New Measures of Financial Risk, Motivated by Pharmaceutical Research

Anne-Marie Oreskovich; John Gittins

doi:doi:10.11648/j.ijefm.20210901.13

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New Measures of Financial Risk, Motivated by Pharmaceutical Research

Anne-Marie Oreskovich, John Gittins

Published in International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 1)

Received: 15 March 2019 Accepted: 5 May 2019 Published: 10 February 2021

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Abstract

The paper begins by reviewing the available procedures for measuring value and risk in pharmaceutical research projects. These include Net Present Value (NPV) and its variance, Real Options Valuation (ROV), the Capital Asset Pricing Model (CAPM), Value at Risk (VaR) and Utility. None of these measures focuses specifically on risk as it is perceived by the research manager, except arguably for Utility, which has the serious disadvantage of being by definition a subjective measure. This paper proposes two additional risk measures to go some way towards plugging the gap in what is available. Their advantages are that they: focus on maximum exposure to adverse outcomes, a metric most decision makers have in mind when they wish to evaluate risk; are objective rather than subjective, in contrast to utilities; are easier to specify and more transparent than utilities, since they are in cash terms; are project specific unlike CAPM; satisfy the technical test of coherence, unlike VaR, so it is not possible that diversifying a portfolio could increase the measured risk. The new measures are shown to measure different things from the variance of NPV, which is in some ways similar, and a start is made on exploring what their values are for different patterns of cash flow.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 9, Issue 1)
DOI	10.11648/j.ijefm.20210901.13
Page(s)	16-28
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Resource Allocation, Financial Risk, Risk in Pharmaceutical Research

References

[1]	European Federation of Pharmaceutical Industries and Associations. (2012) The Pharmaceutical Industry in Figures. Key Data 2012. http://www.efpia.eu/sites/www.efpia.eu/files/EFPIA_Figures_2012_Final-20120622-003-EN-v1.pdf.
[2]	Mestre-Ferrandiz, J., Sussex, J., and Towse, A. (2012) The R&D Cost of a New Medicine. Office of Health Economics. London.
[3]	Gavura, S. (2012) What Does a New Drug Cost? Part II: The Productivity Problem. Science-Based Medicine. http://www.sciencebasedmedicine.org/index.php/what-does-a-new-drug-cost-part-ii-the-productivity-problem/.
[4]	Oreskovich, A and Gittins, J. C. (2016) The Evaluation of Risk in Pharmaceutical Research: A Study of Current Models and Techniques. R&D Management. 46 (5): 900-913.
[5]	Dixit, A. K., and Pindyck, R. S. (1995) The Options Approach to Capital Investment. Harvard Business Review, 73 (3), 105-115.
[6]	Dixit, A. K., and Pindyck, R. S. (1994) Investment Under Uncertainty. Princeton and Chichester: Princeton University Press.
[7]	Bode-Greuel, K. M. (2000) Real Options Evaluation in Pharmaceutical R&D: A New Approach to Financial Project Evaluation. Scrip Reports, Strategic Management Series. 2, 1-144.
[8]	Brealey, R., Myers, S., and Marcus, A. (2004) Fundamentals of Corporate Finance. New York: McGraw-Hill.
[9]	Markowitz, H. (1952) Portfolio Selection. Journal of Finance, 7, 77-91.
[10]	Ross, S. (2003) An Elementary Introduction to Mathematical Finance: Options and Other Topics. New York: Cambridge University Press.
[11]	El Karoui, N. (2005) Value at Risk and Average Value at Risk. ChaireUnesco Tunis. October 2005.
[12]	Tsanakas, A. (2005) Section 5.5 of Enterprise Risk Modelling Notes. Support pages for courses taught at Cass Business School, City University, London by Andreas Tsanakas. http://casserm.wordpress.com/lecture-notes/5-measuring-risk-and-performance/55-properties-of-tail-value-at-risk/.
[13]	Wozabal, D. (2010) A New Method for Value-at-Risk constrained optimization using the Difference of Convex Algorithm. Working Paper.
[14]	Artzner, P., Delbaen, F., Eber, J., and Heath, D. (1999) Coherent Measures of Risk. Mathematical Finance, 9 (3), 203-228.
[15]	Baker, R. (2010) Risk Aversion in Maintenance: a Utility-Based Approach. IMA Journal of Management Mathematics. 21 (4), 319-332.
[16]	Sawyer, S. (2002) The Method of Lagrange Multipliers. http://xbeams.chem.yale.edu/~batista/vaa/LagrangeMult.pdf.
[17]	Ross, S. (1983) Stochastic Processes. New York: Wiley.
[18]	Wozabal, D., Hochreiter, R., and Pflug, G. (2010) A D. C. Formulation of Value-at-Risk Constrained Optimization. Optimization, 59 (3), 377-400.

