Can Financial Engineering Cure Cancer?
AbstractTraditional 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.
CitationFagnan, 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
- 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