Tag Archives: MIT Sloan

MIT Sloan trek shows MBA students opportunities to work in policy — Valerio Riavez

See the original article on the MIT Sloan Experts Page>>

If you’re interested in policy work at an institution like the World Bank, the Federal Reserve, or the IMF, a PhD is required. At least that’s what MBA students have long thought. However, a recent MIT Sloan career trek to Washington, D.C. revealed that this is no longer the case.

As these institutions don’t typically participate in on-campus recruiting, it can be challenging for business school students to learn about policy jobs. That’s why the MIT Sloan Finance and Policy Club organized a trek for 25 students to Washington, D.C. We wanted to learn more about job options for MBA and Master of Finance (MFin) students, make connections, and get a glimpse of what living in D.C. is like.

We began the trek at the World Bank Group. Most MBAs are familiar with the IFC, which is the private sector development arm of the WB and an active recruiter of business students. However, during this visit we learned that the World Bank Group is also increasingly hiring people without PhDs. The World Bank has an elite program called the Young Professionals Program (YPP) through which it hires and forms the next generation of WB leaders. We were particularly surprised to learn that the majority of YPP hires actually do not have a PhD.

In the afternoon, we headed over to the Federal Reserve where we visited the boardroom and participated in a Q&A session with a senior economist. We sat around the very table where Janet Yellen, Ben Bernanke, and Alan Greenspan made some of the most significant monetary decisions in the history of global economics. For a policy fan, I must admit it was pretty cool.

A takeaway at the Fed was that jobs are mostly reserved for U.S. citizens. Foreign students are generally ruled out unless they are transferred from another central bank through an exchange program. There is a fierce screening process for all jobs at the Fed because it is a central bank and its activities are at the core of national interests.

We also learned how after the financial crisis, the Fed began looking more to private-sector practitioners to work on unconventional monetary policy endeavors to get the economy back on track. When central banks had to design and implement their quantitative easing, they had to rethink how to intervene in financial markets. To do that, they brought in people with experience in the private sector and exposure to financial markets. For students interested in finance at a policy institution, that is an untapped recruiting resource.

In addition to that good news, we saw that this trend seems to extend to other central banks and financial policy institutions, which are increasingly interested in people with business acumen – meaning a PhD is not always required. The governors of central banks still have PhDs, but the world is changing and private sector experience and exposure to financial markets today are crucial for these institutions. As a result, departments involved in quantitative easing are increasingly comprised of MBAs.

We ended our trek with visits to many landmarks in Washington, D.C., including the Library of Congress, the Washington Monument, the Lincoln Memorial, and the Kennedy Center. On our final night, we visited the Saudi ambassador’s home where we enjoyed a traditional Saudi reception and a great discussion about the economy in the Middle East with the ambassador and members of the Washington diplomatic community.

As most of us are still exploring opportunities for after graduation, meeting with MIT alumni in D.C. also helped us have a better grasp of what life is like in the city. After seeing all of the great policy opportunities available to MBA graduates and touring the city, it’s definitely a place to keep on the radar.

Valerio Riavez is a native of Italy and dual degree student at MIT Sloan and the Harvard Kennedy School. He holds a Master’s Degree in economics and previously worked in both the public and private sector in finance. He is co-president of the MIT Sloan Finance and Policy Club.

This is your fund manager’s secret weapon to fight high-frequency traders

See the original post on MarketWatch here>>

Mutual-fund and other asset managers trying to get the best price on a stock purchase or sale face a formidable challenge from fast-moving high-frequency traders — but managers are not defenseless.

To be sure, it’s difficult to execute large trades when HFTs deploy sophisticated pattern-recognition software in search of order-flow information that they can use to their advantage. When an asset manager unintentionally leaves footprints that tip its hand to these HFTs, the price is often impacted to the detriment of the asset manager.

So what can an asset manager do to prevent this from happening? By answering this question, we can help institutional investors improve their execution, reduce transaction costs, and ultimately deliver better investment returns.

In a recent study, my colleague and I looked into this issue. Our goal was to provide a realistic analysis of the strategic interaction between investors trading for fundamental reasons, such as pension funds, mutual funds, and hedge funds, and traders seeking to exploit leaked order-flow information, such as certain types of HFTs.

We find that asset managers have a powerful weapon against HFTs that exploit order flow information: Randomness.

Here is a typical scenario to show how this works: An asset manager legally discovers better information of a stock than the market does and trades to exploit that information. After the order is filled, a “back-runner” legally observes the institution’s filled order. The back-runner could be an HFT that uses sophisticated pattern recognition software to determine the existence of a large investor trying to buy or sell. The back-runner then competes with the institution by using that order-flow information to its advantage.

