Newsletter 2021

Section on Finance                Fall 2021

Message from Section Chair

Dear Friends, Students, and Colleagues, 

 

Another challenging year is about to end. The pandemic has been difficult to deal with, but I am optimistic we will see the light at the end of this tunnel. The INFORMS Finance Section has been working intensively to keep the Finance community cohesive and engaged during these difficult times.

 

First, I would like encourage you to reserve the date for the 2021 INFORMS Annual Meeting, if you have not already done so. The meeting will run from October 24 through October 27. The meeting will be held in a hybrid format this year. with all talks available virtually.  The Finance Section has decided to go completely virtual this year due to the continued risks of COVID-19.  Though virtual talks will be pre-recorded, each session of the conference will be followed directly by Live Q&A sessions.  We hope you all join for the same spirited discussions following the talks as in prior years.

 

We have been working closely with our Advisory Board. Our board currently consists of five distinguished practitioners, whose research is highly relevant to the operations of financial systems. Two members of the board, Mark Squillante and Nitin Gaur have kindly agreed to share their thoughts on a number of topics of high importance for our Finance community. See the interview responses below to learn more…

 

I trust we will be able to all meet in person soon, right after these challenging times are behind the curve.

 

Agostino Capponi

Chair of the INFORMS Finance Section.

 

 

Interview

 

We are very pleased to report the interview responses provided by two of the members of our advisory board. Mark and Nitin have shared their thoughts, experience, and expertise to address a number of important challenges faced by members of our Section. Please see it below for their perspectives.

 

MSS: Mark Squillante

Distinguished Research Staff Member and the Manager of Foundations of Probability, Dynamics and Control within Mathematical Sciences at the IBM Thomas J. Watson Research Center

NG:  Nitin Gaur

Founder and Director of  IBM WW Digital Asset  Labs
IBM Financial Sciences, IBM Research

1. What advice would you give to students about entering the field?

MSS: Find what interests you most, learn as much as you can about this and related areas of the field, and start to make your own mark on these areas.  Stay curious and always keep learning.  Think of new ways to address both old and new problems.

NG: stay curious and with an open mind as the industry is still in its infancy

       2. How has your involvement with INFORMS impacted your career?

MSS: One of the main technical communities of my areas of interest, in terms of journals, conferences, networking and so on.

NG: ability to network and connect with leaders and like-minded professionals

MSS: An important shift toward behavioral aspects of the field, and the availability of broader sources of data to support various aspects of the field.

NG: rapid progress in tech leading to Fintech and now Defi

     5. What directions do you see the field moving in the future?

MSS: Continuing to see the above trends grow and expand with increased use of various sources of data supporting the field, from theory to practice.

NG: yet to be seen

      6. Finance isn’t all about options and algorithmic trading.  What new frontiers are promising?

MSS: Behavioral aspects of finance, rigorous methods that exploit data, the role of financial aspects in other areas of INFORMS.

NG: digital Identity and global access to digital securities.

       8. How can students facilitate the transition from academics to industry?

MSS: Learn as much as you can about the industrial aspects of the areas of interest and any specialization thereof. If possible, try to find a mentor from whom you can learn and from whom you can receive guidance along the way.

NG: read, understand and apply and question - everything!!

       9. What can INFORMS do that would increase your participation in the organization?

NG: bring the industry leadership and academia together on meaningful collaboration.

NG: -- changes the way we work.=!

 

Business Meeting Information

 

The Business Meeting will be held on Monday, October 25 from 7:30-8:30PM Eastern Time through Zoom.  The Business Meeting can be accessed directly by following the link: https://zoom.us/j/94925108535?pwd=cDJWL21FM1hJcjN1U0xhTGhvMUJ5QT09 or by using the Meeting ID: 949 2510 8535 and Password: AM2021

 

 

 

Title and Abstracts of Finalists for the INFORMS Student Paper Award Competition

 

The Adoption of Blockchain-Based Decentralized Exchanges

Ruizhe Jia      Columbia University

Abstract: We investigate the market microstructure of Automated Market Makers (AMMs), the most prominent type of blockchain-based decentralized exchanges. We show that the order execution mechanism yields token value loss for liquidity providers if token exchange rates are volatile. AMMs are adopted only if their token pairs are highly correlated, or of high personal use for investors. The adoption of AMMs leads to a surge of transaction fees on the underlying blockchain if exchange rates fluctuate wildly. A pricing curve with higher curvature makes the arbitrage problem less severe but also decreases investors’ surplus. Pooling multiple tokens exacerbates the arbitrage problem. We provide statistical support for our main model implications using transaction-level data of AMMs.

