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Can Financial Engineering Cure Cancer?

Author

Listed:
  • David E. Fagnan
  • Jose Maria Fernandez
  • Andrew W. Lo
  • Roger M. Stein

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.

Suggested Citation

  • David E. Fagnan & Jose Maria Fernandez & Andrew W. Lo & Roger M. Stein, 2013. "Can Financial Engineering Cure Cancer?," American Economic Review, American Economic Association, vol. 103(3), pages 406-411, May.
    • Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:406-11
    Note: DOI: 10.1257/aer.103.3.406
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    Citations

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    Cited by:

    1. Ewens, Michael & Nanda, Ramana & Rhodes-Kropf, Matthew, 2018. "Cost of experimentation and the evolution of venture capital," Journal of Financial Economics, Elsevier, vol. 128(3), pages 422-442.
    2. Debonneuil, Edouard & Loisel, Stéphane & Planchet, Frédéric, 2018. "Do actuaries believe in longevity deceleration?," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 325-338.
    3. David Blake & Marco Morales & Enrico Biffis & Yijia Lin & Andreas Milidonis, 2017. "Special Edition: Longevity 10 – The Tenth International Longevity Risk and Capital Markets Solutions Conference," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(S1), pages 515-532, April.
    4. Christopher J. Neely, 2015. "Financial Engineering Versus Cancer," Economic Synopses, Federal Reserve Bank of St. Louis, issue 18.
    5. Camille Loir & Bertrand Groslambert, 2023. "The impact of innovation on the profitability of the biotech industry," Economics Bulletin, AccessEcon, vol. 43(3), pages 1286-1297.
    6. Onur Bayar & Thomas J. Chemmanur & Mark H. Liu, "undated". "How to Motivate Fundamental Innovation: Subsidies versus Prizes and the Role of Venture Capital," Working Papers 0175fin, College of Business, University of Texas at San Antonio, revised 06 Jan 2016.
    7. John Liechty & Stefan Wuyts, 2021. "'If I had a hedge fund, I would cure diabetes': endogenous mechanisms for creating public goods," SN Business & Economics, Springer, vol. 1(10), pages 1-18, October.
    8. Lo, Andrew W. & Thakor, Richard T., 2023. "Financial intermediation and the funding of biomedical innovation: A review," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    9. Ramana Nanda & Matthew Rhodes-Kropf, 2017. "Financing Risk and Innovation," Management Science, INFORMS, vol. 63(4), pages 901-918, April.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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