Research Interests: economics, finance, operations
Links: Personal Website
Gerry Tsoukalas is an assistant professor at the Wharton School at the University of Pennsylvania, teaching the core MBA class in Business Analytics, as well as graduate and undergraduate-level electives in mathematical modeling for finance.
His research interests lie at the interface of operations, economics and finance. His work focuses on developing theoretical models and data-driven decision-making tools to study how firms are/should be financing their operations. Specific areas of application include supply chain financing and portfolio optimization, and more recently, innovative funding platforms such as crowdfunding, blockchain and ICO’s (Initial Coin Offerings). His work has appeared in leading academic journals, including Operations Research and Management Science. He serves on the editorial board of Management Science, as an Associate Editor.
Professor Tsoukalas completed his undergraduate studies in France, receiving degrees in Physics from the University of Paris, and Aeronautical Engineering from the Institut Supérieur de l’Aéronautique et de l’Espace-Supearo (2005). He completed his graduated studies in the US, receiving a Masters in Aeronautics & Astronautics from MIT (2007) and a PhD in Economics & Finance from the Management Science & Engineering Department at Stanford University (2009-2013). He was also previously a doctoral scholar at the MIT Operations Research Center (2011-2012).
Professor Tsoukalas has experience working with a variety of firms in the financial services and tech industries. Previously, He was a structured products trader at Morgan Stanley in London (2007-2009). He has also consulted for and advised several startups, proprietary investment firms and hedge funds, including EvA Funds (2010-2011), and Weiss Asset Management (2012-2013), and has held stints in several international banks, including Barclays Capital (2006) and Societe Generale (2005).
Jiri Chod, Trichakis Nikos, Gerry Tsoukalas, Mark Weber, Henry Aspegren (Under Review), Blockchain and the Value of Operational Transparency for Supply Chain Finance.
Abstract: We examine how blockchains, which were originally designed to provide verifiability of digital goods transactions, can be ported to provide verifiability of physical goods transactions for supply chains. We identify some of the unique implementation challenges and propose ways to mitigate them. To exemplify, we describe an open-source blockchain platform we developed and one of its use cases in agricultural supply chains. We then develop a theory showing how the proposed blockchain-enabled verifiability of physical goods transactions can be leveraged by high-quality firms to signal their operational capabilities through their upstream inventory orders, and thereby finance their supply chain operations more efficiently. Although signaling is in some cases possible even in the absence of blockchain technology, we show that it comes at the cost of larger operational distortions in equilibrium. Our theory suggests that the potential benefits of blockchain adoption in supply chains include lower operational distortions and financing costs. The benefits would be greatest for firms procuring perishable and/or illiquid input inventory, and those facing considerable information asymmetry vis-a-vis their financiers, SMEs and startups in particular.
Elena Belavina, Simone Marinesi, Gerry Tsoukalas (Under Revision), Designing Crowdfunding Platform Rules to Deter Misconduct.
Abstract: Lacking credible rule enforcement mechanisms to punish entrepreneurial misconduct, existing reward-based crowdfunding platforms can leave campaign backers exposed to two sources of risk: the risk that entrepreneurs run away with backers' money (funds misappropriation) and the risk of product misrepresentation (performance opacity). In contrast to prior work, which has mainly focused on studying the first, we examine the adverse consequences of both. We show that not only do both risks have a material impact on crowdfunding efficiency, but they cannot even be analyzed in isolation: rather, their joint presence leads to complex interactions that either dampen or amplify their individual adverse effects. In light of these results, we find that a simple deferred payment scheme with escrow, which the literature argues to be optimal, cannot overcome both sources of friction. We then propose two new designs that Pareto dominate this benchmark. The first design does not rely on escrow, and thus requires less involvement on the part of the platform---but cannot achieve optimality. The second design can restore full efficiency, but requires the platform to take a more active role: we thus provide guidance on how to ease its practical implementation.
Vlad Babich, Simone Marinesi, Gerry Tsoukalas (Under Review), Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?.