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APA Style

Anne-Marie Oreskovich, John Gittins. (2021). New Measures of Financial Risk, Motivated by Pharmaceutical Research. International Journal of Economics, Finance and Management Sciences, 9(1), 16-28. https://doi.org/10.11648/j.ijefm.20210901.13

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ACS Style

Anne-Marie Oreskovich; John Gittins. New Measures of Financial Risk, Motivated by Pharmaceutical Research. Int. J. Econ. Finance Manag. Sci. 2021, 9(1), 16-28. doi: 10.11648/j.ijefm.20210901.13

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AMA Style

Anne-Marie Oreskovich, John Gittins. New Measures of Financial Risk, Motivated by Pharmaceutical Research. Int J Econ Finance Manag Sci. 2021;9(1):16-28. doi: 10.11648/j.ijefm.20210901.13

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@article{10.11648/j.ijefm.20210901.13,
  author = {Anne-Marie Oreskovich and John Gittins},
  title = {New Measures of Financial Risk, Motivated by Pharmaceutical Research},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {9},
  number = {1},
  pages = {16-28},
  doi = {10.11648/j.ijefm.20210901.13},
  url = {https://doi.org/10.11648/j.ijefm.20210901.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20210901.13},
  abstract = {The paper begins by reviewing the available procedures for measuring value and risk in pharmaceutical research projects. These include Net Present Value (NPV) and its variance, Real Options Valuation (ROV), the Capital Asset Pricing Model (CAPM), Value at Risk (VaR) and Utility. None of these measures focuses specifically on risk as it is perceived by the research manager, except arguably for Utility, which has the serious disadvantage of being by definition a subjective measure. This paper proposes two additional risk measures to go some way towards plugging the gap in what is available. Their advantages are that they: focus on maximum exposure to adverse outcomes, a metric most decision makers have in mind when they wish to evaluate risk; are objective rather than subjective, in contrast to utilities; are easier to specify and more transparent than utilities, since they are in cash terms; are project specific unlike CAPM; satisfy the technical test of coherence, unlike VaR, so it is not possible that diversifying a portfolio could increase the measured risk. The new measures are shown to measure different things from the variance of NPV, which is in some ways similar, and a start is made on exploring what their values are for different patterns of cash flow.},
 year = {2021}
}

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TY  - JOUR
T1  - New Measures of Financial Risk, Motivated by Pharmaceutical Research
AU  - Anne-Marie Oreskovich
AU  - John Gittins
Y1  - 2021/02/10
PY  - 2021
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DO  - 10.11648/j.ijefm.20210901.13
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
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PB  - Science Publishing Group
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AB  - The paper begins by reviewing the available procedures for measuring value and risk in pharmaceutical research projects. These include Net Present Value (NPV) and its variance, Real Options Valuation (ROV), the Capital Asset Pricing Model (CAPM), Value at Risk (VaR) and Utility. None of these measures focuses specifically on risk as it is perceived by the research manager, except arguably for Utility, which has the serious disadvantage of being by definition a subjective measure. This paper proposes two additional risk measures to go some way towards plugging the gap in what is available. Their advantages are that they: focus on maximum exposure to adverse outcomes, a metric most decision makers have in mind when they wish to evaluate risk; are objective rather than subjective, in contrast to utilities; are easier to specify and more transparent than utilities, since they are in cash terms; are project specific unlike CAPM; satisfy the technical test of coherence, unlike VaR, so it is not possible that diversifying a portfolio could increase the measured risk. The new measures are shown to measure different things from the variance of NPV, which is in some ways similar, and a start is made on exploring what their values are for different patterns of cash flow.
VL  - 9
IS  - 1
ER  -

