Title: Venture Capital and Knowledge Transfer

Abstract:

This talk identifies a new channel through which venture capital helps to promote innovative start-ups. Venture capitalists typically have access to a great deal of inside information about the innovative entrepreneurial start-ups they finance, and considerable opportunities to transfer valuable knowledge between different companies in their portfolio. The existing theoretical literature on venture capital has focused primarily on the potential negative consequences, namely expropriation of ideas by venture capitalists, and ways in which this problem might be reduced. The main novelty in our approach is to also consider the potential benefits of knowledge transfer implemented privately by the venture capitalist, and analyse the resulting trade-offs. We study first the case of firms whose innovative knowledge does not fall in the category of intellectual property that can be protected by a patent. We then examine the case where patent protection is feasible in principle, but there is some uncertainty ex ante as to whether the innovation will succeed in obtaining a patent (e.g. whether it will satisfy the requirements of novelty and non-obviousness). We establish the conditions for an innovative start-up to prefer financing by a venture capitalist (VC) or by a non-VC investor. The paper therefore adds a new rationale for VC financing to the ones that have already received considerable attention in the theoretical literature (monitoring, screening, and the provision of advice and support by the VC).

Date: Tuesday 12th November, 17:00 - 18:00

Event Location: Newnham College

Title: Linear-Rational Term Structure Models

Abstract: 

We introduce the class of linear-rational term structure models, where the state price density is modeled such that bond prices become linear-rational functions of the current state. This class is highly tractable with several distinct advantages:

i) ensures non-negative interest rates,

ii) easily accommodates unspanned factors affecting volatility and risk premia, and

iii) admits analytical solutions to swaptions.

For comparison, affine term structure models can match either i) or ii), but not both simultaneously, and never iii). A parsimonious specification of the model with three term structure factors and one, or possibly two, unspanned factors has a very good fit to both interest rate swaps and swaptions since 1997. In particular, the model captures well the dynamics of the term structure and volatility during the recent period of near-zero interest rates.

Date: Tuesday 26th November, 17:00 - 18:00

Event Location: Room MR2, Centre for Mathematical Sciences, Cambridge University 

About Maria Bustamante

Title: Product Market Competition and Industry Returns

Abstract:

This paper documents that product market competition has two opposing effects on asset returns. We find that firms in more competitive industries have less valuable growth options and thus lower loadings on systematic risk. We also find that these firms have lower profit margins which make them more exposed to systematic shocks. The first effect dominates the second, so that firms in more competitive industries earn lower asset returns on average. Our empirical findings are robust to using five alternative empirical measures of competition, and to controlling for the sample selection bias of publicly listed firms.

Date: Thursday 23rd January, 17:00 - 18:00

Event Location: Newnham College

About Mark H. A. Davis

Title: Consistency of Risk Measure Estimates

Abstract:

Recently there has been renewed debate about the relative merits of VaR and CVaR as measures of financial risk. VaR is not coherent and does not qantify the risk beyond VaR, while CVaR shows some computational instabilities and is not "elicitable" (Gneiting 2010, Zwiebel 2013). It is argued in this talk that such questions are best addressed from the point of view of probability forecasting or Dawid's "prequential statistics". We introduce a concept of "consistency" of a risk measure, which is close to Dawid's "strong prequential principle", and show that VaR indeed has special properties not shared by any other risk measure. 

Date: Thursday 6th February, 17:30 - 18:30

Event Location: Bridgetower Room, Trinity Hall

About Harjoat Bhamra

Title: Financial Fragility & Incentives  

Abstract: Not Disclosed

Date: Thursday 20th February, 17:00 - 18:00

Event Location: Room W2.02 Cambridge Judge Business School

About Maureen O’Hara

Title:  Relative Tick Size and the Trading Environment

Abstract:

Recent proposals to raise the tick size on small stocks bring attention to the role played by market structure in shaping the trading environment and ultimately in capital formation. In this paper, we look at the how the relative tick size influences liquidity and the biodiversity of trader interactions in the market. Using unique order-level data from the NYSE, we find mixed evidence on whether a larger relative tick size enhances liquidity. Specifically, depth closer to market prices as well as fill rates of limit orders are higher with a larger relative tick size, but resiliency of depth at the best prices is lower and there is a shift to less displayed depth. We observe that high-frequency trading firms that operate as market makers on the NYSE take on a more prominent role in liquidity provision for stocks with larger relative tick sizes: spending more time at the quote, improving market-wide prices, and increasing their participation in trading. A larger relative tick size does not, however, seem to attract more overall trading volume from investors to the stocks, and we find that some volume shifts from the primary market to other (non-exchange) trading venues.