 

While Stability Lasts: A Stochastic Model of Stablecoins

Ariah Klages-Mundt     Cornell University

Abstract: The `Black Thursday' crisis in cryptocurrency markets demonstrated deleveraging risks in over-collateralized stablecoins. We develop a stochastic model that helps explain such crises. In our model, the stablecoin supply is decided by speculators who optimize the profitability of a leveraged position while incorporating the forward-looking cost of collateral liquidations, which involves the endogenous price of the stablecoin. We formally characterize regimes that are interpreted as stable and unstable for the stablecoin. We prove bounds on quadratic variation and the probability of large deviations in the stable domain and we demonstrate distinctly greater price variance in the unstable domain. We formally characterize a deflationary deleveraging spiral by means of a submartingale. These deleveraging spirals, which resemble short squeezes, lead to faster collateral drawdown (and potential shortfalls) and are accompanied by higher price variance, as experienced on Black Thursday. We also demonstrate `perfect' stability results in idealized settings and discuss mechanisms which could bring realistic settings closer to such idealized stable settings.

 

Risk-Sensitive Optimal Execution via a Conditional Value-at-Risk Objective

Seungki Min Columbia University

Abstract: We consider an optimal execution problem in a continuous-time setting under which a trader wants to liquidate an asset while minimizing the conditional value-at-risk (CVaR) of implementation shortfall given a target quantile. The trader must determine the trading rate so as to balance transaction costs with risk. We interpret this optimization problem as a continuous-time stochastic game against an adversary who controls a martingale process to distort the likelihood of each sample path. As a result, we obtain a closed-form expression for the optimal policy, which is price-adaptive and demonstrates “aggressive-in-the-money”. Our analysis also shows that the optimal adaptive policy can reduce costs by 5%-15% compared to the best static schedule.

 

Blockchain-Enabled Deep-Tier Supply Chain Finance

Yunzhe Qiu      Washington University in St. Louis

Abstract: For many supply chains, deep-tier suppliers, due to their small sizes and lack of access to capital, are most vulnerable to disruptions. In this paper, we study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk and compare the traditional system (deep-tier financing with limited visibility) with the blockchain-enabled system (financing with perfect visibility). The main goal of this paper is to shed light on how blockchain adoption impacts agents’ operational and financial decisions as well as profit levels in a multitier supply chain. Traditionally, because of the limited visibility in the deep-tiers, powerful downstream manufacturers’ financing schemes offered to their immediate upstream suppliers are not effective in instilling capital into the deep-tiers. Advancements in blockchain technology improve the supply chain visibility and enable the manufacturer to better devise deep-tier financing to improve supply chain resilience. We develop a three-tier supply chain model and take a game-theoretic approach to understand a financially constrained supply chain’s optimal operational and financial strategies. We find that the improved supply chain visibility (by blockchain adoption) always benefits the manufacturer by enabling her to induce the desired operational risk-mitigation investment from the tier-1 and tier-2 suppliers. However, depending on the directional change in the operational risk- mitigation investment, which depends on the suppliers’ initial wealth levels, the tier-1 and tier-2 suppliers can be worse-off. The “win-win-win” outcome takes place only when all operational risk-mitigation measures increase, that is, when the tier-1 supplier is severely capital constrained but the tier-2 supplier is moderately capital constrained. Comparing the two types of blockchain-enabled deep-tier financing schemes, adjacent- tier delegated financing versus cross-tier direct financing, the manufacturer strictly prefers the latter. In contrast, the tier-1 supplier strictly prefers the former because the former endows the tier-1 with financial leverage over the manufacturer. The tier-2 supplier prefers the latter only when the emergency source is expensive. Our insights help firms assess opportunities and challenges associated with enhancing supply chain visibility via blockchain adoption.

 

Annual Meeting Schedule Overview

The Finance Section is hosting 15 sessions this year including the session for the Student Paper Award Finalists.  Sessions will take place throughout the conference from Sunday, October 24 through Wednesday, October 27.  In addition to our usual focus on financial engineering and financial mathematical problems related to pricing, risk, and portfolio selection, this year we are hosting numerous sessions focused on machine learning in finance and financial technology.  A general overview of the schedule is as follows:

Session Date	Session title
Sunday, October 24	Finance Student Paper Competition
Sunday, October 24	Big Data Finance
Sunday, October 24	Machine Learning Algorithm and Theory in Stochastic Control and Games
sunday, October 24	Machine Learning in Finance
Monday, October 25	Financial Risk Modeling and Fintech
Monday, October 25	Digital Finance
Monday, October 25	Green Finance
Monday, October 25	Green Finance 2
Tuesday, October 26	Recent Developments on Modeling Financial Systemic Risk
Tuesday, October 26	Systemic Risk and Network Models in Finance
Tuesday, October 26	Central Counterparties in OTC Markets
Tuesday, October 26	Algorithmic Stock Trading
Wednesday, October 27	Equilibrium Asset Pricing
Wednesday, October 27	New Methods in Asset Pricing and Allocation
Wednesday, October 27	Equilibrium and Games in Mathematical Finance