Story in the School of Business
Sanjiv R. Das
Finance professor develops a model that accurately determines risks in investment.
The dot-com crash exposed a gap in the financial analysis of security prices. Start-ups had been running on credit—often publicly traded convertible bonds—but the prospect of default wasn't adequately factored into these bond prices.
Finance Professor Sanjiv R. Das from SCU's Leavey School of Business, working with a partner at New York University, developed a model that more accurately accounts for all of the risks. It took the duo five years to develop the dense, multi-lined algorithm-linked equation, and they tested it against real situations.
"A model should give consistent results or it isn't any good. Like a good car, it needs to perform well on the road conditions for which it is designed," says Das.
Das and his research partner, Rangarajan K. Sundaram, published their findings in the September 2007 issue of Management Science. The formula applies to hybrid securities trading, such as convertible arbitrage, and any form of defaultable debt. It's also useful for trading credit risk, a growing area today as investors try to hedge their credit exposure in a volatile market.
"It's not uncommon to see firms trading on small differences in price," says Das. "It's become a real high tech business. The difference in value between the market price and what our formula shows may be as little as a tenth of a percent. But when you're talking about hundreds of millions of dollars in bond face value, that's enough of a spread to drive a tank through."