Swiss Finance Institute

Zürich, Switzerland

Swiss Finance Institute

Zürich, Switzerland

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Pelgrin F.,EDHEC Business School | St-Amour P.,CIRANO | St-Amour P.,University of Lausanne | St-Amour P.,Swiss Finance Institute
Journal of Health Economics | Year: 2016

This paper studies the lifetime effects of exogenous changes in health insurance coverage (e.g. Medicare, PPACA, termination of employer-provided plans) on the dynamic optimal allocation (consumption, leisure, health expenditures), status (health and wealth), and welfare. We solve, simulate, and structurally estimate a parsimonious life cycle model with endogenous exposure to morbidity and mortality risks, and exogenous health insurance. By varying coverage, we identify the marginal effects of insurance when young and/or when old on allocations, statuses, and welfare. Our results highlight positive effects of insurance on health, wealth and welfare, as well as mid-life substitution away from healthy leisure in favor of more health expenses, caused by peaking wages, and accelerating health issues. © 2016 Elsevier B.V.

Chebbi S.,King Saud University | Soner H.M.,ETH Zurich | Soner H.M.,Swiss Finance Institute
Nonlinear Analysis: Real World Applications | Year: 2013

We study the classical optimal investment and consumption problem of Merton in a discrete time model with frictions. Market friction causes the investor to lose wealth due to trading. This loss is modeled through a nonlinear penalty function of the portfolio adjustment. The classical transaction cost and the liquidity models are included in this abstract formulation. The investor maximizes her utility derived from consumption and the final portfolio position. The utility is modeled as the expected value of the discounted sum of the utilities from each step. At the final time, the stock positions are liquidated and a utility is obtained from the resulting cash value. The controls are the investment and the consumption decisions at each time. The utility function is maximized over all controls that keep the after liquidation value of the portfolio non-negative. A dynamic programming principle is proved and the value function is characterized as its unique solution with appropriate initial data. Optimal investment and consumption strategies are constructed as well. © 2012 Published by Elsevier Ltd.

Yukalov V.I.,ETH Zurich | Yukalov V.I.,Joint Institute for Nuclear Research | Sornette D.,ETH Zurich | Sornette D.,Swiss Finance Institute
IEEE Transactions on Systems, Man, and Cybernetics: Systems | Year: 2014

We investigate how the choice of decision makers can be varied under the presence of risk and uncertainty. Our analysis is based on the approach we have previously applied to individual decision makers, which we now generalize to the case of decision makers that are members of a society. The approach employs the mathematical techniques that are common in quantum theory, justifying our naming as quantum decision theory. However, we do not assume that decision makers are quantum objects. The techniques of quantum theory are needed only for defining the prospect probabilities taking into account such hidden variables as behavioral biases and other subconscious feelings. The approach describes an agent's choice as a probabilistic event occurring with a probability that is the sum of a utility factor and of an attraction factor. The attraction factor embodies subjective and unconscious dimensions in the mind of the decision maker. We show that the typical aggregate amplitude of the attraction factor is 1/4, and it can be either positive or negative depending on the relative attraction of the competing choices. The most efficient way of varying the decision makers choice is realized by influencing the attraction factor. This can be done in two ways. One method is to arrange in a special manner the payoff weights, which induces the required changes of the values of attraction factors. We show that a slight variation of the payoff weights can invert the sign of the attraction factors and reverse the decision preferences, even when the prospect utilities remain unchanged. The second method of influencing the decision makers choice is by providing information to decision makers. The methods of influencing decision making are illustrated by several experiments, whose outcomes are compared quantitatively with the predictions of our approach. © 2013 IEEE.

Sornette D.,ETH Zurich | Sornette D.,Swiss Finance Institute
Reports on Progress in Physics | Year: 2014

This short review presents a selected history of the mutual fertilization between physics and economics - from Isaac Newton and Adam Smith to the present. The fundamentally different perspectives embraced in theories developed in financial economics compared with physics are dissected with the examples of the volatility smile and of the excess volatility puzzle. The role of the Ising model of phase transitions to model social and financial systems is reviewed, with the concepts of random utilities and the logit model as the analog of the Boltzmann factor in statistical physics. Recent extensions in terms of quantum decision theory are also covered. A wealth of models are discussed briefly that build on the Ising model and generalize it to account for the many stylized facts of financial markets. A summary of the relevance of the Ising model and its extensions is provided to account for financial bubbles and crashes. The review would be incomplete if it did not cover the dynamical field of agent-based models (ABMs), also known as computational economic models, of which the Ising-type models are just special ABM implementations. We formulate the 'Emerging Intelligence Market Hypothesis' to reconcile the pervasive presence of 'noise traders' with the near efficiency of financial markets. Finally, we note that evolutionary biology, more than physics, is now playing a growing role to inspire models of financial markets. © 2014 IOP Publishing Ltd.

