Arturo Cifuentes

• PhD-- California Institute of Technology (Caltech)
• Senior Researcher at Pontifical Catholic University of Chile

ABSTRACT This paper is concerned with the estimation of the minimum number of positions needed to achieve an adequate level of risk reduction within a given asset class, compared to holding a single asset of that asset class. The paper proposes a simple expression that links the three key variables: (i) the desired level of risk reduction; (ii) N,...

This study explores the relationship between climate change and the quality of the Cabernet Sauvignon produced in Chile’s Maipo Valley based on data corresponding to the 1983–2021 period. Although the region has experienced increasing temperatures and diminishing rainfall levels, the quality of its cabernet, as measured by Wine Spectator ratings, h...

The Black–Scholes (B-S) model is considered by the academic environment one of the greatest achievements of financial economics. Yet it brings with it some conundrums. The model is often used in a manner that contradicts one of its assumptions, and its predictions are not supported by market reality. Here we address, from the perspective of philoso...

Revenue-sharing agreements are very common in the live entertainment industry. Such agreements typically include a minimum revenue guarantee for the benefit of the entertainer, combined with a formula to split the revenue, in case the revenue exceeds the minimum guarantee. In essence, these are derivative contracts between the event organizer (O) a...

This study explores the relationship between climate change and the quality of the Cabernet Sauvignon produced in Chile's Maipo Valley based on data corresponding to the 1983-2021 period. Although the region has experienced increasing temperatures and diminishing rainfall levels, the quality of its cabernet, as measured by Wine Spectator ratings, h...

This article presents a new framework to evaluate the merits of an art investment that differs substantially from previous studies. First, it assumes that the investor already holds a portfolio consisting of more traditional assets and is planning to add art to it. This is far more realistic than the usual academic set up in which it is assumed tha...

Purpose The climate in Mendoza is significantly different from the climate in most global wine-making regions. This paper aims to explore the relationship between the quality of the Malbec wine from the Mendoza region and its weather. Design/methodology/approach This study uses a multivariate regression model with fixed effects to assess how weath...

The Casablanca Valley, which is located in Chile’s central region and is one of the eleven Wine Capitals of the World, presents a most unusual climate among the global wine regions: cold summers (Csc according to the Koppen classification). In this study we explore the relationship between weather and wine quality in Casablanca and we conclude that...

The Worth of Art: Financial Tools for the Art Markets shows readers how to use empirical evidence to answer questions such as: How do the returns on Basquiat compare to the S&P 500? Are Monet’s portraits as valuable as his landscapes? Do red paintings fetch higher prices than blue ones, and does the color palette matter equally to the sales of abst...

The enthusiasm for structuring ESG-compliant investment portfolios has grown hand-in-hand with the confusion regarding what ESG actually means. Given this situation, this study investigates whether there is a relationship between ESG ratings (in this case provided by MSCI and S&P) and financial performance, based on either return or risk. Using thr...

We propose a new approach to portfolio optimization that utilizes a unique combination of synthetic data generation and a CVaR-constraint. We formulate the portfolio optimization problem as an asset allocation problem in which each asset class is accessed through a passive (index) fund. The asset-class weights are determined by solving an optimizat...

The impetus to structure ESG-compliant investment portfolios has grown hand-in-hand with the confusion regarding what ESG actually means. Given this situation, this study investigates whether there was a relationship between ESG ratings and financial performance, based on either return or risk. Using three rank order metrics, as well as pairwise co...

The impetus for adopting ESG-sensitive investment policies has increased steadily since 2006, when the United Nations outlined its Principles of Responsible Investment (PRI). Recently, a new industry aimed at helping investors to make sound ESG-driven decisions has flourished: ESG rating agencies. We investigated the ratings provided by four leadin...

Features, or contextual information, are additional data than can help predicting asset returns in financial problems. We propose a mean-risk portfolio selection problem that uses contextual information to maximize expected returns at each time period, weighing past observations via kernels based on the current state of the world. We consider yearl...

The impetus for adopting ESG-sensitive investment policies has increased steadily since 2006, when the United Nations outlined its Principles of Responsible Investment (PRI). More recently, a new industry aimed at helping investors to make sound ESG-driven decisions has flourished: ESG rating agencies. We investigated the ratings provided by four l...

