Hedging structured credit products during the credit crisis: A horse race of 10 models

Pricing and hedging structured credit products poses major challenges to financial institutions. This paper puts several valuation approaches through a crucial test: How did these models perform in one of the worst periods of economic history, September 2008, when Lehman Brothers went under? Did they produce reasonable hedging strategies? We study several bottom-up and top-down credit portfolio models and compute the resulting delta hedging strategies using either index contracts or a portfolio of single-name CDS contracts as hedging instruments. We compute the profit-and-loss profiles and assess the performances of these hedging strategies. Among all 10 pricing models that we consider the Student-t copula model performs best. The dynamical generalized-Poisson loss model is the best top-down model, but this model class has in general problems to hedge equity tranches. Our major finding is however that single-name and index CDS contracts are not appropriate instruments to hedge CDO tranches.     

Attitudes to externally organising knowledge management tasks: a review, reconsideration and extension of the NIH syndrome

Companies may carry out all major knowledge management tasks, i.e. knowledge acquisition, accumulation and exploitation, internally and externally. Therefore, we propose the integrate-or-relate decision in knowledge accumulation as a complement to the well-known make-or-buy and keep-or-sell decisions in knowledge acquisition and exploitation. A key factor for taking adequate decisions, for building up organisational capabilities and for realising a firm's knowledge potential are unbiased attitudes to the knowledge management tasks. While past research has focused on the 'not-invented-here' (NIH) syndrome as a negative attitude to acquiring external knowledge, a more holistic view is adopted in the present article by extending prior research on two dimensions. Firstly, we consider all major knowledge management tasks and do not limit our analysis to knowledge acquisition. Secondly, we take into account that, apart from overly negative attitudes, excessively positive attitudes may exist. Accordingly, we identify the following six syndromes: 'NIH' vs. 'buy-in' in knowledge acquisition, 'all-stored-here' vs. 'relate-out' in knowledge accumulation and 'only-used-here' vs. 'sell-out' in knowledge exploitation. After briefly reviewing research into NIH and developing a knowledge management framework, the syndromes are defined, and possible antecedents, consequences and managerial actions are described.     

Project Failures Arising from Corporate Entrepreneurship: Impact of Multiple Project Failures on Employees' Accumulated Emotions,Learning, and Motivation

In this paper, we consider an organizational paradox inherent to corporate entrepreneurship; that is, the pursuit of entrepreneurial projects is necessary for organizational rejuvenation, renewal, and/or organic growth; however, the high failure rate of entrepreneurial projects likely has enduring implications for the project team members and, by extension, the organization. Drawing on the psychology and emotion literatures, we model the human capital costs of corporate entrepreneurship arising from the multiple failures of entrepreneurial projects. Specifically, we explore how and with what consequence negative emotions can accumulate across multiple failures; when this accumulation is most likely to occur; and what the nature of this accumulation is across organizational contexts, employee differences, and time. This theorizing complements extant scholarship focused on the financial benefits and costs of corporate entrepreneurship by investigating the negative impact of multiple project failures on employees.     

Corporate venture capital as a strategy for external innovation: an exploratory empirical study

By creating corporate venture capital (CVC) units, large corporations predominantly pursue strategic objectives, especially the realisation of external innovations. Theoretical and preliminary empirical results on corporate venturing suggest how to manage CVC in order to achieve strategic objectives. We analyse for a sample of 21 corporate venture units in Germany, if the respective CVC programmes pursue the strategic objective to leverage external innovation and if these programmes are managed accordingly. We find that the majority of German corporate venture programmes follow mixed objectives and are not organised and managed as suggested in the literature. We come to the conclusion that a short-term focus on financial objectives of these CVC programmes prohibits the achievement of long-term strategic benefits from external innovation.     

