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American Economic Review: Vol. 103 No. 3 (May 2013)

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Can Financial Engineering Cure Cancer?

Article Citation

Fagnan, David E., Jose Maria Fernandez, Andrew W. Lo, and Roger M. Stein. 2013. "Can Financial Engineering Cure Cancer?" American Economic Review, 103(3): 406-11.

DOI: 10.1257/aer.103.3.406

Abstract

Traditional financing sources such as private and public equity may not be ideal for investment projects with low probabilities of success, long time horizons, and large capital requirements. Nevertheless, such projects, if not too highly correlated, may yield attractive risk-adjusted returns when combined into a single portfolio. Such "megafund" portfolios may be too large to finance through private or public equity alone. But with sufficient diversification and risk analytics, debt financing via securitization may be feasible. Credit enhancements (i.e., derivatives and government guarantees) can also improve megafund economics. We present an analytical framework and illustrative empirical examples involving cancer research.

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Authors

Fagnan, David E. (MIT)
Fernandez, Jose Maria (MIT)
Lo, Andrew W. (MIT and AlphaSimplex Group)
Stein, Roger M. (MIT and Moody's Corporation)

JEL Classifications

G10: General Financial Markets: General (includes Measurement and Data)
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
L65: Chemicals; Rubber; Drugs; Biotechnology
O31: Innovation and Invention: Processes and Incentives


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