Research Newsletter

"Real Options and Risk Management " by Michel Benaroch, professor of management information systems

While most companies recognize the intellectual notion that real options are a powerful analytical tool, a smaller percentage of companies have embraced real options techniques as a standard of practice. However, new research from Michel Benaroch, professor of information systems in the Whitman School, indicates that all companies that manage risk should consider seriously utilizing real options techniques for improved economic performance.

"Managerial Ownership Not a Recipe for reduced Diversification " by Todd Alessandri, assistant professor of management, with Ravu Dharwadkar, professor of management, Pamela Brandes, associate professor of management, and Maria Goranova ’07 PhD, assistant professor in the Lubar School of Business at the University of Wisconsin, Milwaukee

In the world of business, it is not unusual for managers to occasionally make decisions with which shareholders disagree. Decisions related to diversification – that is, a company which operates in more than one industry – are no exception. Typically, managers may prefer diversification since it can reduce the company’s risk, as well as the risk to a manager’s compensation. But for shareholders, diversification is problematic. Because shareholders can achieve diversification on their own through changes to the composition of their portfolio, they don’t receive the same benefits from a company’s diversification.

"Whitman Research Spotlight"

Amber Anand and Sugato Chakravarty (March 2007), “Stealth Trading in Options Markets,” Journal of Financial and Quantitative Analysis

What role do informed traders play in the markets and in “price discovery”? This significant question is examined in two recent studies by Professor Amber Anand. The first, published in 2007, found that informed traders camouflaged their trades in the options markets, strategically fragmenting their orders into small and medium trades for low and high volume contracts, respectively. Anand and his co-author also found that almost 60 percent of price discovery occurs in the exchange with the largest market share for a given option, where informed traders favor medium size trades.

Kissan Joseph and Alex Thevaranjan (2007), “Investigating Pricing Solutions to Combat Spam: Postage Stamp and Bonded Senders,” Journal of Interactive Marketing

E-mail is a powerful communication tool for marketers. Unfortunately, the efficacy of this tool is rapidly being eroded by spam.Thevaranjan and Joseph find that only bonded senders emerge as a solution that is self-enforcing. Their analytical findings thus give pause to pure postage type mechanisms but encourage investments in the bonded senders mechanism.

Amiya Basu, Tridib Mazumdar, and S.P. Raj (2007), “Components of Optimal Price Under Logit Demand,” European Journal of Operational Research

In this article, Basu, Mazumdar and Raj develop a linear approximation of the Nash equilibrium optimal price of a brand as its marginal cost plus a weighted sum of: (1) the inverse of the price sensitivity of the market, (2) the average value added by all brands in the market, and (3) the value advantage (or disadvantage) of the brand.