Karl Schmedders

Professor of Finance

Karl Schmedders is Professor of Finance. His research and teaching focuses on sustainability and the economics of climate change. He is therefore able to provide key insights on the transition risk arising from the shift to a greener economy and help companies face up to the challenges of potential asset degradation and increasing carbon prices.

He says finance and economics offer many tools to combat climate change, and that the power of incentives and markets can be employed to make progress. In addition, businesses and consumers need to take a leading role in the search for solutions to the climate crisis and not just wait for governments and policymakers to introduce climate change mitigation and adaptation measures.

Global warming is the defining problem of our times, which deserves the attention of business leaders. It is not just short-term hype.

Schmedders is passionate about the importance of a “just transition” in which no one loses out as a result of action to tackle climate change. He believes that more attention needs to be paid to the S and G elements of the ESG (environmental, social and governance) equation to ensure that action on the environmental component does not adversely affect people with low incomes and those living in developing countries. In his view, humanity will fail in its fight against climate change and global warming if it does not also address inequality and ensure a just transition.

His expertise in computational methods in finance means that he is able to apply numerical solution techniques to complex economic and financial models and shed light on a range of topical market issues and industry problems for organizations. He was Director of IMD’s custom program for Malaysian bank Maybank and has worked with a range of clients such as ABB, Airbus, Eneva, Evonik, Orkla, and Julius BĂ€r.

Schmedders is also Director of IMD’s new online certification course for structured investment products in partnership with Swiss company Leonteq, teaches in the Advanced Management Concepts (AMC) and Executive MBA programs, and is an advisor on International Consulting Projects in the MBA program.

He has published numerous research articles in international academic journals such as Econometrica, Review of Economic Studies, the Journal of Financial Economics, the Journal of Finance, Review of Financial Studies, Management Science, and Operations Research.

Before joining IMD in 2019, Schmedders was Professor of Quantitative Business Administration at the University in Zurich and Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management at Northwestern University in Evanston, Illinois. He received his PhD from Stanford University and received several teaching awards from both Stanford and Kellogg.

He remains a visiting professor of Executive MBA Education at Kellogg School of Management and is a board member of Swiss firms LPX Group and SYLVA AG. He is also a fellow of the Game Theory Society and an SAET Economic Theory Fellow.

