John Birge
University of Chicago Booth School of Business
Title
Default and Recovery Risk Premia and Nonlinear Asset Pricing Models
Abstract
Asset pricing models often focus on linear relationships between a set of factors (e.g., market, size, value, profitability, and investment) and expected equity returns. Equities, however, effectively call options on a firm’s value exceeding its debt and naturally have a nonlinear relationship with the value of the underlying firm asset. This relationship links the equity’s return to the expected default. This talk will describe how this relationship can be uncovered using credit default swap (CDS) spreads and how the forward-looking nature of CDS spreads can overcome the difficulties of using lagging information such as credit ratings. Empirical results for individual firm returns will illustrate the explanatory power of the resulting nonlinear asset-pricing model.
Bio
John R. Birge is the Hobart W. Williams Distinguished Service Professor of Operations Management at the University of Chicago Booth School of Business. He studies mathematical modeling of systems under uncertainty, especially for maximizing operational and financial goals using the methodologies of stochastic programming and large-scale optimization. He has applied his work in a variety of contexts and industries including energy, finance, health care, manufacturing, and transportation. He has published widely and is the recipient of multiple awards and honors including INFORMS Fellow, IISE Medallion Award, and election to the National Academy of Engineering.