Asset transfer pricing models and their role : a decision framework from complexity economics and systems theory

Wasilewski, Stefan M.

Abstract

This thesis reviews the expectations and outcomes of financial models used prior to the 2008 credit crisis and offers a possible solution to the management of the high variety of risks prevalent in the financial markets by ensuring each investment is properly valued as to a range of possible outcomes derived from a due-diligence process that is understood by both parties and uses a sustainable recursive economic model to benchmark such outcomes. More specifically it asks whether the failure in the 2008 Credit Crisis was due to extant models and/or whether the managers had the tools to cope with the variety of risks and strategies needed in a global, complex financial industry. Central to all financial transactions is the exchange of some form of soft or hard asset(s), that generally come under the purview of Asset Transfer Pricing Models (“ATPMs”), and an associated due diligence process designed to expose the risks, processes and rewards for the particular project at hand. Current ATPM's vary in form and do not offer a consistent method by which they are applied. They equally do not state the complete set of variables as they are usually focused on the project at hand and not on on-going management of ex-post investment or the contextual structure within which it must operate. The latter being a nested set of economic processes that are not deterministic in nature and consequently affects the project in a non-linear fashion. Though not part of a ATPMs process the due diligence associated with a project review does not stipulate whether the data is communicated effectively and fully understood such that the financial outcomes expected can materialise. The proposed solution embodies the application of new research methods from the complexity sciences such as; complexity economics, agent, information and network theories; and management cybernetics. The solution takes the form of a set of processes, similar to a due diligence approach, that ensure data is communicated effectively, outcomes are benchmarked against a sustainable business model, and that the variety of outcomes is matched by strategies that can be rapidly implemented to meet events. The sustainable business model used as a benchmark is derived from Stafford Beer’s “Viable System Model” (“VSM”) whereas a modified Klonowski “Investment Analysis Heuristic” is employed as the associated Due Diligence model to gather data. The modifications being derived from Information Theory to ensure that efficient communication of data is ensured. The data from the recursive market structure, the processes engaged by the project’s agents and the outcomes derived by the VSM are then used to benchmark performance by a modified Cellular Potts Model (“CPM”) to show how the rules and parameters evolve over time and whether the expected financial outcomes are sustainable. Alone the process described only assesses the currently available resources’ ability to provide the expected investment outcome. In order to ensure the project survives in the event of catastrophic events a prudent level of standby liquidity is required to finance whatever future strategy management perceive necessary to adapt. To this end a “Thought Experiment” and Cross-Case Analysis is conducted using the artefact as a pricing mechanism for Standby Capital, an insurance-like product that supplies liquidity and equity at the point of the event. Four resources therefore provide the central framework of the artefact: Design Science Research Methodology (“DSRM”) to develop then test its concepts; the “CPM” as a performance metric whose “Hamiltonian” references the recursive business topography of Stafford Beer’s “VSM”; and an adapted Klonowski Investment Analysis Heuristic as a Due-Diligence process. The artefact is called GHOST: a General Heuristic on System & Time. The ontological framework of the artefact moves ATPMs away from their existing deterministic to a probabilistic pricing approach that responds dynamically to changes in strategy. A major consequence of which is that time, as used in corporate finance, be shown to be process dependent and variable. The thesis concludes it is possible to develop a range of tools to manage the variety faced by modern investors/managers and offers lines of research to implement them.

Citation

Wasilewski, S. M. (2016). Asset transfer pricing models and their role : a decision framework from complexity economics and systems theory. (Thesis). University of Hull. Retrieved from https://hull-repository.worktribe.com/output/4219358

• Thesis Type: Thesis
• Deposit Date: Jun 21, 2017
• Publicly Available Date: Feb 23, 2023
• Keywords: Business
• Public URL: https://hull-repository.worktribe.com/output/4219358
• Additional Information: Business School, The University of Hull
• Award Date: Nov 1, 2016