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Much offinancial regulation and supervision is devoted to ensuring the safety and soundness of financial institutions. Such microand macroprudential policies are almost always formulated as capital requirements, leverage constraints, and... more
Much offinancial regulation and supervision is devoted to ensuring the safety and soundness of financial institutions. Such microand macroprudential policies are almost always formulated as capital requirements, leverage constraints, and other statutory restrictions designed to limit the probability of extreme financial loss to some small but acceptable threshold. However, if the risks of a financial institution's assets vary over time and across circumstances, then the efficacy of financial regulations necessarily varies in lockstep unless the regulations are adaptive. We illustrate this principle with empirical examples drawn from thefinancial industry, and show how the interaction of certain regulations with dynamic loss probabilities can have the unintended consequence of amplifying financial losses. We propose an ambitious research agenda in which legal scholars and financial economists collaborate to develop optimally adaptive regulations that anticipate the endogeneity of...
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Business, Economics, Principal Component Analysis, Hedge Funds, Financial Crises, and 15 moreFinancial Crisis, Social Science Research Network, Developing Country, Financial Institutions, Dislocations, Liquidity, Systemic Risk, Hedge Fund, Insurance Companies, Granger Causality Test, C, G, Dynamic Networks, Econometric Model, and JEL Classification
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Business, Economics, Financial Economics, Principal Component Analysis, Hedge Funds, and 11 moreFinancial Crisis, Social connectedness, Financial Institutions, Granger causality, Liquidity, Systemic Risk, Insurance Companies, Time varying, Predictive power, Finance and Investment Banking Area, and Finance and Investment Banking
Financial markets have undergone a remarkable transformation over the past two decades due to advances in technology. These advances include faster and cheaper computers, greater connectivity among market participants, and perhaps most... more
Financial markets have undergone a remarkable transformation over the past two decades due to advances in technology. These advances include faster and cheaper computers, greater connectivity among market participants, and perhaps most important of all, more sophisticated trading algorithms. The benefits of such financial technology are evident: lower transactions costs, faster executions, and greater volume of trades. However, like any technology, trading technology has unintended consequences. In this paper, we review key innovations in trading technology starting with portfolio optimization in the 1950s and ending with high-frequency trading in the late 2000s, as well as opportunities, challenges, and economic incentives that accompanied these developments. We also discuss potential threats to financial stability created or facilitated by algorithmic trading and propose “Financial Regulation 2.0,” a set of design principles for bringing the current financial regulatory framework ...
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Bacteria are easily characterizable model organisms with an impressively complicated set of abilities. Among them is quorum sensing, a cell-cell signaling system that may have a common evolutionary origin with eukaryotic cell-cell... more
Bacteria are easily characterizable model organisms with an impressively complicated set of abilities. Among them is quorum sensing, a cell-cell signaling system that may have a common evolutionary origin with eukaryotic cell-cell signaling. The two systems are behaviorally similar, but quorum sensing in bacteria is more easily studied in depth than cell-cell signaling in eukaryotes. Because of this comparative ease of study, bacterial dynamics are also more suited to direct interpretation than eukaryotic dynamics, e.g., those of the neuron. Here we review literature on neuron-like qualities of bacterial colonies and biofilms, including ion-based and hormonal signaling, and a phenomenon similar to the graded action potential. This suggests that bacteria could be used to help create more accurate and detailed biological models in neuroscientific research. More speculatively, bacterial systems may be considered an analog for neurons in biologically based computational research, allowi...
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Few patient populations are as helpless and in need of advocacy as children with cancer. Pharmaceutical companies have historically faced significant financial disincentives to pursue pediatric oncology therapeutics, including low... more
Few patient populations are as helpless and in need of advocacy as children with cancer. Pharmaceutical companies have historically faced significant financial disincentives to pursue pediatric oncology therapeutics, including low incidence, high costs of conducting pediatric trials, and a lack of funding for early-stage research. Review of published studies of pediatric oncology research and the cost of drug development, as well as clinical trials of pediatric oncology therapeutics at ClinicalTrials.gov, identified 77 potential drug development projects to be included in a hypothetical portfolio. The returns of this portfolio were simulated so as to compute the financial returns and risk. Simulated business strategies include combining projects at different clinical phases of development, obtaining partial funding from philanthropic grants, and obtaining government guarantees to reduce risk. The purely private-sector portfolio exhibited expected returns ranging from -24.2% to 10.2%...
In Volume 5 of the Annual Review of Financial Economics, we continue focusing on the role of banks and credit in the recent financial crisis with articles on too big to fail, credit-rating agencies, corporate governance for banks, bank... more
In Volume 5 of the Annual Review of Financial Economics, we continue focusing on the role of banks and credit in the recent financial crisis with articles on too big to fail, credit-rating agencies, corporate governance for banks, bank leverage and real interest rates, and financial contagion in the banking sector. More traditional topics such as dynamic capital-structure models, cross-sectional asset pricing tests, trends in firm-specific volatility, short selling, and conglomerates and the theory of the firm are also included. In addition, we have two contributions that fall outside the mainstream of financial economics, one involving capital allocation in the insurance industry and the other involving tax issues at the intersection of law and finance. But we begin this volume with a commemoration of the 40th anniversary of the publications of Black & Scholes (1973) and Merton (1973b) on pricing options and other derivative securities, two articles that forever changed the theory ...
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Page 1. Applied Economics, 1989, 21, 631649 Games of survival in the US newspaper industry RANDOLPH E. BUCKLIN,* RICHARD .E. CAVESt and ANDREW W. LO' *Anderson Graduate School of Management, UCLA, Los ...
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Page 1. A Solution Manual to The Econometrics of Financial Markets Petr Adamek John Y. Campbell Andrew W. Lo A. Craig MacKinlay Luis M. Viceira Author address: MIT Sloan School, 50 Memorial Drive, Cambridge, MA 02142{1347 ...
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In response to the current financial crisis, a number of hedge funds have implemented “gates” on their funds that restrict withdrawals when the sum of redemption requests exceeds a certain percentage of the fund’s total assets. To reduce... more
In response to the current financial crisis, a number of hedge funds have implemented “gates” on their funds that restrict withdrawals when the sum of redemption requests exceeds a certain percentage of the fund’s total assets. To reduce the investor’s risk exposures during these periods, we propose a futures overlay strategy designed to hedge out or control the common factor exposures of gated assets. By taking countervailing positions in stock, bond, currency, and commodity exposures, an investor can greatly reduce the systematic risks of their gated assets while still enjoying the benefits of manager-specific alpha. Such overlay strategies can also be used to reposition the betas of an investor’s entire portfolio, effectively rebalancing asset-class exposures without having to trade the less liquid underlying assets during periods of market dislocation. To illustrate the costs and benefits of such overlays, we simulate the impact of a simple beta-hedging strategy applied to long/...