A mixed PDE-Monte Carlo approach for pricing credit default index swaptions

Abstract The problem of numerically pricing credit default index swaptions on a large number of names is considered. We place ourselves in a stochastic intensity framework, where Ornstein-Uhlenbeck-type correlated processes are used to model both firms’ distance to default and a macroeconomic state variable. Here the default of the firms’ follows the reduced-form approach and the (random) intensity of the default depends on the behavior of the diffusion processes. We propose here a numerical method based on both a Monte Carlo and a deterministic approach for solving PDEs by finite differences. Numerical tests demonstrate the efficiency and the robustness of the proposed procedure.     

Ex-post full surplus extraction,straightforwardly

Consider an estimate of the common value of an auctioned asset that is symmetric in the bidders’ types. Such an estimate can be represented solely in terms of the order statistics of those types. This representation forms the basis for a pricing rule yielding truthful bidding as an equilibrium, whether bidders’ types are affiliated or independent. We highlight the link between the estimator and full surplus extraction, providing a necessary and sufficient condition for ex-post full surplus extraction, including the possibility of independent types. The results offer sharp insights into the strengths and limits of simple auctions by identifying the source of informational rents in such environments. Harstad acknowledges hospitable accommodation by the Fuqua School of Business, Duke University, and the Olin School of Business, Washington University in St. Louis, during parts of this research. We are grateful for comments and suggestions from Richard McLean and Jeroen Swinkels.     

Morgan Stanley's Risk‐Reward Views: Unlocking the Full Potential of Fundamental Analysis

Since 2008, Risk‐Reward Views have been the basis for the recommendations on all the stocks covered by Morgan Stanley's equity research analysts globally. The firm's analysts use this systematic approach to communicate a broader range of fundamental insights about expected returns and risks, and to articulate more clearly the logic underlying their price targets and calls, and the level of conviction associated with them. The rationale for this approach is to align the firm's research product with its clients' thinking and investment discipline while also creating a link between traditional equity analysis and widely accepted principles of modern portfolio management. Too many sell‐side analysts still try to manifest expertise and conviction with one‐sided investment theses backed by single‐point estimates and “table pounding.” That does a disservice to investors who are looking to sell‐side analysts for an ongoing dialogue about the future with experts on company fundamentals. Risk‐Reward Views are designed to produce a more complete view of the risk‐reward trade‐off in a given stock. They are meant to supplement the use of quant‐only risk models that, while offering at least the illusion of precision, are also often opaque and backward looking. The approach aims to increase transparency while avoiding unnecessary complexity by focusing on a handful of critical uncertainties and modeling a manageable number of coherent scenarios that are relevant to investor debates and cover a full range of plausible outcomes. This article focuses on the theoretical underpinnings of the department's Risk‐Reward initiative. For a more detailed discussion of the institutional setting and the processes followed to implement these ideas, readers are referred to the recently published Harvard Business School case study, “The Risk‐Reward Framework at Morgan Stanley Research” (Harvard Business School Case N9–111–011).     

Industry concentration in common value auctions: theory and evidence

We examine theoretically and experimentally two countervailing effects of industry concentration in common value auctions. Greater concentration of information among fewer bidders reduces competition but increases the precision of private estimates. We demonstrate that this generally leads to more aggressive bidding. However, the reduction in competition dominates the informational effects, resulting in lower prices. We examine these hypothesized effects experimentally by conducting a series of auctions with constant informational content but distributed among a varying number of bidders. The experimental results are consistent with our theoretical predictions. The authors would like to thank Octavian Carare, Eric Friedman, Luke Froeb, Ron Harstad, Toshi Iizuka, Mike Rothkopf, Charles Thomas, and two anonymous referees, for many useful comments and suggestions.     

Exporting, capital investment and financial constraints

Many firms cite financial constraints as some of the most important impediments to their investment and growth. Using a unique data set from the Czech Republic this paper investigates the importance of financing constraints in the context of exporters. It finds that exporters are less financially constrained than non-exporters. However, after carefully correcting for possible endogeneity and selection issues, the evidence points to less constrained firms self-selecting into exporting rather than exporting alleviating firms’ financial constraints.     

“Unprecedented,” “extraordinary,” and “we're all in this together”: Does advertising really need to be so tedious in challenging times?

As government-mandated lockdowns and steep declines in trade set in because of the COVID-19 pandemic, a common theme became apparent in the advertising of the time: It was all the same. Regardless of the product category or brand personality, many ads were remarkably similar. They began with melancholy music, voiceovers reminding the audience that the brand is here for them, and referred to these times as “unprecedented” and “extraordinary.” Ads reassured viewers that “together, we can get through this.” In this installment of Marketing & Technology, we articulate the problem of advertising sameness and explore how and why it likely arises during a time of crisis. We then discuss why advertising uniformity is a problem and present a series of strategic, media, and creative considerations—taking into account the constraints of a crisis— to help marketing professionals produce more effective advertising in the context of a disaster.     

From “Broad Studies” to Internet-based “Expert Knowledge Aggregation”. Notes on the methodology and technology of knowledge integration

The article takes as a starting point Herman Kahn's concept of a process-based approach to future-oriented knowledge aggregation and integration and discusses the opportunities created by Internet technologies to achieve the goal envisioned by such a model. The article briefly introduces a general framework for analyzing knowledge aggregation, the use of various aggregation mechanisms as well as aggregation systems that rely either on human facilitators (meta-experts) or on computer algorithms. Available online instruments for knowledge aggregation and expert challenge are presented and the possibility of using them for setting up “virtual think tanks” for foresight studies is explored.     

Access to liquidity and non‐monetary trade in Russia

This article places non‐monetary trade (NMT), the persistent growth of which in Russia in 1992–98 economists have struggled to explain, within the framework of the credit channel of monetary policy. It shows that producers resorted to NMT responding to increases in the cost and the unavailability of external funds. The article traces the origins of structural breaks in the NMT trend to shifts in state policy that affected financial markets and its transitory fluctuations to temporary shocks in the demand for goods. It concludes that there is significant evidence supporting the existence of the credit channel in the Russian transition.     

Can probability theory deal with entrepreneurship?

The Austrian theory of entrepreneurship emphasizes the importance of epistemic heterogeneity and the unlistability of the set of all possibilities. A similar concern with what has been called “the art of choosing the space of possibilities” is an important part of Bayesian model selection. Both Austrian and Bayesian authors view the common knowledge assumption as an unrealistic and unnecessary restriction. This coincidence of concerns leads to a joint theory of entrepreneurship. Three important benefits result from this merger: (1) the ability to use Itti & Baldi’s Bayesian theory of surprise to empirically measure radical surprise and improve the Betrand competition model as a consequence, (2) dealing with the unlistability problem, and (3) better understanding why the emergence of common knowledge is always the outcome of a social process rather than an inherent consequence of “rationality”.