Fall 2004 Finance 4366 Weblog

Prediction markets - who will win the Nobel Prize?

Not only do we have prediction markets for politics; there are also prediction markets for economic scholarship; specifically, who will win the Nobel prize in economics (to be announced this coming Monday)?  The current leaders are Edward Prescott (Minneapolis Fed/Arizona State University), Robert Barro (Harvard University/Hoover Institution), and Paul Krugman (Princeton).  It will be interesting to see how accurately these markets predict outcomes!

Update on Flu Vaccination at Baylor...

Here's the latest information (sent today to all Baylor faculty and staff) from Dr. Mark Schwartze (Medical Director,  Baylor Health Services) concerning Baylor's flu vaccination policy:

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Due to the shortage of injectable flu vaccine, The Center for Disease Control has advised the vaccine to be prioritized for those individuals at high risk for severe complications to the influenza virus.

High risk individuals include:

• Adults 65 years of age or older
• Residents of long-term care facilities or nursing homes that house persons with chronic medical conditions
• Anyone with a long-term health problem such as, heart disease, kidney disease, asthma and diabetes
• Anyone with a weakened immune system due to HIV/AIDS, long-term treatment with drugs such as steroids and cancer treatments
• Anyone 6 months to 18 years of age on long-term aspirin treatment
• Pregnant women
• Children 6 to 23 months of age

The Baylor Health Center will follow these guidelines. The flu clinics will be held as previously scheduled. The Flu Clinic schedule for October is listed under Featured Events on the events calendar on the Baylor home page, or the Health Services website: http://www.baylor.edu/health_center/index.php?id=21347.

If there is flu vaccine left after the scheduled flu clinics, it will be made available for the Baylor community through the Baylor Health Center.

Mark Schwartze, M.D.
Medical Director
Baylor Health Services

Flu Clinics Schedule

Unlike the rest of the United States, Baylor does not face a shortage of flu vaccine (see my earlier entry entitled "Impact of the tort system on flu vaccine availability in the United States") which explains why this is the case.  Anyway, here's the schedule (by the way, the cost of the vaccine is $15):

Impact of the tort system on flu vaccine availability in the United States

It is well known that the U.S. tort system undermines incentives for U.S. pharmaceutical corporations to bring innovative, yet risky drugs to market.  This is particularly apparent in the case of vaccines against infectious diseases, where the "tort tax" is by far and away the most significant cost component in the manufacturing and distribution of vaccines.  With this in mind, it is interesting to consider the consequences for the United States of today's decision by the UK's Medicines and Healthcare Products Regulatory Agency (MHRA) to suspend Chiron Corporation's (NASDAQ:CHIR) license to manufacture influenza virus vaccine in its Liverpool facility, which in turn will prevent the company from releasing any of the product during the 2004-2005 influenza season.  This doesn't seem like it should be that big of a deal until one considers the fact that the United States was counting on U.S.-based Chiron Corporation to provide roughly 1/2 of its total flu vaccine for the upcoming flu season.  Now that Chiron is out of the picture, the only supply source for flu vaccine for the entire United States is a French company called Aventis Corporation (NYSE:AVE), and Aventis has made it quite clear that it cannot possibly scale its manufacturing to meet the needs of the United States during the upcoming flu season. (Fortunately for Baylor University students, faculty and staff, Baylor was prescient enough this past spring to contract with Aventis to provide an adequate vaccine supply this fall for the Baylor community).

Needless to say, it seems pathetic that only two (one U.S., the other French) corporations are willing to accept the risk of being sued for products liability by marketing flu vaccines in the United States.  Unfortunately, this situation has created a serious capacity constraint which in turn has given rise to a potentially serious public health problem for the United States which is now looming.  According to the Centers for Disease Control in Atlanta, GA, influenza typically accounts for as many as 140,000 hospitalizations and 40,000 deaths annually in the United States.  Since these are the statistics which obtain under more "normal" (adequately supplied) flu vaccine scenarios, one can only wonder how many more thousands of people will likely die during the upcoming flu season because the highly dysfunctional US tort liability system has persuaded most companies to not bother with trying to compete in the market for flu vaccines!

Midterm exam #1 and key

I have posted midterm exam #1 and key on the class website (go to the class home page, click on the problem sets button, then look under the Other Documents Section, part 3, first two bullet points).  The direct links to these documents are:
 
1. Exam #1: http://129.62.162.249/ofod/midterm1_fall2004.pdf
2. Exam #1 Key: http://129.62.162.249/ofod/midterm1_fall2004_solutions.pdf
 
Anyway, please look these over and I can answer any questions you might have about the exam (other than your exam grade, which won't be available until next Tuesday) at the beginning of class on Thursday.

Various housekeeping issues related to the first midterm exam on Tuesday, October 5

Here are some helpful hints concerning the first FIN 4366 midterm exam which will be given during class this coming Tuesday, October 5.

The exam consists of a total of 4 problems, and I only require that you complete 3 of the 4 problems.  The maximum points possible for each problem will be 32 points. (You get 4 points for showing up and writing your name on the exam booklet :)). At your option, you may also choose to complete all 4 problems, in which case I will count the 3 on which you produce the highest scores.  Here's what you can expect to see on Tuesday's exam:

• One problem that compares and contrasts the stochastic dominance, mean variance, and expected utility models.
• On asset allocation problem (conceptually similar to the third problem on problem set #3).
• Two problems on topics such as certainty equivalents, using Arrow-Pratt risk aversion measures to compare the degree of risk aversion for different consumers, the effect of changes in initial wealth upon the degree of risk aversion, etc.

Let me offer some practical "risk management advice" concerning taking the exam. The first thing you should do when you get the booklet is open it up, skim though the exam, and select the 3 problems which you feel you have the best chance of answering. It also makes sense to assess the level of difficulty of these 3 problems, and get off to a good start by really "nailing" the easiest problem. This strategy will help you build confidence for the remainder of the exam period.

I will not be at the exam on Tuesday, so office hours that day are canceled. In the meantime, if you have any questions or concerns feel free to either email me (at the address James_Garven@baylor.edu) or "IM" me (my AOL instant messenger screen name is "drgarven").

Best of luck on the exam, and I will look forward to seeing y'all next Thursday.