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A meeting of minds: Faculty Present Research to Business Journalists

Want to bet on a "bubble?" Then you might want to pay attention to the Johnson School's Robert Jarrow, Ronald P. and Susan E. Lynch Professor of Investment Management and professor of finance. Jarrow and two other faculty members sat down with members of the national business press in New York City in October to share their latest research and to field questions.

Jarrow began by presenting his ongoing analysis and research on proposed reforms to international bank capitalization regulation, known as Basel II. The journalists, who represented the New York Times, Wall Street Journal, Associated Press, Reuters, and Business Week, among others, engaged him for more than an hour on the complicated regulations and his mathematically based recommendations.

Yet they wouldn't let the professor close without learning more about his research on bubbles. A bubble occurs, Jarrow said, when the value of an instrument is independent of the fundamental value of its future cash flows. Jarrow reached in his wallet to offer an example: a $1 bill.

Money qualifies as a bubble, because it has no future cash flows. It doesn't pay dividends – ever, said Jarrow, whose research seeks to characterize bubbles by a mathematical process. Most instruments do pay dividends, though, and identifying bubbles in them and profiting from those bubbles can be tricky business.

"Was the Internet-stock bubble caused by fundamentals, or by something extraneous and random on the system?" Jarrow said. "If the bubble was caused by fundamentals, regulators can deal with that."

In his presentation, the Parker Center's Sanjeev Bhojraj, associate professor of accounting, put money-making on everyone's mind, as he described his research on how companies manage earnings to beat analysts' forecasts, and the cost-benefit trade-offs of managing earnings to exceed market expectations.

The program ended with a lunch address by Robert H. Frank, Henrietta Johnson Louis Professor of Management and professor of economics, who shared the research behind his upcoming book, Does Rising Inequality Harm the Middle Class?