We investigate the relationship between crime and property prices in the Santiago (Chile) real estate market. The study considers two property types (single-family homes and apartments), and twelve different types of crimes. The study shows the importance of relying on a two-stage least square approach (2SLS) based on instrumental variables (IV) to...

Josef Albers’ Homage to the Square series comprises a vast ensemble of compositions based on similar arrays of nested squares. The main difference among these paintings is the colors employed. Therefore, they constitute an almost natural experiment to explore color preferences. We focus on the relationship between the prices paid in public auctions...

We examine the performance of the Black‐Scholes (B‐S) formulas around (i.e., before, during and after) two periods of market stress: the subprime crisis (October, 2008) and the onset of the Covid‐19 pandemic (March, 2020). This is interesting for two reasons. First, most studies regarding the accuracy of the B‐S formulas have been done under regula...

We propose a general framework to study the relationship between the price of a painting and its color‐related attributes. To this end we focus on four key aspects: dominant colors, features of the color palette, color harmony, and color emotions. We demonstrate the usefulness of this approach with an example based on Mark Rothko's post‐1950 painti...

Portfolio selection problems have been thoroughly studied under the risk-and-return paradigm introduced by Markowitz. However, the usefulness of this approach has been hindered by some practical considerations that have resulted in poorly diversified portfolios, or, solutions that are extremely sensitive to parameter estimation errors. In this work...

In recent years, art-secured lending has grown in both size and popularity. Yet, this business still lacks a well-accepted approach to assess the risks involved. To that end, in this study, we identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo sim...

We present a new economic theory of value based on complexity theory. For simplicity, we call this theory ‘complexalism’ (a portmanteau of ‘complexity’ and ‘capitalism’). Complexalism is a framework that establishes valuations by quantifying the present and future complexities of objects and their surroundings. This framework reparameterises questi...

Providing decision makers and the investment community with transparent methods to value investments in resilience and adaptation measures to protect physical assets from climate change impacts is becoming increasingly critical. To address this need, this paper introduces and utilizes the decoupled net present value (DNPV) valuation methodology. DN...

Traditional valuation methods such as net present value (NPV) utilize increased discount rates to account for risk, in the process introducing a time bias effect that promotes short-termism. Application of NPV often discourages much needed infrastructure projects that require large capital investments yet are slow to generate positive cashflows. NP...

The relationship between prices of paintings at public auctions and their attributes has received much attention in recent years. However, the effects of color have been mostly absent from these studies. The present study explored the relationship between price and color in Rothko’s post 1950 paintings, which were dominated by color rather than fig...

Auction-house guarantees are becoming a common feature in the art market. We analyze these guarantees within the framework of financial options. This approach allows us to derive analytical (closed-form) expressions to value these positions, considering both, the case in which the painting is sold, and the case in which the painting goes unsold (“b...

Mexico and Chile have Defined Contributions (DC) pension systems. In both cases affiliates are offered several investment funds with, allegedly, different risk-return profiles. Analyzing actual return data for the April 2008-March 2018 period, and using a number of risk-and return-related metrics, we reach quite different conclusions in relation to...

In defined contribution (DC) pension schemes, the regulator usually imposes asset allocation constraints (minimum and maximum limits by asset class) in order to create funds with different risk–return profiles. In this article, we challenge this approach and show that such funds can exhibit erratic risk–return profiles that deviate significantly fr...

We derive closed-form expressions to price European calls and puts assuming the cash flows of the underlying asset or project are normally distributed. This approach has important advantages in the context of real options applied to infrastructure projects when compared to the Black-Scholes equation. First, it fits naturally with the way engineers...

We identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. Also, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision-makers and risk managers, we introduce a nu...

We analyze the guarantees that art-auction houses offer from an options viewpoint. This approach allows us to derive analytical expressions to value the positions involved in such arrangements. We further validate these formulas with a Monte Carlo simulation applied to a realistic example. Finally, we show that the risk associated with such guarant...

We analyze the guarantees that art-auction houses offer from an options viewpoint. This approach allows us to derive analytical expressions to value the positions involved in such arrangements. We further validate these formulas with a Monte Carlo simulation applied to a realistic example. Finally, we show that the risk associated with such guarant...

In de�ned contribution (DC) pension schemes, the regulator usually imposes asset allocation constraints (minimum and maximum limits by asset class) in order to create funds with different risk-return profiles. In this article, we challenge this approach and show that such funds can exhibit erratic risk-return profiles that deviate significantly fro...