Saichev A.,ETH Zurich | Saichev A.,Novgorod State University | Sornette D.,ETH Zurich | Sornette D.,Swiss Finance Institute
International Journal of Modern Physics C | Year: 2014

We present a novel simple microstructure model of financial returns that combines (i) the well-known ARFIMA process applied to tick-by-tick returns, (ii) the bid-ask bounce effect, (iii) the fat tail structure of the distribution of returns and (iv) the non-Poissonian statistics of inter-trade intervals. This model allows us to explain both qualitatively and quantitatively important stylized facts observed in the statistics of both microstructure and macrostructure returns, including the short-ranged correlation of returns, the long-ranged correlations of absolute returns, the microstructure noise and Epps effects. According to the microstructure noise effect, volatility is a decreasing function of the time-scale used to estimate it. The Epps effect states that cross correlations between asset returns are increasing functions of the time-scale at which the returns are estimated. The microstructure noise is explained as the result of the negative return correlations inherent in the definition of the bid-ask bounce component (ii). In the presence of a genuine correlation between the returns of two assets, the Epps effect is due to an average statistical overlap of the momentum of the returns of the two assets defined over a finite time-scale in the presence of the long memory process (i). © World Scientific Publishing Company.

De Treville S.,University of Lausanne | Schurhoff N.,University of Lausanne | Schurhoff N.,Swiss Finance Institute | Trigeorgis L.,University of Cyprus | And 2 more authors.
Production and Operations Management | Year: 2014

We develop a real-options model for optimizing production and sourcing choices under evolutionary supply-chain risk. We model lead time as an endogenous decision and calculate the cost differential required to compensate for the risk exposure coming from lead time. The shape of the resulting cost-differential frontier reveals the term structure of supply-chain risk premiums and provides guidance as to the potential value of lead-time reduction. Under constant demand volatility, the break-even cost differential increases in volatility and lead time at a decreasing rate, making incremental lead-time reduction less valuable than full lead-time reduction. Stochastic demand volatility increases the relative value of incremental lead-time reduction. When demand has a heavy right tail, the value of lead-time reduction depends on how extreme values of demand are incorporated into the forecasting process. The cost-differential frontier is invariant to discount rates, making the cost of capital irrelevant for choosing between lead times. We demonstrate the managerial implications of the model by applying it first to the classic Sport-Obermeyer case and then to a supplier-selection problem faced by a global manufacturer. © 2014 Production and Operations Management Society.

De Treville S.,University of Lausanne | Bicer I.,University of Lausanne | Chavez-Demoulin V.,University of Lausanne | Hagspiel V.,University of Lausanne | And 4 more authors.
Journal of Operations Management | Year: 2014

When do short lead times warrant a cost premium? Decision makers generally agree that short lead times enhance competitiveness, but have struggled to quantify their benefits. Blackburn (2012) argued that the marginal value of time is low when demand is predictable and salvage values are high. de Treville et al. (2014) used real-options theory to quantify the relationship between mismatch cost and demand volatility, demonstrating that the marginal value of time increases with demand volatility, and with the volatility of demand volatility. We use the de Treville et al. model to explore the marginal value of time in three industrial supply chains facing relatively low demand volatility, extending the model to incorporate factors such as tender-loss risk, demand clustering in an order-up-to model, and use of a target fill rate that exceeded the newsvendor profit-maximizing order quantity. Each of these factors substantially increases the marginal value of time. In all of the companies under study, managers had underestimated the mismatch costs arising from lead time, so had underinvested in cutting lead times. © 2014 Elsevier B.V.

The increasing importance given to the Corporate Social Responsibility in the field of health organizations gave rise to a wider interest in understanding how to improve accountability. The target organization assessed is the clinic Cardiocentro Ticino (CCT) based in Lugano and the network created in the Swiss and Ticino health system. In order to better represent the public value created, Cardiocentro has recently adopted the sustainability report. The main results are that the best scheme of sustainability report for an hospital is an hybrid of the two main existent (Global Reporting Initiative and Gruppo per la stesura del Bilancio Sociale), Cardiocentro Ticino is creating public value through networking and interrelating with its main stakeholders.

Hetzer M.,ETH Zurich | Sornette D.,ETH Zurich | Sornette D.,Swiss Finance Institute
PLoS ONE | Year: 2013

We study the co-evolutionary emergence of fairness preferences in the form of other-regarding behavior and its effect on the origination of costly punishment behavior in public good games. Our approach closely combines empirical results from three experiments with an evolutionary simulation model. In this way, we try to fill a gap between the evolutionary theoretical literature on cooperation and punishment on the one hand and the empirical findings from experimental economics on the other hand. As a principal result, we show that the evolution among interacting agents inevitably favors a sense for fairness in the form of "disadvantageous inequity aversion". The evolutionary dominance and stability of disadvantageous inequity aversion is demonstrated by enabling agents to co-evolve with different self- and other-regarding preferences in a competitive environment with limited resources. Disadvantageous inequity aversion leads to the emergence of costly ("altruistic") punishment behavior and quantitatively explains the level of punishment observed in contemporary lab experiments performed on subjects with a western culture. Our findings corroborate, complement, and interlink the experimental and theoretical literature that has shown the importance of other-regarding behavior in various decision settings. © 2013 Hetzer, Sornette.

Soner H.M.,ETH Zurich | Soner H.M.,Swiss Finance Institute | Vukelja M.,ETH Zurich
Mathematical Methods of Operations Research | Year: 2016

A utility maximization problem in an illiquid market is studied. The financial market is assumed to have temporary price impact with finite resilience. After the formulation of this problem as a Markovian stochastic optimal control problem a dynamic programming approach is used for its analysis. In particular, the dynamic programming principle is proved and the value function is shown to be the unique discontinuous viscosity solution. This characterization is utilized to obtain numerical results for the optimal strategy and the loss due to illiquidity. © 2016 Springer-Verlag Berlin Heidelberg

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