Long-Term Capital Management | EPFL Graph Search

Long-Term Capital Management L.P. (LTCM) was a highly leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal brokered and put together by the Federal Reserve Bank of New York. LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron Scholes and Robert C. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics. LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. The master hedge fund, Long-Term Capital Portfo

Agency conflicts and short- versus long-termism in corporate policies

Erwan Morellec

We build a dynamic agency model in which the agent controls both current earnings via short-term investment and firm growth via long-term investment. Under the optimal contract, agency conflicts can induce short- and long-term investment levels beyond first best, leading to short- or long-termism in corporate policies. The paper analytically shows how firm characteristics shape the optimal contract and the horizon of corporate policies, thereby generating a number of novel empirical predictions on the optimality of short-versus long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts. (C) 2019 Elsevier B.V. All rights reserved.

ELSEVIER SCIENCE SA2020

Three Essays on Methodologies for Dynamic Modeling of Emerging Socio-technical Systems

Mohammad Amin Dehdarian

Socio-technical energy transitions are long-term and major transformations in incumbent energy infrastructures. They include fundamental changes in technologies as well as institutions and social patterns. Transition studies are primarily focused on frameworks for analyzing the entire transition process by investigating the historical cases of transitions. A multi-phase approach to transition posits this process begins with a pre-development phase characterized by technological and institutional lock-ins, and resistance from incumbent actors. This period is critical for a forward-looking approach to transitions, since early developments shape path-dependent and irreversible processes leading to the emergence of new transition pathways. However, our understanding about the mechanisms and dynamics of this phase is still very limited. This is mainly due to lack of data, weak conceptualization and the necessity of developing new methods proper to deal with these limitations. This dissertation develops methodologies for investigating some complex questions arising in the pre-development phase, by focusing on the case of smart grid development. The first essay uses insights from modeling interventions in complex systems and builds a System Dynamics model to investigate the cost allocation problem of smart metering roll-out. The second essay takes ideas from Technological Innovation System approach and develops a method to analyze the emergence of spatial diversity in smart grid development by combining Social Network Analysis and Agent-Based Modeling. The third essay builds on ideas from network theory and evolutionary modeling to develop a method for identifying the main path of knowledge development and analyzing knowledge trajectories in smart grid initiatives.

EPFL2017

Three Essays in Banking and Finance

Damien Olivier Klossner

This thesis develops three models that study the motivation of various agents to take on debt, and the impact that excessive financial leverage can have on social welfare. In the chapter "Short-term Bank Leverage and the Value of Liquid Reserves", the incentive of a bank to take on leverage stems from the fact that its short-term debt provides liquidity benefits to depositors, at the cost of exposing the bank to the risk of runs. In the model, a bank possesses two instruments to manage the risk of runs: its funding policy and the size of its liquid asset holdings, modeled as government bonds. Issuing more debt allows the bank to better capture the liquidity benefits fits priced into deposits but increases illiquidity risk. Holding more bonds makes the bank more robust to withdrawals but it reduces the bank's asset returns. When the supply is scarce, banks are the natural buyers of government bonds. This links the liquidity premium priced into government bonds to the risk of bank runs. In the chapter "Liquidity, Debt Overhang, and Monetary Policy", firms take on bank credit to relax their liquidity constraint and purchase new capital. But taking on debt creates a debt overhang distortion which causes entrepreneurs to pass on protable projects. In the model, entrepreneurs arrange for their financing before they observe the profitability of their investment opportunity. After the latter becomes known, entrepreneurs are liquidity-constrained when investment conditions are favorable, and over-indebted when they are unfavorable. The monetary authority can generate welfare gains by lowering the cost of holding liquidity and, when debt is contracted in nominal terms, by pursuing a counter-cyclical monetary policy. In the chapter "Safe Claim Production and Capital Structure", firms issue debt to satisfy the demand of risk-averse investors for safe claims, at the cost of increasing default risk. In general equilibrium, firms need to be compensated for this service, which can only occur if their debt and equity claims are held and priced by different investor types. This segmentation of the investor base can be sufficient to prevent the existence of a symmetric equilibrium. Instead, only a fraction of firms opt for levered capital structures, and the gain in value obtained by tranching cash flows into debt and equity is offset by the expected cost of default. Changes in aggregate leverage can be divided into variations in extensive (the fraction of levered firms ) and intensive (the leverage ratio of levered firms ) margins. Changes in rm business risk have opposite effects on leverage, depending on whether the risk is of a systematic nature or firm-specific nature.

EPFL2019

Three Essays in Banking and Finance

Damien Olivier Klossner

EPFL2019