Abstract: We study how a new form of entrepreneurial finance - crowdfunding - interacts with more traditional financing sources, such as venture capital (VC) and bank financing. We model a multi-stage bargaining game, with a moral-hazard problem between entrepreneurs and banks, and a double-sided moral-hazard problem between entrepreneurs and VCs. We decompose the economic value of crowdfunding into cash gains or losses, costs of bad investments avoided, and project-payoff probability update. This economic value is generally shared between entrepreneurs and VC investors, benefiting both. In addition, crowdfunding can alleviate the under-investment problem due to moral-hazard frictions. Furthermore, crowdfunding allows some projects to gain access to both VC and bank financing and the competition between those investor classes benefits entrepreneurs. However, competition from other investors reduces value to VC investors, who may walk away from the deal entirely. This can also hurt entrepreneurs who lose out on valuable VC expertise.
Abstract: We develop a new theory of supplier diversification based on buyer risk. When suppliers are subject to the risk of buyer default, buyers may take costly action to signal creditworthiness so as to obtain more favorable terms. But once signaling costs are sunk, buyers sourcing from a single supplier become vulnerable to future holdup. Although ex ante supply base diversification can be effective at alleviating the holdup problem, we show that it comes at the expense of higher upfront signaling costs. We resolve the ensuing trade off and show that diversification emerges as the preferred strategy in equilibrium. Our theory can help explain sourcing strategies when risk in a trade relationship originates from the sourcing firm, e.g., SMEs or startups; a setting which has eluded existing theories so far.
Abstract: We consider the problem of optimally selecting a large portfolio of risky loans, such as mortgages, credit cards, auto loans, student loans, or business loans. Examples include loan portfolios held by financial institutions and fixed-income investors as well as pools of loans backing mortgage- and asset-backed securities. The size of these portfolios can range from the thousands to even hundreds of thousands. Optimal portfolio selection requires the solution of a high-dimensional nonlinear integer program and is extremely computationally challenging. For larger portfolios, this optimization problem is intractable. We propose an approximate optimization approach that yields an asymptotically optimal portfolio for a broad class of data-driven models of loan delinquency and prepayment. We prove that the asymptotically optimal portfolio converges to the optimal portfolio as the portfolio size grows large. Numerical case studies using actual loan data demonstrate its computational efficiency. The asymptotically optimal portfolio's computational cost does not increase with the size of the portfolio. It is typically many orders of magnitude faster than nonlinear integer program solvers while also being highly accurate even for moderate-sized portfolios.
Abstract: We study the relation between operating flexibility and the borrowing costs incurred by a firm financing inventory investments with debt. We find that flexibility in replenishing or liquidating inventory, by providing risk shifting incentives, could lead to borrowing costs that erase more than a third of the firm's value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a mid-season inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple borrowing base covenants successfully restore firm value. Explicitly characterizing optimal covenant tightness for all these cases, we find that better market conditions, such as lower inventory depreciation rate, higher gross margins or increased product demand, are typically associated with tighter covenants. Our results suggest that inventory-heavy firms can reap the full benefits of additional operating flexibility, irrespective of their leverage, by entering simple debt contracts of the type commonly employed in practice. For such contracts to be effective, however, firms with enhanced flexibility and/or operating in better markets must also be willing to abide by more and/or tighter covenants.
Abstract: We analyze the optimal execution problem of a portfolio manager trading multiple assets. In addition to the liquidity and risk of each individual asset, we consider cross-asset interactions in these two dimensions, which substantially enriches the nature of the problem. Focusing on the market microstructure, we develop a tractable order book model to capture liquidity supply/demand dynamics in a multi-asset setting, which allows us to formulate and solve the optimal portfolio execution problem. We find that cross-asset risk and liquidity considerations are of critical importance in constructing the optimal execution policy. We show that even when the goal is to trade a single asset, its optimal execution may involve transitory trades in other assets. In general, optimally managing the risk of the portfolio during the execution process affects the time synchronization of trading in different assets. Moreover, links in the liquidity across assets lead to complex patterns in the optimal execution policy. In particular, we highlight cases where aggregate costs can be reduced by temporarily overshooting one's target portfolio.
Abstract: Credem, an Italian regional bank, grants loans to Parmigiano Reggiano producers and holds the cheese as collateral in its own warehouse during the maturation process, essentially replacing part of the operations for the cheese producers and gaining deep operations expertise.