Scientists' commitment to underperforming research projects: linking past success and the social environment

This article investigates scientists' commitment to underperforming research projects based on the concomitant consideration of their past success and social environments. Based on escalation of commitment and network theory, the model hypothesizes that past success triggers the commitment to underperforming projects but that the strength of this influence varies depending on the characteristics of decision makers' social networks. Results from the analysis of 3,072 scenario assessments nested within 96 scientists show that the positive relationship between past success and continued investment in underperforming projects is more positive when the network is larger, when the ties within the network are stronger, and when feedback from network partners is predominantly positive. Surprisingly and contrary to model predictions, results also show that the relationship between past success and scientists' tendency to commit to underperforming projects becomes stronger with lower communication frequency with network partners. This study extends current research by exploring the boundary conditions of the impact of decision makers' social environment on commitment to failing projects. Further, it adds to literature on the downside of success by emphasizing that decision makers, particularly those in some social environments, are driven to commit additional resources to underperforming – and potentially failing – projects. Decision makers acting in such environments should be aware that they are prone to overinvestment of resources, and the findings of this study can help them increase their awareness. Based on this study's results, decision makers (including scientists) can thus better reflect on and improve their research project evaluations. Finally, the findings of this study open up various opportunities for future research.     

The Decision to Exploit an R&D Project: Divergent Thinking across Middle and Senior Managers

Research and development (R&D) generates projects, but the question often remains: which projects should be exploited? Building on the innovation, strategy, and managerial cognition literatures, we use a conjoint field experiment to collect data on 4032 decisions made by 126 R&D managers to test how project attributes, strategic context, and managers' characteristics influence innovation exploitation decisions. Using hierarchical linear modeling, we find that (1) experience impacts project exploitation decision policies of middle managers more than senior managers, (2) divergent thinking across middle and senior managers increases with experience, and (3) experienced middle managers diverge from experienced senior managers in their decisions to exploit opportunities by placing greater emphasis on strategic context (relative to competitors and fit within the portfolio) and lesser emphasis on uncertainty (technological and demand). These findings have implications for the strategy and innovation literature.     

Riding High: Success in Sports and the Rise of Doping Cultures

In this paper, I develop a socioeconomic model that can be used to investigate the decisions made by professional athletes concerning doping. In their evaluation of whether to use performance‐enhancing drugs, athletes consider not only costs and benefits (through rank improvement) but also the approval from fellow athletes toward pro‐doping decisions. Peer‐group approval is modeled as a lagged endogenous variable, depending on the share of doping athletes in the history of a sport. As such, the model can explain an equilibrium of high incidence of doping as a “doping culture”. In addition to presenting comparative statics of the equilibrium (i.e., in order to answer the question of how a doping culture can be eliminated), I also investigate how doping decisions are affected by the standards set by the leader in a sport (e.g., Olympic qualification marks), and by the disproportionate public veneration of winners.     

Vertical integration and supplier finance

This paper studies access to finance by suppliers that are linked to a multinational enterprise. The theoretical framework consists of a property rights model featuring suppliers that are either vertically integrated or sell to the multinational at arm's length, which in turn affects the availability of different sources of credit. Integrated suppliers are predicted to cover a relatively larger share of their costs using internal sources, consisting of initial wealth plus funds from the multinational parent. In addition, due to the diminished dependence on external funds (local bank credit), integrated suppliers' funding shares are less responsive to changes in their home country's level of financial development. We test the model's predictions using firm survey data from over 50 developing and emerging countries and find broad support.     

Life expectancy and education: evidence from the cardiovascular revolution

This paper exploits the unexpected decline in the death rate from cardiovascular diseases since the 1970s as a large positive health shock that affected predominantly old-age mortality; i.e. the fourth stage of the epidemiological transition. Using a difference-in-differences estimation strategy, we find that US states with higher mortality rates from cardiovascular disease prior to the 1970s experienced greater increases in adult life expectancy and higher education enrollment. Our estimates suggest that a one-standard deviation higher treatment intensity is associated with an increase in adult life expectancy of 0.37 years and 0.07–0.15 more years of higher education.     

A Simple and Intuitive Method to Solve Small Rational Expectations Models

We present a nonlinear solution method of saddlepoint dynamics in discrete time optimization problems. It is based on the backward attractivity of the stable manifold and is very easy to implement. After an introduction to the general method we present two applications. First, we consider the deterministic neoclassical growth model and demonstrate accuracy and stability of the method. Second, we solve a basic real business cycle model.revised version received July 2, 2003