing, international finance, household finance, and macro-finance.

o.bitu@lse.ac.uk / LinkedIn / CV

London, UK.

Research

Published Papers

The expected return of COEs (with Fernando Chague, Bruno Giovannetti and Tomaz Hamdan), Brazilian Review of Finance, 2021 (COEs' documents)

Abstract: Structured operations certificates (certificados de operações estruturadas, COEs) are complex financial products that are commonly sold to retail investors in Brazil. However, information about their expected returns are not disclosed to the buyers. In this paper we estimate the expected returns of two groups of COEs. The first is composed of the 50 highest-volume COEs sold to at least 100 retail investors between 2016 and 2019. The second group includes 234 COEs distributed by a large Brazilian brokerage house from 2019 to 2020. Of these 284 COEs, 252 had an expected return lower than the risk-free return available to investors at the time of sale.

Media coverage: CNN Brasil, Folha de SP, Suno Research, ValorInvest, Você S/A.

Working Papers

Structured retail products: investment or bets? (with Bernardo Guimaraes and Bruno Giovannetti) (SRPs' documents)

Abstract: This paper proposes a simple diagnostic test to distinguish bet-like financial products that create unbacked risk from financial investments that share risk. The test uses only standard measures of expected return and risk. Its key insight is that products that create risk should exhibit a negative relationship between risk and expected return, unlike risk-sharing investments. We apply the test to a novel hand-collected dataset of 1,847 structured retail products. Most product types display the usual positive risk-return relationship and look like risk-sharing financial investments. However, a prevalent category – autocallables – exhibits the opposite pattern and therefore looks more like bets.

Home bias in emerging markets and exchange rate implications (draft upon request)

Abstract: Why do emerging market investors overinvest locally and what are exchange rate implications? This paper develops a modelling framework to characterize deviations from a benchmark equilibrium in which all investors are rational and correctly optimize their portfolios. In the irrational equilibrium, only a fraction λ of investors is rational, while 1-λ is irrational and ignore the exchange rate effect in their decision process. Considering an emerging market with a higher interest rate than a foreign developed country, the existence of irrational investors with a high enough degree of irrationality (c1) make the overall economy underinvest abroad, leading to a lower demand for the foreign currency. Thus, in equilibrium, we observe an appreciated home currency, and a higher exchange rate volatility than in the benchmark case where all investors are rational.

Work in Progress

Retail access to complex markets: asset pricing, welfare and policy implications (draft upon request)

Abstract: In this paper I develop a tractable equilibrium model to study welfare and asset pricing effects of expanding retail access to complex financial assets when they misperceive risk. Broadening access improves hedging and risk-sharing opportunities by enlarging the set of available assets but may also lead to distorted portfolio allocations when investors underestimate risk. The model characterizes this trade-off and shows that the welfare effects of financial inclusion depend on investor's sophistication, assets' correlation, distribution mass of investors and size of liquidity shocks. Retail access is more likely to improve welfare when misperception is limited and the retail share in the population is large, but can reduce welfare when distortion is severe, assets are too correlated and liquidity shocks are large. The framework provides a simple tool to evaluate regulatory policies governing retail participation in complex financial markets.

Previous Work

Cross-section of option returns and volatility (draft upon request)

Abstract: This paper replicates and extends "Cross-section of option returns and volatility", by Amit Goyal and Alessio Saretto (Journal of Financial Economics, 2009). Tables 1 to 4 reproduce the same tables from the original paper, while also providing some extensions. Overall, I obtain the same results, both in relative and in absolute magnitudes: straddles and delta-hedged calls long-short portfolios formed by sorting stocks based on the difference between their realized and implied volatilities generate alpha once controlled for various risk factors. I extend the analysis in three ways: by incorporating more traded risk factors, by analyzing the effect of decomposing the original signal into a systematic and an idiosyncratic component, and also by running Fama-MacBeth regressions to incorporate non-traded factors in the regressions. For all these variations, the considered long-short portfolios still generate statistically significant $\alpha coefficients.

Autocallable structured notes: payoff probabilities under the Heston Model (draft upon request)

Abstract: This paper investigates what are the payoff probabilities of Autocallable Structured Products implied by the Heston Model. The analysis covers all Step Down Kick-Out products based on the FTSE 100 Index distributed by Meteor Asset Management from October 2019 to October 2021 in the United Kingdom. On average, the probability of the structure being called on the first observation date is 55.02%, and the probability of negative returns is 9.97% - in this case, resulting in an average loss of 63.10%. The analysis covers 118 products, 43 (36.44%) of them having negative ex-ante expected Sharpe Ratios in the baseline calibration.

Teaching (LSE)

Teaching Assistant

FM101 – Finance: 2024/25, 2025/26
FM406 - Topics in Portfolio Management: 2025/26
FM406E - Topics in Portfolio Management: 2025/26
FM423 - Asset Markets: 2023/24, 2024/25, 2025/26
FM471 - Sustainable Finance and Impact Investing: 2024/25, 2025/26

Teaching Staff

FM210 - Principles of Finance I: 2024/25
FM211 - Principles of Finance II: 2024/25
FM310 - Corporate Finance, Investments and Financial Markets: 2025/26
FM406E - Topics in Portfolio Management: 2025/26

Summer School

FM202 - Analysis and Management of Financial Risk: Jul 2024, Jul 2025, Jul 2026
FM230 - Alternative Investments: Jun 2025, Jun 2026
FM250 - Finance: Aug 2024, Jun 2025, Aug 2025, Jun 2026, Aug 2026

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