In this situation, the HFT has no crystal ball; it cannot see an order before it reaches the market. Instead, the HFT is watching the market all the time looking for patterns that indicate the intention of a large investor, as that suggests that a particular stock is over or undervalued. When the HFT sniffs out a large investor, it can become a competitor with its own transactions, driving the stock price up or down.

The best response of institutional investors is to introduce some “noise,” or the appearance of randomness, to cover their tracks. For example, if the real goal is to buy 100,000 shares, then the investor could include some sells in the mix of transactions to essentially play hide-and-seek with the HFT and mask its true intent. It also could change its buying pattern so that the number of shares per trade and the timing of the trades appear random. This use of randomization makes it riskier for the back-running HFT, as it can’t be certain of the institutional investor’s real plans or even its presence.

The takeaway from our research is that asset managers can outfox “back-running” HFTs by making their trades appear random to avoid detection. Although it may seem to be an inefficient way to complete a large trade, randomization will benefit investors in the long run by limiting the back-running behavior that increases investors’ price impacts. Reduced transaction costs not only increase investment returns, but also incentivize asset managers to invest in more fundamental price discovery.

Haoxiang Zhu is an assistant professor of finance at the MIT Sloan School of Management. He is the coauthor of “Back-Running: Seeking and Hiding Fundamental Information in Order Flows,” with Liyan Yang of the University of Toronto.

How much do natural disasters really cost corporate America?

See the original article posted on Fortune here>>

Sales growth of supplier firms directly hit by a natural disaster drops by around five percentage points, according to a study.

As spring begins in New England after record-setting snowfall this winter, the economic consequences of natural disaster are a common topic of discussion. We know it will have a big impact on New England, but will it affect other parts of the country? If so, who will be affected and how much?

We hear these types of questions a lot following any type of disaster whether it is weather related or not. For instance, the fear of contagion was at the root of the decision of the U.S. government to bailout Chrysler and GM in 2008. Surprisingly, Ford’s CEO Allan Mullaly himself advocated the bailout of his two competitors in front of a U.S. Senate committee, as he recognized that “the collapse of one or both of our domestic competitors would threaten Ford because we have 80% overlap in supplier networks and nearly 25% of Ford’s top dealers also own GM and Chrysler franchises.”

So the key question is: When a shock — like a natural disaster or financial crisis — hits a supplier, what really happens to the firms in that network? Is there a spillover effects? To address this issues, we studied the transmission of shock caused by natural disasters in the past 30 years in the U.S. within the supply chain of publicly traded firms. We analyzed a sample of 2000 large corporations and 4000 of their suppliers.

You’d think that at a firm level, shocks could easily be absorbed in production networks. Even when they face disruptions, firms are supposedly flexible enough to change their production mix or switch to other suppliers. However, our study showed that shocks cause significant effects in production networks.

First, we found that the sales growth of supplier firms directly hit by a natural disaster drops by around five percentage points. The customers of these suppliers are also disrupted, as their sales growth drops on average by two percentage points when one of their suppliers is hit by a natural disaster. This is a strikingly large effect. We also found evidence that customers with lower inventories are the most exposed to disruption affecting their suppliers.

Then we investigated whether the drop in firms’ sales caused by supply disruptions translates into value losses. Our study shows that supply disruptions caused a 1% drop in customer firms’ equity value. This effect is almost twice as large when the disrupted supplier is a specific supplier, meaning a supplier producing differentiated goods, generating high R&D expenses, or holding patents.

Finally, we looked at whether the shock originating from one supplier propagates to other suppliers of the same firm, which were not directly affected by the natural disaster. You might expect that firms would continue to buy from other suppliers outside of the natural disaster zone, or that the other suppliers would find alternative buyers. However, our research shows large negative spillovers of the initial shock to other suppliers. We found that other suppliers of a main customer see a drop in sales growth by roughly three percentage points.

These findings highlight the presence of strong interdependencies in production networks. In other words, production networks matter. When one of your suppliers or customers is experiencing a negative event, there will be important implications for you.

This research likely applies to contexts beyond natural disasters, such as strikes and financial recessions. More generally, shocks that originate in one part of the economy can be amplified because of the strong interconnections between firms.

As for the economic impact of the weather in New England this winter, there is good reason to think that the effects will be propagated to other parts of the economy through relationships that Massachusetts firms have with customers all over the country. But who will be affected and how much? We’ll have to wait and see.

Jean-Noel Barrot is assistant professor of finance at the MIT Sloan School of Management. Julien Sauvagnat is a postdoctoral researcher at ENSAE-CREST and is expected to join Bocconi University in September 2015.