The regulatory approval process for new therapies involves costly clinical trials that can span multiple years. When valuing a candidate therapy from a financial perspective, industry sponsors may terminate a program early if clinical evidence suggests market prospects are not as favorable as originally forecasted. Intuition suggests that clinical trials that can be modified as new data are observed, i.e., adaptive trials, are more valuable than trials without this flexibility. To quantify this value, we propose modeling the accrual of information in a clinical trial as a sequence of real options, allowing us to systematically design early-stopping decision boundaries that maximize the economic value to the sponsor. In an empirical analysis of selected disease areas, we find that when a therapy is ineffective, our adaptive financing method can decrease the expected cost incurred by the sponsor in terms of total expenditures, number of patients, and trial length by up to 46%. Moreover, by amortizing the large fixed costs associated with a clinical trial over time, financing these projects becomes less risky, resulting in lower costs of capital and larger valuations when the therapy is effective.
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We develop a new cryptographic platform called SCRAM (Secure Cyber Risk Aggregation and Measurement) that allows multiple entities to compute aggregate cyber-risk measures without requiring any entity to disclose its own sensitive data on cyberattacks, penetrations, and losses. Using the SCRAM platform, we present results from two computations in a pilot study with six large private-sector companies: (1) benchmarks of the adoption rates of 171 critical security measures and (2) links between monetary losses from 49 security incidents and the specific sub-control failures implicated in each incident. These results provide insight into problematic cyber-risk-control areas that need additional scrutiny and/or investment, but in a completely anonymized and privacy-preserving way.

We use a global survey of over 22,400 individual investors, 4,892 financial advisors, and 2,060 institutional investors between 2015 and 2017 to elicit their asset allocation behavior and risk preferences. We find substantially different behaviors among these three groups of market participants. Most institutional investors exhibit highly contrarian reactions to past returns in their equity allocations. Financial advisors are also mostly contrarian; a few of them demonstrate passive behavior. However, individual investors tend to extrapolate past performance. We use a clustering algorithm to partition individuals into five distinct types: passive investors, risk avoiders, extrapolators, contrarians, and optimistic investors. Across demographic categories, older investors tend to be more passive and risk averse.

We provide a critical review of macroeconomic models used for monetary policy at central banks from a finance perspective. We review the history of monetary policy modeling, survey the core monetary models used by major central banks, and construct an illustrative model for those readers who are unfamiliar with the literature. Within this framework, we highlight several important limitations of current models and methods, including the fact that local-linearization approximations omit important nonlinear dynamics, yielding biased impulse-response analysis and parameter estimates. We also propose new features for the next generation of macrofinancial policy models, including: a substantial role for a financial sector, the government balance sheet and unconventional monetary policies; heterogeneity, reallocation, and redistribution effects; the macroeconomic impact of large nonlinear risk-premium dynamics; time-varying uncertainty; financial sector and systemic risks; imperfect product market and markups; and further advances in solution, estimation, and evaluation methods for dynamic quantitative structural models.

Current business models have struggled to support early-stage drug development. In this paper, we study an alternative financing model, the megafund structure, to fund drug discovery. We extend the framework proposed in previous studies to account for correlation between phase transitions in drug development projects, thus making the model a more realistic representation of biopharma research and development. In addition, we update the parameters used in our simulation with more recent estimates of the probability of success (PoS). We find that the performance of the megafund becomes less attractive when correlation between projects is introduced. However, the risk of default and the expected returns of the vanilla megafund remain promising even under moderate levels of correlation. In addition, we find that a leveraged megafund outperforms an equity-only structure over a wide range of assumptions about correlation and PoS.

Advances in financial technology have made tax-loss harvesting more feasible for retail investors than such strategies were in the past. We evaluated the magnitude of this “tax alpha” with the use of historical data from the CRSP monthly database for the 500 securities with the largest market capitalizations from 1926 to 2018. Given long-term and short-term capital gains tax rates of 15% and 35%, respectively, we found that a tax-loss-harvesting strategy yielded a before-transaction-cost tax alpha of 1.08% per year for our sample period. When the strategy was constrained by the “wash sale rule,” the tax alpha decreased from 1.08% per year to 0.82% per year.

Advances in biomedical research have created significant opportunities to bring to market a new generation of therapeutics. However, early-stage assets often face a dearth of funding, as they have a high risk of failure and significant development costs. Historically, this has been particularly true for assets intended to treat rare diseases, where market sizes are often too small to attract much attention and funding. Venture philanthropy (VP) — which, for the purpose of this paper, is defined as a model in which nonprofit, mission-driven organizations fund initiatives to advance their objectives and potentially achieve returns that can be reinvested toward their mission — offers an alternative to traditional funding sources like venture capital or the public markets. Here we highlight the Cystic Fibrosis (CF) Foundation, widely considered to be the leading VP organization in biotech, which facilitated the development of Kalydeco, the first disease-modifying therapy approved to treat cystic fibrosis. We evaluate the CF Foundation’s example, including its agreement structures and strategy, explore the challenges that other nonprofits may have in adopting this strategy, and draw lessons from the CF Foundation for other applications of VP financing.

The prediction of clinical outcomes for patients with cancer is central to precision medicine and the design of clinical trials. We developed and validated machine-learning models for three important clinical end points in patients with advanced non–small-cell lung cancer (NSCLC)—objective response (OR), progression free survival (PFS), and overall survival (OS)—using routinely collected patient and disease variables. We aggregated patient-level data from 17 randomized clinical trials recently submitted to the US Food and Drug Administration evaluating molecularly targeted therapy and immunotherapy in patients with advanced NSCLC. To our knowledge, this is one of the largest studies of NSCLC to consider biomarker and inhibitor therapy as candidate predictive variables. We developed a stochastic tumor growth model to predict tumor response and explored the performance of a range of machine-learning algorithms and survival models. Models were evaluated on out-of-sample data using the standard area under the receiver operating characteristic curve and concordance index (C-index) performance metrics. Our models achieved promising out-of-sample predictive performances of 0.79 area under the receiver operating characteristic curve (95% CI, 0.77 to 0.81), 0.67 C-index (95% CI, 0.66 to 0.69), and 0.73 C-index (95% CI, 0.72 to 0.74) for OR, PFS, and OS, respectively. The calibration plots for PFS and OS suggested good agreement between actual and predicted survival probabilities. In addition, the Kaplan-Meier survival curves showed that the difference in survival between the low- and high-risk groups was significant (log-rank test P, .001) for both PFS and OS. Biomarker status was the strongest predictor of OR, PFS, and OS in patients with advanced NSCLC treated with immune checkpoint inhibitors and targeted therapies. However, single biomarkers have limited predictive value, especially for programmed death-ligand 1 immunotherapy. To advance beyond the results achieved in this study, more comprehensive data on composite multiomic signatures is required.

We define long shots as investment projects with four features: (1) low probabilities of success; (2) long gestation lags before any cash flows are realized; (3) large required up-front investments; and (4) very large payoffs (relative to initial investment) in the unlikely event of success. Funding long shots is becoming increasingly difficult—even for high-risk investment vehicles like hedge funds and venture funds—despite the fact that some of society’s biggest challenges such as cancer, Alzheimer’s disease, global warming, and fossil-fuel depletion depend critically on the ability to undertake such investments. We investigate the possibility of improving financing for long shots by pooling them into a single portfolio that can be financed via securitized debt, and examine the conditions under which such funding mechanisms are likely to be effective.