We propose a two-step hybrid investment strategy suitable for pension funds. Our method consists of an active component (an optimization-based approach to decide the asset allocation), followed by a passive strategy (an index-based approach). We test our strategy with data from the Chilean pension system using two different risk metrics and we show...

Credit ratings play an important role in the bond market, as the regulatory framework of this sector is based on ratings.Acritical assumption is that the ratings of all the rating agencies are equivalent, ie, they exhibit very close agreement. This paper, borrowing concepts from measurement, test and psychometric theories, explores this issue in th...

We analyze the Solvency II standard formula (SF) for capital risk aggregation in relation to the treatment of operational risk (OR) capital. We show that the SF implicitly assumes that the correlation between OR and the other risks is very high: a situation that seems to be at odds with both the empirical evidence and the view of most industry part...

We examine the returns based on auction data for two individual artists and two groups of artists. We employ a Hedonic Pricing Model correcting for the log-transformation bias followed by a wild bootstrap method. This approach allows us to specify confidence intervals for the return estimates. We find that the resulting confidence intervals are wid...

Synthetic collateralized debt obligations (CDOs) performed very badly during the subprime crisis: they suffered massive rating downgrades (even at the most senior levels of the capital structure) and inflicted significant losses on investors. Using numerical simulations, this study shows that such structures are highly unstable; minor errors in the...

We estimate the correlation between the returns of an S&P 500-based portfolio and Renoir paintings. Unlike previous studies that relied on single-point estimates of the correlation to explore the merits of adding art assets to a portfolio of stocks, we rely on a wild bootstrap algorithm to determine confidence intervals for the correlation estimate...

This technical note presents a numerical simulation technique to perform valuations of infrastructure projects with minimum revenue guarantees (MRG). It is assumed that the project cash flows–in the absence of the MRG–can be described in a probabilistic fashion by means of a very general multivariate distribution function. Then, the Gaussian copula...

We analyze the Solvency II standard formula (SF) for capital risk aggregation in relation to the treatment of operational risk (OR) capital. We show that the SF implicitly assumes that the correlation between OR and the other risks is very high, a situation which seems to be at odds with both, the empirical evidence, and the view of most industry p...

We examine the annual returns based on auction data for four groups of artists using a hedonic pricing model in combination with a wild bootstrap statistical technique. This approach allows us to estimate confidence intervals for such returns, and also, for several figures of merit based on these returns. We find that the confidence intervals assoc...

We examine the annual returns based on auction data for four groups of artists and using five different approaches. We conclude that return estimates vary a great deal depending on the metric used to estimate them. Additionally, using a wild bootstrap method, we estimate confidence intervals for such returns. Our results indicate that relying on po...

Credit risk derivatives and securitization techniques are difficult topics to teach. Most students have preconceived ideas some of them quite wrong. And frequently students feel there is almost something like "black magic" behind the concept that one can create Aaa securities out of risky assets. Moreover, the fact that credit derivatives played an...

We propose a model to assess the credit risk features of fixed income portfolios assuming they can be characterized by two parameters: their default probability and their default correlation. We rely on explicit expressions to assess their credit risk and demonstrate the benefits of our approach in a complex leveraged structure example. We show tha...

This paper introduces a new financial metric for the art market. The metric is based on the price per unit of area and is applicable to two-dimensional art objects such as paintings.

This paper introduces a new financial metric for the art market. The metric, which we call Artist Power Value (APV), is based on the price per unit of area (dollars per square centimeter) and is applicable to two-dimensional art objects such as paintings. This metric has several advantages from the investor’s viewpoint. It makes it easy to: (i) est...

In the last 30 years the market for paintings has received an increasing amount of attention from economists and financial analysts. They have brought to this field many quantitative techniques already employed in more conventional markets. Most efforts have dealt with returns; specifically, how to compute return indexes for the art market. This is...

This paper explores the influence of cash-flow correlations on the behavior of the net present value (NPV) and internal rate of return (IRR) when performing valuations. In general, correlation has a negligible effect on the expected value of both the NPV and IRR. Even in cases of high correlation the IRR distribution departs very little from normal...

