Story in the School of Business
Finance professor pinpoints the cost of doing business with intermediary agencies and has his work published.
In today's markets when an investor wants to buy or sell, the deal goes through right away. That's because intermediary organizations, such as banks and brokerage houses, are willing to hold securities or other financial instruments until they can be turned around—so there's always an immediate buyer or seller.
There's a cost to this service, of course. SCU Finance Professor George Chacko, at the Leavey School of Business, has come up with a model to determine what this service is worth.
"Everybody understands what's going on in this sort of transaction," says Chacko. "But nobody has modeled it before. That's what we've tried to do."
Chacko is first author of a paper on the topic, along with two colleagues, Jakub W. Jurek and Erik Stafford, from Harvard Business School, to be published by the Journal of Finance.
A familiar example of business intermediaries is the grocery store. "If you go to the store to buy a tube of toothpaste," Chacko says, "you're paying a premium to the store for buying the toothpaste and holding it until you come in for it."
Customers are willing to pay that premium because it would be inconvenient to deal directly with the manufacturers. But it's hard to place an objective value on that premium, which is one reason the same tube of toothpaste sells for different prices at different stores.
Chacko started thinking about the lack of formula to determine what the intermediary holding service is worth. As managing partner of a hedge fund, it's a question he's very interested in.
"This was something that has always been done by hunch and experience, but I wanted a more formal and rigorous way of doing it," he says.