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Unlocking the modern financial system

Leading MIT Sloan finance faculty share research, ideas with alumni in London

Professor Robert Merton speaks at the MIT Sloan Finance Forum: Financial System 2.0

The financial system is evolving and businesses and regulators need to move quickly to keep pace with the speed of change. That was a key lesson at Financial System 2.0, a special event held in London on June 13 as part of the MIT Sloan Finance Forum series.

Some 200 alumni and friends of the School attended the event, which saw MIT Sloan’s leading academics meet with experts from across the finance industry to discuss the state of the world’s financial markets and how to shape what comes next.

Highlights of the day included:

Professor Stewart Myers look at management incentives and corporate governance. Myers discussed ways to build a functional balance between shareholder remuneration and good company management, including the idea of levying a transaction cost on shareholder intervention.

Professor Andrew Lo’s examination of how financial markets can be harnessed to help cure cancer. Lo explained that a typical cancer drug development program could cost  $200 million, with a success rate of 5 percent. However, instead of investing in one program, it might be possible to invest in 150 different ones, with diversification offering investors more than a 99 percent chance of at least two successes and a higher return on investment. The reduced level of risk resulting from diversification would allow managers of a “cancer megafund” to issue approximately $16.7 billion of debt immediately, Lo said.

“Instead of declaring war on cancer, we should put a price on its head,” said Lo.

A frank discussion, chaired by Financial Times commentator Gillian Tett, on hedge funds and how they are evolving to respond to the shifting financial landscape.

An overview of MIT Sloan’s intensive, one-year Master of Finance program. Launched in 2008, during the financial crisis, the program was developed to put highly-trained graduates to work in the financial sector. MIT Sloan’s goal is to create the next generation of global finance leaders, with a deep understanding of the profession’s potential contributions to society. Graduation data demonstrates that it is succeeding: although the finance sector has seen a general decline in interest, the number of graduates from MIT Sloan’s Master of Finance program continues to grow.

Professor Antoinette Schoar’s demonstration of how to apply insights from behavioral finance in order to mitigate credit risk, particularly in emerging markets. Schoar explained that in many emerging market countries, small businesses regularly pay late and go into default. Behavioral economics suggests small businesses and individuals in emerging economies slip into default through lack of attention to the repayment cycle, said Schoar.

Professor Andrei Kirilenko’s discussion of market evolutions and high-frequency trading. Kirilenko asked whether high-frequency trading is essentially beneficial or “legalized front­running.” He showed that a survey of market participants concluded that high frequency trading had been the cause of the May 2010 “Flash Crash” that saw the Dow Jones Industrial Average dip 9 percent only to rebound a few minutes later.

But Kirilenko shared research showing that high-frequency trading had not caused the crash.

“We should not look at high-frequency trading as being ‘good’ or ‘evil,’” Kirilenko said. “It is more productive to think of it as a trade-off between beneficial and detrimental effects.”

Kirilenko also discussed the new MIT Sloan Center for Finance and Policy, which will serve as a hub for financial analysis of public policy issues and a collaborative platform to stimulate cooperation between government, the private sector, and academia.

Professor Robert Merton’s demonstration of the role connectedness plays in the global financial markets. Merton warned that there is a need to improve integration between the different parts of government with responsibility for managing fiscal policy and promoting stability.


View videos from this event here

MIT Sloan community in NYC gathers for Finance Day

“Pioneers of finance” present research to alumni, students

M2012 Finance DayIT Sloan’s top finance faculty shared new research and led engaging discussions April 20 in New York City, when the School welcomed more than 300 alumni and current and incoming students to its first Finance Day.

At the event, faculty discussed MIT Sloan’s commitment to train the new generation of finance professionals, its role in policy analysis, and the School’s growing finance course and degree offerings, including a new Master of Finance (M.Fin.) program, a complement to the already successful MBA Finance Track.

“We intend to capitalize not just on the MIT finance tradition, but on the MIT tradition broadly defined,” said Andrew Lo, Charles E. and Susan T. Harris Professor of Finance, noting MIT’s leading work in economics, mathematics, operations research, and other fields. Earlier this month Lo was named one of TIME Magazine’s 100 Most Influential People in the World for his theory of adaptive markets and his work developing the federal Office of Financial Research.

Lo called MIT Sloan home to “pioneers of finance,” including Robert Merton, School of Management Distinguished Professor of Finance, Stewart Myers, Robert C. Merton (1970) Professor of Financial Economics, and Stephen Ross, Franco Modigliani Professor of Financial Economics. Myers emceed Finance Day, while Merton and Ross presented research on credit risk and market prediction, respectively. Merton received the Nobel Memorial Prize in Economics in 1997 for developing a new method to determine the value of derivatives.

“Every day there are new insights that these pioneers provide to us,” Lo said. “The M.Fin. program is meant to take that Sloan finance franchise and expand it in a very significant way.”

“Our view is that while there may have been a number of problems in the financial industry—finance itself is not the problem,” Lo said. “In fact, it will ultimately have to be the solution.”

Other presentations at Finance Day included an exploration of how economic booms and busts shape the career paths of CEOs, from Professor Antoinette Schoar, Michael M. Koerner (1949) Professor on Entrepreneurship, and a panel discussion on financial reform featuring Ricardo Caballero, Ford International Professor of Economics at MIT, Blackrock co-founder and chief risk officer Bennett Golub, SB ’78, SM ’82, Ph.D. ’84, U.S. Commodity Futures Trading Commission chief economist Andrei Kirilenko, and Deborah Lucas, MIT Sloan Distinguished Professor of Finance.

MIT and MIT Sloan have an influential history in finance, led by groundbreaking work from Nobel prize-winning economists and other living legends on the faculty. In addition to the Finance Track in the MBA program and a doctoral offering, the School in 2009 launched the intensive one-year Master of Finance.

The financial collapse of 2008 exposed a dearth of properly trained economists working in the financial industry and has led to a policy and regulation quandary that calls for the input of the highly trained financial professionals MIT Sloan creates. The number of MIT Sloan graduates entering the financial sector has been on the rise since 2009.

“We’re growing,” Myers told the crowd, which engaged in a series of insightful question and answer sessions with faculty throughout the day. “The full-time faculty is 18 instead of single digits years ago. We’re now offering 33 different finance courses at MIT, instead of probably single digits year ago.”

Myers urged the alumni at Finance Day to sponsor and encourage colleagues to apply to MIT Sloan’s finance programs, consider hiring graduates, and otherwise be a part of the School’s extensive and influential network of experts and leaders throughout the financial industry.

“As this illustrates,” Myers said, “we’re also reaching out to alumni, friends, and practitioners, anyone who has an interest in finance and is willing to listen to us and talk to us.”