Informs Annual Meeting 2017

TB32

INFORMS Houston – 2017

2 - Structural Pricing of Cocos and Deposit Insurance with Regime Switching and Jumps Olivier Le Courtois, Professor, EM Lyon Business School, Lyon, 69134, France, lecourtois@em-lyon.com, Xiaoshan Su, Xiaoshan Su This article constructs a structural model with jumps and regime switching features that is specifically dedicated to the pricing of CoCos and deposit insurance. This model assumes that the assets of a bank evolve as a geometric regime switching double exponential jump diffusion and that debt profiles are of exponential type. The definition of an Esscher transform and the definition and implementation of a related matrix Wiener-Hopf factorization are developed. Then, valuation formulas for the bank equity, debt, deposits, CoCos and deposit insurance are obtained. An illustration concludes the paper and addresses the respective impacts of jumps and regime switching on the viability of a bank. 4 - A New Framework for Pairs Trading without Spread Functions B. Ross Barmish, Professor, University of Wisconsin, 1415 Engineering Drive, ECE Department, Madison, WI, 53706, United States, barmish@engr.wisc.edu, Atul Deshpande Pairs-trading methods in the literature largely rely on mean-reverting spread functions defined on the two stock prices under consideration. In this paper, we present a new framework for trading pairs which only requires a weak assumption involving correlation of the returns; i.e., no spread function is used. Within this idealized framework, our main result is a trading algorithm which is proven to guarantee a positive expected profit for the generic case when the expected returns are non-zero. Whereas traditional pairs trading relies on a widening spread function to obtain such a result, in our framework, we obtain such results for new situations. 5 - Investigate the Most Suitable Distance Measurement for Evaluation of Portfolio Composition HeonBae Jeon, Yonsei University, Yonsei-ro 50, Bld#212, Seoul, 03722, Korea, Republic of, kimsm@yonsei.ac.kr, Hongseon Kim, Seongmoon Kim This study suggests the portfolio composition evaluation in terms of the distance. Various vector distance measurements are compared to select a method to evaluate the portfolio composition. Through the regression analysis and the symmetry analysis of the distribution, we confirmed that Euclidean distance measurement is suitable to evaluate the portfolio composition. In addition, by comparing the portfolio performance, such as Sharpe ratio and return, with Euclidean distance, we checked the relationship between the portfolio performance and the composition. Therefore, we confirmed that Euclidean distance measurement can be used as a new analysis method for portfolio optimization models. 6 - Resilience Measurement of the Financial System Considering Recovery Solutions Mingying Song, The University of Hong Kong, Haking Wong Room 824, Hong Kong, 999077, Hong Kong, mysong@hku.hk, Junwei Wang Resilience is a property of the system, which focuses on the recovery ability of the system after a shock. Financial system plays a key role in our society. Therefore, resilience is especially important for the financial system. In this paper, we present a modified novel model for the risk contagion process of the financial system considering both network effects and market liquidity effects. In addition, we put forward several some recovery solutions. Based on these recovery solutions, we present a measure for resilience in the context of the financial system. A case study considering shocks of different levels is given to illustrate the whole risk contagion and resilience measurement process. 351B Operations/Finance Interface Contributed Session Chair: Philippe Chevalier, UCL, Louvain La Neuve, Belgium, philippe.chevalier@uclouvain.be 1 - Welfare Implication of Reforming Energy Subsidies Hossein Mirzapour, University of Montreal (HEC School of Business), 920-6275 Northcrest, Montreal, QC, H3S.2N3, Canada, hossein.mirzapour@hec.ca, Michèle Breton Reforming energy consumption subsidies has been frequently referred to as a quick-win policy to enhance environmental mitigation. One of the most recognized challenges of such reform is “selling” the new energy prices to citizens, particularly those with a more fragile purchasing power. Several studies have prescribed that a direct compensation mechanism may ensure the feasibility of reform. That practice was successful at the beginning in cases like Iran but did not proceed as expected. In this paper, we develop a stylized model to study the feasibility range of a subsidy reform where direct compensation is the instrument proposed to restore consumers’ utility against increased energy prices. TB32

2 - Managing Product Innovation in Sourcing Yunke Mai, Duke University, 4225 Larchmont Road, Durham, NC, 27707, United States, yunke.mai@duke.edu, Sasa Pekec, Bin Hu We study strategic decisions of an innovator and a competitor-supplier in the presence of spillover risk. The value of innovation is uncertain, and depends on the market acceptance of new product features or the innovative concept. We characterize equilibrium decisions for both firms and show that the innovator’s optimal sourcing decision involves making tradeoffs between managing innovation spillover risk and (not-) securing market leadership position. The exact nature of this tradeoff depends on the structure of uncertainty in the product value that the innovation brings. 3 - Pricing and Prioritization in a Duopoly with Self Selecting Heterogeneous Time Sensitive Customers Arvind Sainathan, Nanyang Business School, S3-B2a-03, Nanyang Business School, 50 Nanyang Avenue, Ntu, Singapore, 639798, Singapore, Asainathan@ntu.edu.sg Time is often used as a differentiating factor in several service operations contexts by service providers (SPs) who prioritize their customers. We investigate the competition between two SPs involving a three-stage game. In the first stage, the SPs decide whether single service, in which customers are not prioritized, or differentiated service, with two service classes, should be offered. In the second stage, they set their prices. In the third stage, customers self-select and decide which option they should purchase. We consider impatient and patient customers. We use a novel approach to model customer self-selection. We characterize key equilibria and derive insights on when they occur. 4 - Optimal Forecast Disclosure in Ride-sharing Platforms Hao Sun, Tsinghua University, School of Economics and We study how much forecast information on future demand should a ride- sharing platform disclose to drivers. We show that there is an interplay between the wage structure and the optimal disclosure policy. We show that when the wage is fixed, or when it is optimized but does not depend on the forecast, there are cases in which the platform should hide the forecast; we solve for the optimal disclosure policy in this case. However, when the wage is optimized and can depend on the forecast, then the platform should share as much forecast information as possible. We support our analytical findings with numerical experiments. 5 - Enterprise Optimal Selling Strategy when Considering Product Quality and Response Time Guoqing Gao, Student, HUST, Room 328, School of Management, HUST, Wuhan, 430074, China, 1414902387@qq.com Researching on a company’s selling strategy under different conditions. Establishing the revenue function based on customer utility, and solve the problem to get the optimal strategy. The result suggests that firms should increase the product price and product quality, or decrease the response time when the production cost raises, or price sensitivity declines. 6 - Joint Dynamic Pricing and Lot-sizing under Competition Philippe Chevalier, Professor, UCL, Louvain School of Management - CORE, L1.03.01, Louvain La Neuve, B1348, Belgium, philippe.chevalier@uclouvain.be, Alejandro Lamas We study the joint dynamic pricing and lot-sizing problem when firms operate in a competitive environment. The pricing strategies of the firms should reach a Nash equilibrium. In order to compute the equilibrium efficiently, we propose a framework to bound solutions a priori. For this we use the fact that, under some conditions, pricing and inventory planning remain stable to marginal variations in competitors’ prices. Our approach reduces the computation times by more than an order of magnitude, and we show that dynamic pricing can give significant profit improvements. Management, Tsinghua, Beijing, China, sunh3.13@sem.tsinghua.edu.cn, Peng Shi

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