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UPCOMING & ONGOING investors to use to control their exposure to sovereign default. However, they see a flaw in the CDS model that leaves investors only partially covered in the event of a sovereign debt restructuring. Finance professor Darrell Duffie and econom- ics student Mohit Thukral explain that current CDS contracts pay buyers based only the price of the sover- eign's outstanding bonds, even if the sovereign has just exchanged those legacy bonds—defined as bonds held for a long period of time—for new bonds with lesser face value. CDS payouts ignore this additional loss to the bondholder. In the model Duffie and Thukral propose, CDS pay- outs would tie the face value of the new bonds to the face value of the old bonds. That is, if a country exchanged a legacy bond with a face value of €100 for a new bond with a face value of €50, the CDS would recognize the drop in value as an actual loss to the bondholder. This model, the authors write, would allow for better sover- eign risk management and CDS pricing that more accu- rately reveals sovereign default risk. "The current design of credit derivatives is of questionable value for managing the risk of sov- ereign default, which is a significant issue given the current stresses on the eurozone," says Duffie. "Unless there is a change in the contract design, such as the one we propose, investors could be left with- out an effective tool for controlling their exposure to sovereign default." That situation, he adds, would make investors even more hesitant to purchase sov- ereign bonds in the first place, which could threaten market stability. Furthermore, this new CDS model could help allevi- ate a problem that arose with Greek debt restructur- ing, in which the country exchanged old bonds for new. As a result, bondholders of Greek debt received a combination of new bonds, GDP linked securities, and private sector involvement (PSI) payment notes, which are obligations of the European Financial Stability Facility. Protection payouts ignored that element of the package. "The goal is to ensure that the CDS market remains an effective means for bond investors to manage risk," concludes Duffie. "Protection payments must be reli- ably correlated with actual bondholder losses." "Redesigning Credit Derivatives to Better Cover Sovereign Default Risk" is available at ssrn.com/ abstract=2050499. n REAL ESTATE FINANCE FOCUS New York University's Stern School of Business has opened its Center for Real Estate Finance Research to explore areas such as residential mortgage finance reform and how real estate performs as a large asset class in portfolio management. The center also will support Stern's efforts to expand its real estate curriculum. n EXPLORING RATIONALITY Nick Chater, head of the Behavioural Science Group at the Warwick Business School in the United Kingdom, has received a European Research Council Advanced Grant of €2 million to study the cogni- tive and social foundations of human rationality and behavior. The goal, says Chater, is to explore how much human thought and behavior is based on reason and how much of it is based on brain mechan- ics. Chater notes that his findings could have important implications for business and politics, where people too often assume that humans are "perfectly rational agents." n R&D IN HIGHER ED Margaret Dalziel, associ- ate professor of innovation and entrepreneurship at the University of Ottawa's Telfer School of Management in Canada, recently received a CAN$17,500 grant from the Social Sciences and Humani- ties Research Council and Industry Canada. Dalziel is using the grant to examine international best practices in measuring the impact of invest- ments in higher education research and development. INSIGHTS ON BUYERS The University of Chicago Booth School of Business and the research firm Nielsen have partnered to study the history of consumer purchasing behavior in the U.S. Tenure-track professors and doctoral students from accredited colleges and universities in the U.S. can apply for access to historical consumer panel information that Nielsen gathered from 40,000 to 60,000 U.S. households between 2004 and 2009. The longitudinal data will make possible research studies on branding and consumer behavior over time, across multiple retail channels and consumer segments. The partners also are working to release retail scanner purchase information. For information, visit research.chicagobooth.edu/nielsen. BizEd July/August 2012 49