Date: Thursday 1st May, 17:00 - 18:00

Event Location: Graham Storey Room, Trinity Hall

About Woo Chang Kim

Title: Understanding Robust Portfolios

Abstract:

Robust portfolio optimization has been developed to resolve the high sensitivity to inputs of the Markowitz mean-variance model. The main idea is to introduce an uncertainty set for the model parameters, and to obtain the portfolio with worst-case optimization approach. Although much effort has been put into forming robust portfolios, there have not been many attempts to analyze the characteristics of portfolios formed from robust optimization. In this presentation, we discuss the recent finding on the qualitative characteristics of the robust portfolios. More specifically, there are three main questions to be addressed:

1) Is robust portfolio really robust?

2) Robust portfolio is different from traditional mean-variance portfolio. Is there any consistent

pattern in regard to this qualitative difference in two portfolios?

3) If robust portfolio is consistently different from traditional mean-variance portfolio, is it possible

to reduce the difference without losing the robustness?

Date: Thursday 8th May, 17:00 - 18:00

Event Location: Barbara White Room, Newnham College

About Wang Neng

Title: Investment, Liquidity, and Financing under Uncertainty

Abstract:

We develop a real options model for a financially constrained firm. Facing external financing costs, the firm prefers to fund its investment through internal funds, so that the firm's optimal investment policy and its value depend on the size of its liquidity holdings. We show that financial constraints significantly alter the standard real options results. Importantly, the investment hurdle is highly non-monotonic in the firm's internal funds as the firm may prefer accumulating internal funds rather than accessing costly external capital markets when internal funds are sufficiently high. Additionally, the firm's external equity issue is non-monotonic in its liquidity holdings. With multiple rounds of growth options, a value-maximizing financially constrained firm may choose to exercise its growth option sooner that the first-best level in earlier stages in order to mitigate delayed growth option exercising in later stages. Our analysis brings out the rich and subtle interactions between sources of funds (external, internal, and endogenous retained earnings) and the optimal exercising of investment and abandonment options.   

Date: Thursday 15th May, 17:00 - 18:00

Event Location: Bridgetower Room, Trinity Hall

Title: Finance and the Real Economy

Abstract: Not Disclosed

Date: Monday 19th May, 17:00 - 18:00

Event Location: Lucia Windsor Room, Newnham College

About Alejandro Reynoso

Title: First-In-Class: Three Cases of Financial innovation in Mexico

Abstract:

This is a document that presents three examples of development and implementation of first-in-class financial products in Mexico led by the author between 2011 and 2014. The first hedge fund, the first fundamentally weighted ETF and the first REIT.

Each one of the cases is presented in a way that highlights the connection between concrete market needs, the use of contemporary tools for analysis and design and a pragmatic adaptation of the ideas to the market infrastructure and legal and tax environment.

From a technical standpoint the cases highlight the use of tools such as the design of expert systems for hedge fund asset allocation algorithms, constrained and unconstrained dynamic portfolio optimization and the application of Simulink to solving dynamic non-linear deterministic and stochastic programming models characteristic of structured contracts like REITS

All cases also leave the reader with some useful references for further academic work. For example we found the factor-loading specification of a long-short technically based hedge fund by doing the reverse-engineering of the fund described in the document. We also highlighted the factors that emerge from optimized indexes and addressed issues of optimal contracting and solutions to the principal-agent contradictions in the specific structures of the Mexican REITS.

Date: Thursday 29th May, 17:00 - 18:00

Event Location: Barbara White Room, Newnham College

About Sheridan Titman

Title: Investor Composition and Liquidity: An Analysis of Japanese Stocks

Abstract: Not Disclosed

Date: Wednesday 4th June, 17:30 - 18:30

Event Location: Lecture Theatre 1, Cambridge Judge Business School