Notwithstanding almost forty years of efforts, the market for paintings still lacks a widely accepted price index. In this paper, we introduce a simple and intuitive metric to construct such index. Our metric is based on the price of a painting divided by its area. This formulation rests on a solid mathematical foundation as it corresponds to a par...

Structured products performed very badly during the subprime crisis. Not only they suffered massive ratings downgrades (even at the most senior levels of the capital structure) but also inflicted significant losses on investors. This study shows, using numerical simulations based on historical data, that such structures were highly unstable. In oth...

Paintings are − among other things − financial assets. The most basic piece of information regarding a financial asset is probably its return, or, more appropriately, the potential return that it can offer. Not surprisingly, many scholars have devoted a fair amount of effort to explore how to compute returns for such assets. Unfortunately, after mo...

The Capital Asset Pricing Model (CAPM) has been used in a number of studies to explore the features of the art market (or individual artists). We claim that such studies have been based on unsuitable estimates of art market returns in the context of the CAPM methodology. The CAPM calls for employing total returns whereas most art-related studies re...

This paper introduces a new financial metric for the art market. The metric, which we call Artistic Power Value (APV), is based on the price per unit of area (dollars per square centimeter) and is applicable to two-dimensional art objects such as paintings. This metric has several advantages from the investor’s viewpoint. It makes it easy to: (i) e...

Banking systems are at the center of the financial infrastructure of any country. It has become apparent after the subprime crisis that such systems cannot be studied by looking at their components individually (that is, in isolation). Thus, an integrated approach is needed.In this paper we introduce a numerically friendly, yet general, algorithm t...

Securitization is a difficult topic to teach. Most students have preconceived ideas about it. Some of them are quite wrong. And frequently many students feel that there is almost something like “black magic” behind the concept that one can create AAA-securities out of risky assets. Additionally, the fact that securitization played an important role...

The one-factor Gaussian copula method has become the de facto standard to analyze most synthetic collateralized debt obligation structures. Unfortunately, this method produces a peculiar phenomenon known as correlation smile (the implied correlation determined by the model depends on the CDO tranche one is considering instead of being tranche-indep...

The three drivers in modeling CDOs (collateralized debt obligations) are the probability of default, the recovery rate, and correlation of the underlying pool of credits. In general, the probability of default is by far the most relevant factor and correlation, the least. Unfortunately, an unwarranted amount of attention is currently given to corre...

This technical note presents a global sensitivity analysis method for the dynamic response of electronic systems considering several design parameters at the same time. The method is an extension of a previous method presented by the authors for the one-dimensional case (only one design variable at a time was considered subjected to uncertainty). T...

Thermal analysis of electronic components-a critical step in assessing the reliability of a system-involves the determination of the temperature field as a function of certain design parameters which are normally subjected to error. This paper presents a general method to quantify the importance of these errors (or uncertainties) in the determinati...

The dynamic behavior of a printed wiring (PW) board plays an important role in its reliability. One key parameter in determining such behavior is the fundamental frequency of the PW board. This paper shows how the sensitivity of the natural frequencies of the board with respect to some design variables can be studied using a statistical approach an...

This paper is concerned with the sensitivity of the dynamic response of printed wiring boards (PWB). A general method to study the sensitivity of the response of the board as a function of the variability of the design variables is presented. The method, which is based on a probabilistic approach, assumes that the design variables belong to a given...

For pt. 1 see ibid., vol. 41, no. 8, p. 1379-87 (1994). Device and circuit results from transistors fabricated with a novel bipolar isolation technology are presented and discussed. The isolation structure, called sequentially planarized interlevel isolation technology (SPIRIT), is fabricated by using a combination of selective epitaxial growth of...

This paper presents a technique to study the sensitivity of the dynamic response of an electronic system as a function of some of its design parameters. In this approach the system parameters are defined in terms of some nominal value plus a deviatoric component. Different sensitivity measures for the electronic component response are characterized...

The dynamic behavior of printed circuit (PC) boards plays an important role in the reliability of a package. This paper is concerned with four issues that are important in estimating the dynamic response of PC boards, namely, limitations of estimates based on the first vibration mode, the importance of geometric nonlinearities, the influence of a c...

Chile, located along the southwestern coast of South America between the Pacific Ocean and the Andes Mountains, has a long history of seismic activity. The country has been struck by a number of severe earthquakes. The most notable quake, in 1960, measured 8.5 on the Richter scale and caused more than 5,000 deaths. Another quake in 1939 destroyed t...

