2015 Informs Annual Meeting

WC10

INFORMS Philadelphia – 2015

4 - Macroprudential Bank Capital Regulation in a Competitive Financial System Christian Opp, University of Pennsylvania, The Wharton School, Philadelphia, United States of America, opp@wharton.upenn.edu, Markus Opp, Milton Harris We develop a tractable general equilibrium model to analyze the effects of macroprudential bank capital regulation in an economy where firms of heterogeneous quality and risk seek financing from competitive banks and public markets. Our analysis provides an exact characterization of economy-wide capital allocation and highlights that tighter capital requirements can cause more banks to engage in value-destroying risk-shifting when banks face external financing frictions. WC07 07-Room 307, Marriott Risk Management and Financial Regulation Cluster: Risk Management Invited Session Chair: Xianhua Peng, Assistant Professor, Hong Kong University of Science and Technology, Department of Mathematics, Hong Kong, Chen Yang, National University of Singapore, Department of Mathematics, Blk S17, 10 Lower Kent Ridge Road, Singapore, 119076, Singapore, yang.chen@u.nus.edu, Min Dai, Steven Kou, Zhenfei Ye In terms of the dual fund, an innovative structured fund capable of capturing the characteristics of both bond market and equity market, we propose an estimation of the level of China’s risk-free rate under the Black-Scholes framework, and semi-model-free bounds based on minimal model specification. The level of estimation is uniformly higher than the commonly used risk-free rate proxies, which confirms the presence of a downward bias in the level of proxies as suggested by empirical studies. 2 - Bonus Caps, Deferrals and Bankers’ Risk-taking Xuchuan Yuan, Risk Management Institute, National University of Singapore, 21 Heng Mui Keng Terrace I3 Building, #04-03, Singapore, Singapore, rmiyuanx@nus.edu.sg, Jussi Keppo, Esa Jokivuolle We model a banker’s future bonuses as a series of call options on profits and show that bonus caps and deferrals reduce risk-taking. Optimal risk-taking depends on the cost of risk-taking. We calibrate the model to US banking data and show that increasing the bonus payment interval has no material impact, whereas capping the bonus to the base salary substantially reduces risk-taking. Our results suggest the bonus cap reduces risk-taking whereas bonus clawbacks in Dodd-Frank Act seem ineffective. 3 - A Dual-curve Market Model for Interest Rate Derivatives Lixin Wu, Professor, Department of Mathematics, Hong Kong University of Science and Technology, malwu@ust.hk After the 2007 financial crisis, the differences among the forward rates of various tenors are too significant to ignore, which necessitates multi-curve modeling. We introduce the term structure of “mean-loss rates,” and adapt the LIBOR market model to the post-crisis reality of interest-rate markets by jointly modeling a forward-rate curve and a mean-loss rate curve of the same tenor. We then demonstrate how the “reshuffle premium” causes the basis spreads, a belief held by market participants. WC08 08-Room 308, Marriott Finance Theory and Empirics Contributed Session Chair: Wenqing Zhang, Assistant Professor, University of Minnesota Duluth, 1318 Kirby Drive, LSBE, UMD, Duluth, MN, 55812, United States of America, wqzhang@d.umn.edu 1 - Expected Commodity Returns and Pricing Models Gonzalo Cortazar, Pontificia Universidad Católica de Chile, Vicuna Mackenna 4860, Santiago, Chile, gcortaza@ing.puc.cl, Ivo Kovacevic, Eduardo Schwartz Commodity pricing models provide true (in addition to risk neutral) distributions which are measured with large errors. To increase reliability risk premium parameters should be obtained from other sources and we show that this can be done without losing any precision in the pricing of futures contracts. We show how the risk premium parameters can be obtained from estimations of expected futures returns and provide alternative procedures for estimating these expected futures returns. Hong Kong - PRC, maxhpeng@ust.hk 1 - The Level of Risk-free Rate in China

2 - Sequential Global Sourcing Investment Decision Making under Extreme Situations Wenqing Zhang, Assistant Professor, University of Minnesota Duluth, 1318 Kirby Drive, LSBE, UMD, Duluth, MN, 55812, United States of America, wqzhang@d.umn.edu, Prasad Padmanabhan, Chia-hsing Huang Uncertainty plays an important role in determining a decision maker’s choice when making sequential global sourcing investment decisions. This paper presents evidence that firms hiring adventurous managers may be able to generally reap dividends when faced with negative cash flows (extreme or normal) when the cost ratios are small, the investment horizons are high, and the discount rates are small. WC09 09-Room 309, Marriott Innovation and Entrepreneurship I Contributed Session Chair: Magali Delmas, UCLA, Anderson School of Management, Los Angeles, United States of America, delmas@ioes.ucla.edu 1 - Optimal Product Launch Times for a Small Firm in a Competitive Environment Jacqueline Ng, Northwestern University, 2145 Sheridan Road, Evanston, Il, 60208, United States of America, jacquelineng2018@u.northwestern.edu, Izak Duenyas, Seyed Iravani We consider the optimal production introduction policy for a small firm that produces a single base product that progresses through a series of product generations over time against a large rival firm. We develop a dynamic programming model to analyze the small firm’s new product introduction strategy, and prove the optimality of a threshold policy. We then compare and contrast the optimal policy with the common time-pacing and event-pacing product introduction policies used in practice. 2 - A Case Study - Problem Based Learning Works to Foster the Entrepreneurial Minded Engineer Don Reimer, College Professor, LTU, 21000 West Ten Mile Road, Southfield, United States of America, dreimer@ltu.edu, Ahad Ali This abstract focuses tools that have successfully engaged engineering students in actively participating in learning the skills. Through the use of Problem Bases Learning (PBL) as an interactive tool, engineering students are engaged. Examples of engineering students engaged in PBL will be used in case studies of a class currently being offered at LTU. The case study – Tires, Tires, Tires Everywhere will be used to demonstrate the use of PBL in the classroom. 3 - The Dynamics of Energy Conservation: Novelty and Framing Effects Omar I. Asensio, UCLA, Institute of the Environment, Los Angeles, United States of America, omar.asensio@ucla.edu, Magali Delmas Using a field experiment with high frequency data, we investigate dynamic consumer responses to information-based interventions designed to encourage conservation behavior in the residential electricity sector. We discuss novelty and framing effects as temporal mechanisms resulting from new consumer innovations in appliance level metering and information technologies. Our results on dynamic decision-making are based on 52 million observations at 1/30Hz for 118 residences over 8 months.

WC10 10-Room 310, Marriott E-Business/Commerce I Contributed Session

Chair: Wei Zhang, Assistant Professor, University of Hong Kong, University of Hong Kong, Hong Kong, China, zhangw.03@gmail.com 1 - How Many Crowd Workers should a Requester Hire on Amazon Mechanical Turk? Arthur Carvalho, Assistant Professor, Rotterdam School of Management, Erasmus University, Burgemeester Oudlaan 50, J Building, Room 35-5th Floor, Rotterdam, NA, 3038BG, Netherlands, carvalho@rsm.nl, Stanko Dimitrov, Kate Larson We investigate the optimal number of workers a requester should hire on the crowdsourcing platform Amazon Mechanical Turk. In particular, we report the results of three studies involving different tasks and payment schemes. Surprisingly, we find that the optimal number of workers a requester should hire is around 10 to 11, no matter the underlying task and payment scheme. To derive such a result, we employ a principled analysis based on segmented linear regression.

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