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Author Information

Anne-Marie Oreskovich

Department of Statistics, University of Oxford, Oxford, United Kingdom
John Gittins

Department of Statistics, University of Oxford, Oxford, United Kingdom

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APA Style

Anne-Marie Oreskovich, John Gittins. (2021). New Measures of Financial Risk, Motivated by Pharmaceutical Research. International Journal of Economics, Finance and Management Sciences, 9(1), 16-28. https://doi.org/10.11648/j.ijefm.20210901.13

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ACS Style

Anne-Marie Oreskovich; John Gittins. New Measures of Financial Risk, Motivated by Pharmaceutical Research. Int. J. Econ. Finance Manag. Sci. 2021, 9(1), 16-28. doi: 10.11648/j.ijefm.20210901.13

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AMA Style

Anne-Marie Oreskovich, John Gittins. New Measures of Financial Risk, Motivated by Pharmaceutical Research. Int J Econ Finance Manag Sci. 2021;9(1):16-28. doi: 10.11648/j.ijefm.20210901.13

Copy | Download

@article{10.11648/j.ijefm.20210901.13,
  author = {Anne-Marie Oreskovich and John Gittins},
  title = {New Measures of Financial Risk, Motivated by Pharmaceutical Research},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {9},
  number = {1},
  pages = {16-28},
  doi = {10.11648/j.ijefm.20210901.13},
  url = {https://doi.org/10.11648/j.ijefm.20210901.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20210901.13},
  abstract = {The paper begins by reviewing the available procedures for measuring value and risk in pharmaceutical research projects. These include Net Present Value (NPV) and its variance, Real Options Valuation (ROV), the Capital Asset Pricing Model (CAPM), Value at Risk (VaR) and Utility. None of these measures focuses specifically on risk as it is perceived by the research manager, except arguably for Utility, which has the serious disadvantage of being by definition a subjective measure. This paper proposes two additional risk measures to go some way towards plugging the gap in what is available. Their advantages are that they: focus on maximum exposure to adverse outcomes, a metric most decision makers have in mind when they wish to evaluate risk; are objective rather than subjective, in contrast to utilities; are easier to specify and more transparent than utilities, since they are in cash terms; are project specific unlike CAPM; satisfy the technical test of coherence, unlike VaR, so it is not possible that diversifying a portfolio could increase the measured risk. The new measures are shown to measure different things from the variance of NPV, which is in some ways similar, and a start is made on exploring what their values are for different patterns of cash flow.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - New Measures of Financial Risk, Motivated by Pharmaceutical Research
AU  - Anne-Marie Oreskovich
AU  - John Gittins
Y1  - 2021/02/10
PY  - 2021
N1  - https://doi.org/10.11648/j.ijefm.20210901.13
DO  - 10.11648/j.ijefm.20210901.13
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 16
EP  - 28
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20210901.13
AB  - The paper begins by reviewing the available procedures for measuring value and risk in pharmaceutical research projects. These include Net Present Value (NPV) and its variance, Real Options Valuation (ROV), the Capital Asset Pricing Model (CAPM), Value at Risk (VaR) and Utility. None of these measures focuses specifically on risk as it is perceived by the research manager, except arguably for Utility, which has the serious disadvantage of being by definition a subjective measure. This paper proposes two additional risk measures to go some way towards plugging the gap in what is available. Their advantages are that they: focus on maximum exposure to adverse outcomes, a metric most decision makers have in mind when they wish to evaluate risk; are objective rather than subjective, in contrast to utilities; are easier to specify and more transparent than utilities, since they are in cash terms; are project specific unlike CAPM; satisfy the technical test of coherence, unlike VaR, so it is not possible that diversifying a portfolio could increase the measured risk. The new measures are shown to measure different things from the variance of NPV, which is in some ways similar, and a start is made on exploring what their values are for different patterns of cash flow.
VL  - 9
IS  - 1
ER  -

Copy | Download