Thermal stresses are a major concern in the reliability of metal lines. This paper addresses some modeling issues concerning the determination of thermal stresses in such structures. Specifically, a finite element technique that allows one to follow the evolution of the stress field as a function of the steps of the manufacturing process is discuss...

This paper is concerned with the dynamic behavior of printed wiring boards. A method to determine the optimal locations of supports for this class of structures is presented. Then, an example to emphasize the importance of choosing the supports wisely is discussed

Local stress fields associated with deep trench structures are modeled in three dimensions utilizing a finite-element method. A model consisting of a SiO₂-filled deep trench residing in a silicon substrate is utilized, and stress is generated by differential thermal contraction. It is shown that corner regions, especially convex, `outsid...

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This study compares the performance of linear and quadratic tetrahedral elements and hexahedral elements in various structural problems. The problems selected demonstrate different types of behavior, namely, bending, shear, torsional and axial deformations. It was observed that the results obtained with quadratic tetrahedral elements and hexahedral...

Periodic structures, that is, structures that consist of a basic pattern which is repeated multiple times, are commonplace in the electronics industry. This paper is concerned with the determination of thermal stresses in such structures. Specifically, it is demonstrated that thermal stresses can be computed using a reduced model, if one uses the c...

This work presents a general modeling technique for following the evolution of the stress field during the manufacturing of multilevel structures. This technique combines the finite element method with a modeling strategy that uses artificial nodes to simulate material interfaces. It can be applied to both linear and nonlinear structures. The main...

The problem of determining the stresses in a bimaterial beam subjected to a thermal load is considered. One beam layer is assumed to be linear while the second layer is assumed to be elastoplastic. A simple analysis solution is derived and compared against results obtained with finite elements.

This technical note shows that the determination of the stresses induced in multi-metal beams by temperature changes reduces to solving a linear system of equations. This system of equations has a very particular structure that allows one to obtain a closed form solution easily.

This paper presents a simple yet general procedure to determine influence lines and surfaces for frames, beams, trusses, and plates. The method is based on the application of the Muller-Breslau principle and finite elements. It can be easily implemented with most commercial finite element codes.

This paper presents a finite element method for the study of gas-lubricated bearings. The fluid is assumed to be compressible, and the effect of the molecular mean free path has been incorporated into the formulation. A variational statement for the governing equation is derived and used to formulate a non-linear quadrilateral finite element that h...

This paper presents a finite element technique to model the steady-state response of a flexible tape during high-speed recording. The tape is modeled as a flexible plate, including geometric nonlinearities due to large deflections. The air-film pressure field is described by using a modified version of the Reynolds equation for compressible fluids....

This paper presents a combined finite element/finite difference technique to determine the response of a beam excited by a moving mass. The technique introduced herein is based on a Lagrange Multiplier formulation that allows one to represent the compatibility condition at the beam/mass interface using a set of auxiliary functions. This approach ca...

This paper introduces a system identification algorithm based upon modelling of the restoring force behaviour of the structure. This algorithm is more efficient than traditional algorithms based upon matching the time history of response of the structure, since error evaluation does not require the solution of any differential equations. The effect...

Consider again the beam structure of Problem 14 (Figure 14.1) and assume that two dashpots (c= 1.5 lb-s/in) have been added at the ends, as in Problem 18. Determine the transient response of this beam when it vibrates freely under the action of gravity assuming the initial configuration described in Figure 19.1. No external loads other than the eff...

Consider the semicircular arch shown in Figure 22.1. Determine the reactions at the supports when a vertical load of 60 lb is applied at the center point of the arch in the negative y-direction. Assume E=30x106 psi and v = 0.3333.

Calculate the normal modes and natural frequencies of the beam structure analyzed in Problems 14 and 15 (Figures 14.1 and 14.2) using the coupled mass matrix option.

Analyze the truss described in Problem 1 (Figures 1.1 and 1.2) subjected to two different loading conditions. First, apply a thermal load by raising the temperature of the six GRIDs of the structure as follows: $$ {{\rm{T}}_1} = {{\rm{T}}_{\rm{2}}} = {{\rm{T}}_3} = {{\rm{T}}_{\rm{4}}} = 60^\circ {\rm{F}} $$ (4.1) and $$ {{\rm{T}}_5} = {{\rm{T}}_{\r...