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Publications
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- Faculty Publications (759)
- January 2008
- Background Note
Equity Derivatives
By: Joshua Coval and Erik Stafford
The goal of these simulations is to understand the dynamic replication technique behind the Black-Scholes/Merton options model. The simulations focus on a single stock and a risk-free discount bond, which are used to replicate a contingent payoff. The underlying stock... View Details
- January 2008
- Background Note
Index Options
By: Joshua Coval and Erik Stafford
The goal of this simulation is to understand the patterns in index option prices that are not predicted by the Black-Scholes model. In particular, the simulation focuses on two properties of options prices. First, at-the-money implied volatilities from index options... View Details
Keywords: Volatility; Stock Options; Investment; Price; Profit; Risk Management; Mathematical Methods
- January 2008
- Background Note
Collateralized Debt Obligations (CDOs)
By: Joshua Coval and Erik Stafford
This lesson integrated Merton's (1974) contingent claims model of debt and equity claims with the CAPM, which allows us to examine the risks and pricing of credit portfolios and the derivative claims issued against them. In particular, this model is used to make... View Details
- January 2008
- Teaching Note
Credit Risk: Valuing Risky Debt & CDOs (TN)
By: Joshua D. Coval and Erik Stafford
Teaching Note for [208111] and [208113]. View Details
- January 2008
- Background Note
Valuing Risky Debt
By: Joshua Coval and Erik Stafford
This lesson develops the classical structural approach to pricing and hedging credit risk: Merton's (1974) contingent claims model of debt and equity claims. This model is used to make investment and risk management decisions in an over-the-counter (OTC) market for... View Details
Keywords: Borrowing and Debt; Credit; Investment; Price; Risk Management; Mathematical Methods; Valuation
- January 2008
- Background Note
Measuring Investment Performance
By: Andre F. Perold and Kenneth A. Froot
Examines various approaches to measuring investment performance. The approaches include the use of risk exposure and the Sharpe and Information Ratios. Applies the approaches to a variety of mutual funds to demonstrate the effect of using different metrics to measure... View Details
- January 2008
- Article
Do Well by Doing Good? Don't Count on It
By: Joshua D. Margolis, Hillary Anger Elfenbein and James P. Walsh
Research over 35 years shows only a weak link between socially responsible corporate behavior and good financial performance. However, there's no evidence of risk in doing good, only in being exposed for misdeeds. View Details
- January 2008
- Article
On the Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance
By: K. A. Froot and P. O'Connell
- December 2007
- Case
The Campaign for Bank Insurance in Antebellum New York
By: David A. Moss and Cole Bolton
The New York State Legislature had come to a standstill in 1829 as lawmakers refused to charter any new banks or recharter any existing banks. Four of New York's forty banks had failed since 1825, and many legislatures believed that a significant change in the banking... View Details
- December 2007 (Revised January 2008)
- Background Note
Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk
The announcement of merger or acquisition conveys new information to the capital markets. This note describes how the stock prices of a Buyer and Target behave after the announcement of a deal. First, for an all-stock deal that is certain to go through, the note... View Details
- December 2007
- Article
Applying Modern Risk Management to Equity and Credit Analysis
By: Robert C. Merton
Traditional conventions of accounting and actuarial science distort the valuation of capital risk in corporations with pension plans because under these conventions, pension assets and liabilities are not included in balance sheet calculations. The modern risk... View Details
- November 2007 (Revised June 2011)
- Case
ISS A/S (A)
By: Clayton S. Rose
Provides the opportunity to examine the nature and extent of a company's responsibilities to its bondholders, and to develop an enhanced understanding of the challenges in managing contractual obligations, and circumstances under which business leaders might agree to... View Details
- November 2007
- Background Note
Asset Allocation I
By: Joshua D. Coval, Erik Stafford, Rodrigo Osmo, John Jernigan, Zack Page and Paulo Passoni
The goal of these simulations is to understand the mathematics of mean-variance optimization and the equilibrium pricing of risk if all investors use this rule with common information sets. Simulation A focuses on five to 10 years of monthly sector returns that are... View Details
- November 2007
- Background Note
Event Arbitrage
By: Joshua D. Coval and Erik Stafford
The event arbitrage module includes two simulation sessions. The first simulation focuses on analyzing and evaluating individual merger transactions, while the second simulation emphasizes managing a portfolio of individual positions and the limitations of arbitrage... View Details
- November 2007
- Article
A Model of Consumer Learning for Service Quality and Usage
By: Raghuram Iyengar, Asim Ansari and Sunil Gupta
In many services, e.g., the wireless service industry, consumers choose a service plan based on their expected consumption. In such situations, consumers experience two forms of uncertainty. First, consumers may be uncertain about the quality of their service provider... View Details
- 2007
- Working Paper
New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability
By: Dale F. Gray, Robert C. Merton and Zvi Bodie
This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy. It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of... View Details
- November 2007
- Article
Standing Out from the Crowd: The Visibility-Enhancing Effects of IPO-related Signals on Alliance Formation by Entrepreneurial Firms
By: Tim Pollock and Ranjay Gulati
In this study, we explore how multiple signals related to entrepreneurial companies at the time of their initial public offering (IPO) influence the firms' ability to acquire non-financial resources over time. Specifically, the study looks at how signals based on... View Details
- Fourth Quarter 2007
- Article
Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk
By: Dale . F. Gray, Robert C. Merton and Zvi Bodie
This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign balance sheet in a way that can... View Details
- August 2007 (Revised February 2008)
- Case
Pinnacle Ventures
By: Michael J. Roberts, William A. Sahlman and Elizabeth Kind
Describes a prospective "venture debt" loan to a new venture from the perspective of Patrick Lee, a principal at Pinnacle Ventures. Forces students to grapple with the nature of financial risk in the start-up firm and assess the prospective risks and returns to a... View Details
- July 2007 (Revised May 2008)
- Case
Central Bank: The ChexSystemsSM QualiFile® Decision
By: Dennis Campbell, Francisco de Asis Martinez-Jerez, Peter Tufano and Emily McClintock
The "Central Bank" series analyzes the use of information and product design for managing the counterparty risk of newly acquired customers. Central Bank, a mid-sized regional U.S. bank, was attempting to grow its customer base by increasing the number of new checking... View Details