Kenneth A. Froot
André R. Jakurski Professor of Business Administration (Leave of Absence)
Kenneth A. Froot is André R. Jakurski Professor of Business Administration at Harvard University's Graduate School of Business Administration. He teaches courses in Capital Markets, International Finance, and Risk Management. Previously, he served as Director of Research, and held the Industrial Bank of Japan Professorship in Finance and the Thomas Henry Carroll-Ford Foundation Visitor's Chair at Harvard. At MIT, he held the Ford International Development Chair. He has taught executive education programs at MIT, Harvard, Princeton, Dartmouth, and for corporations and institutions in addition to his regular teaching of MBAs and Ph.D.s.
Professor Froot received his B.A. from Stanford University and his Ph.D. from the University of California at Berkeley. He spent the 1988-1989 academic year as an Olin Fellow at the National Bureau of Economic Research, where he is Research Associate and Chair of the NBER’s Insurance Group. His research on a wide range of topics in finance, risk management, and international markets has been published in many journals and books. He is Editor of the Journal of International Financial Management and Accounting, Associate Editor of the Journal of International Economics, and of The Financing of Catastrophe Risk, Foreign Direct Investment, and The Transition in Eastern Europe, Vols. 1 and 2.
Professor Froot is a founding partner of FDO Partners, LLC and State Street Associates, firms producing investment and knowledge resources for global investors. Froot has worked with companies, countries, and official institutions, including the International Monetary Fund, the World Bank, and the Board of Governors of the Federal Reserve on international financial risk and investment management issues. He has also acted as a Financial Adviser to the Prime Minister of the Republic of Slovenia and to the Finance Minister of Poland, and served on the staff of the US President's Council of Economic Advisers and the Economic Advisory Board of the Export-Import Bank of the US.
Kenneth Froot's research spans a variety of topics in international finance. With regard to securitization of insurance risks, particularly those linked to catastrophes such as windstorms and earthquakes, he is exploring the feasibility of securitized reinsurance, the quantitative and qualitative properties of returns on insurance exposures, and the institutional pressures that exist in the marketplace today. Froot is currently organizing research conferences on these topics. A second focus is risk management for corporations and financial institutions. Here, Froot's research seeks to identify appropriate goals and implementation schemes for risk management programs, particularly in financial institutions in which profitability depends critically on the ability to manage risk. Finally, regarding asset allocation for investors, Froot is examining the impact of investor horizons on optimal currency hedge ratios and, in particular, on prudent asset allocation strategies. Other work in progress includes an inquiry into how stock prices are affected by the countries in which stocks are traded.
Distribution of Insurance Risk
Risks that originate with natural disasters such as hurricanes, earthquakes, and floods are substantial enough to exhaust the capital and surplus of insurers and reinsurers many times over. Despite significant advances in the efficiency of risk allocation in the financial system, these catastrophic risks are still largely allocated through brokered insurance and reinsurance agreements. Faculty involved in the Global Financial System project who are pursuing this stream of research, Kenneth A. Froot and Sanjiv R. Das, are studying primarily the institutional arrangements for distributing catastrophic risks. In addition to comparing public and private mechanisms for distributing and analyzing various securities designed to aid in the allocation or hedging of catastrophic risk, they have undertaken an empirical investigation of the pricing of catastrophic exposures. The latter work reveals the historical returns reinsurers have realized from writing catastrophic risks and provides a basis for testing hypotheses about the formulation of catastrophic cover prices.
Risk Capital and Capital Allocation
For the principal financial firms, proper risk control is imperative, and capital allocation exerts an impact on a variety of decisions related to: accounting for the profitability of individual businesses; entering or divesting businesses; determining profit-related employee compensation; choosing from among alternative organizational forms; and managing overall risk. Historically a top-down concern, principally of the CFO/treasurer, with the growing importance of off-balance sheet (derivatives) positions, these issues have also fallen squarely into the domain of the "risk manager," a bottom-up perspective. Of central importance is the need for a unifying framework to reconcile the two perspectives that can be applied on a firmwide basis. The determinants of the costs of risk capital and possible approaches for measuring and allocating these costs to the individual businesses that comprise a firm are receiving particular emphasis in the Global Financial System project. Principal researchers in this area are Andre F. Perold, Kenneth A. Froot, and Robert C. Merton.