Abstract: This paper formulates and solves the selection problem for a portfolio of credit swaps. The problem is cast as a goal program that involves a constrained optimization of preference-weighted moments of the portfolio value at the investment horizon. The constraints address collateral and solvency requirements, initial capital, and position limits. The portfolio value takes account of the exact timing of protection premium and default loss payments, as well as any mark-to-market profits and losses realized at the horizon. The multi-moment formulation accommodates the complex distribution of the portfolio value, which is a nested expectation under risk-neutral and actual probabilities. It also generates computational tractability. Numerical results illustrate the features of optimal portfolios.
Gerry Tsoukalas, Peter Belobaba, William Swelbar (2008), Cost Convergence in the US Airline Industry: An Analysis of Unit Costs 1995-2006, Journal of Air Transport Management, 14 (4), pp. 179-187.
Abstract: Recent changes in the strategies of US airlines have led to a convergence of unit costs between the network legacy carriers and low-cost carriers. We develop a methodology for breaking down operating cost data reported by the airlines and argue that certain cost categories must be excluded to make a valid comparison between the carrier groups. We find significant evidence of convergence in unit costs excluding fuel and transport-related expenses, and labor unit costs in particular. While network legacy carriers have improved cost efficiency through dramatic labor cost reductions and longer stage length flying, low-cost carriers labor unit costs continue to increase as these former new entrant airlines mature.
Quantitative methods have become fundamental tools in the analysis and planning of financial operations. There are many reasons for this development: the emergence of a whole range of new complex financial instruments, innovations in securitization, the increased globalization of the financial markets, the proliferation of information technology and the rise of high-frequency traders, etc. In this course, models for hedging, asset allocation, and multi-period portfolio planning are developed, implemented, and tested. In addition, pricing models for options, bonds, mortgage-backed securities, and other derivatives are studied. The models typically require the tools of statistics, optimization, and/or simulation, and they are implemented in spreadsheets or a high-level modeling environment, MATLAB. This course is quantitative and will require extensive computer use. The course is intended for students who have strong interest in finance. The objective is to provide students the necessary practical tools they will require should they choose to join the financial services industry, particularly in roles such as: derivatives, quantitative trading, portfolio management, structuring, financial engineering, risk management, etc. Prospective students should be comfortable with quantitative methods such as basic statistics and the methodologies (mathematical programming and simulation) taugh tin OIDD612 Business Analytics and OIDD321 Management Science (or equivalent). Students should seek permission from the instructor if the background requirements are not met.
"Managing the Productive Core: Business Analytics" is a course on business analytics tools and their application to management problems. Its main topics are optimization, decision making under uncertainty, and simulation. The emphasis is on business analytics tools that are widely used in diverse industries and functional areas, including operations, finance, accounting, and marketing.
Quantitative methods have become fundamental tools in the analysis and planning of financial operations. There are many reasons for this development: the emergence of a whole range of new complex financial instruments, innovations in securitization, the increased globalization of the financial markets, the proliferation of information technology and the rise of high-frequency traders, etc. In this course, models for hedging, asset allocation, and multi-period portfolio planning are developed, implemented, and tested. In addition, pricing models for options, bonds, mortgage-backed securities, and other derivatives are studied. The models typically require the tools of statistics, optimization, and/or simulation, and they are implemented in spreadsheets or a high-level modeling environment, MATLAB. This course is quantitative and will require extensive computer use. The course is intended for students who have strong interest in finance. The objective is to provide students the necessary practical tools they will require should they choose to join the financial services industry, particularly in roles such as: derivatives, quantitative trading, portfolio management, structuring, financial engineering, risk management, etc. Prospective students should be comfortable with quantitative methods quantitative methods, such as basic statistics and the methodologies (mathematical programming and simulation) taught in OPIM612 Business Analytics or OPIM321 Management Science (or equivalent). Students should seek permission from the instructor if the background requirements are not met.
Buoyed by low oil prices and new fuel-efficient aircraft, several low-cost European carriers are challenging major legacy airlines in the lucrative U.S.-Europe market.Knowledge @ Wharton - 2017/06/13