Selected publications
Article
A large-scale optimization model for replicating portfolios in the life insurance industry
Finance
Replicating portfolios have emerged as an important tool in the life insurance industry, used for the valuation of companies’ liabilities. This paper describes the replicating portfolio (RP) model ...
1 July 2021
Article
Asset pricing with heterogeneous agents and long-run risk
FinanceInvestment
This paper shows that belief differences have strong effects on asset prices in consumption-based asset-pricing models with long-run risks. Belief heterogeneity leads to time-varying consumption an...
1 June 2021
Article
What managers need to know about data exchanges: The era of big-data silos is fading. Shared data is the future.
DigitalData Analytics
The idea that many businesses rely heavily on data to produce or market goods and services is not new. However, data differs greatly from traditional factors of production, such as capital and labo...
9 June 2020
Article
Higher order effects in asset pricing models with long-run risk
Finance
This paper shows that the latest generation of asset pricing models with long‐run risk exhibit economically significant nonlinearities, and thus the ubiquitous Campbell‐Shiller log-linearization ca...
2 February 2018
Article
Optimal and naive diversification in currency markets
Economics
DeMiguel, Garlappi, and Uppal (Review of Financial Studies, 22 (2009), 1915–1953) showed that in the stock market, it is difficult for an optimized portfolio constructed using mean-variance analysi...
15 August 2016
Article
A polynomial optimization approach to principal-agent problems
Finance
This paper presents a new method for the analysis of moral hazard principal–agent problems. The new approach avoids the stringent assumptions on the distribution of outcomes made by the classical f...
3 April 2015
Academic publications
Article
The social cost of carbon when we wish for full-path robustness
Sustainability
We compute the social cost of carbon (SCC) when decision makers want robust estimates in the face of deep (or “Knightian”) uncertainty. We introduce the notion of full-path accumulated robust prefe...
24 April 2023
Article
Re-use of collateral: Leverage, volatility, and welfare
FinanceEconomics
We assess the implications of collateral re-use on leverage, volatility, and welfare within a calibrated infinite-horizon asset-pricing model with heterogeneous agents and disaster shocks. In our m...
2 January 2023
Article
Multi-party certification on blockchain and its impact in the market for lemons
EconomicsIndustry Analysis
Markets in which similar goods of different qualities are sold suffer from information asymmetries and their negative consequences. Dealers have established themselves, and mediate these markets th...
3 April 2022
Article
A large-scale optimization model for replicating portfolios in the life insurance industry
Finance
Replicating portfolios have emerged as an important tool in the life insurance industry, used for the valuation of companies’ liabilities. This paper describes the replicating portfolio (RP) model ...
1 July 2021
Article
Asset pricing with heterogeneous agents and long-run risk
FinanceInvestment
This paper shows that belief differences have strong effects on asset prices in consumption-based asset-pricing models with long-run risks. Belief heterogeneity leads to time-varying consumption an...
1 June 2021
Case Study
DIY Cambridge Analytica: Running personality analytics
DigitalStrategy
The case walks the readers first through the Cambridge Analytica scandal, eliciting its effect and presenting an overview of the analysis the infamous company did. Readers are then introduced with ...
19 March 2021
Article
Discrete‐time dynamic principal–agent models: Contraction mapping theorem and computational treatment
Economics
We consider discrete‐time dynamic principal–agent problems with continuous choice sets and potentially multiple agents. We prove the existence of a unique solution for the principal's value functio...
20 November 2020
Article
Computing economic equilibria using projection methods
Economics
The analysis of dynamic economic models routinely leads to the mathematical problem of determining an unknown function for which no closed-form solution exists. Economists must then resort to metho...
2 August 2020
Article
Statistical approximation of high-dimensional climate models
Sustainability
We propose a general emulation method for constructing low-dimensional approximations of complex dynamic climate models. Our method uses artificially designed uncorrelated CO2 emissions scenarios, ...
1 January 2020
Article
The economic and public health impact of influenza vaccinations: Contributions of Swiss pharmacies in the 2016/17 and 2017/18 influenza seasons and implications for vaccination policy
Economics
Healthy adults have had the option to receive prescriptionless vaccination against influenza in pharmacies of several Swiss cantons since the 2015/16 influenza season. We aimed to assess in a cost-...
17 December 2019
Article
Higher order effects in asset pricing models with long-run risk
Finance
This paper shows that the latest generation of asset pricing models with long‐run risk exhibit economically significant nonlinearities, and thus the ubiquitous Campbell‐Shiller log-linearization ca...
2 February 2018
Article
Optimal and naive diversification in currency markets
Economics
DeMiguel, Garlappi, and Uppal (Review of Financial Studies, 22 (2009), 1915–1953) showed that in the stock market, it is difficult for an optimized portfolio constructed using mean-variance analysi...
15 August 2016
Article
Asset prices with temporary shocks to consumption
EconomicsFinance
Most standard asset-pricing models assume that all shocks to consumption are permanent. We relax this assumption and allow also for temporary shocks. The implications of our model are dramatically ...
25 May 2016
Article
Margin regulation and volatility
EconomicsFinancial RegulationFinance
An infinite-horizon asset-pricing model with heterogeneous agents and collateral constraints can explain why adjustments in stock market margins under US Regulation T had an economically insignific...
1 October 2015
Article
A polynomial optimization approach to principal-agent problems
Finance
This paper presents a new method for the analysis of moral hazard principal–agent problems. The new approach avoids the stringent assumptions on the distribution of outcomes made by the classical f...
3 April 2015
Article
Collateral requirements and asset prices
Finance
Many assets derive their value not only from future cash flows but also from their ability to serve as collateral. In this article, we investigate this collateral premium and its impact on asset re...
23 January 2015
Article
Finding all pure‐strategy equilibria in games with continuous strategies
FinanceEconomics
Static and dynamic games are important tools for the analysis of strategic interactions among economic agents and have found many applications in economics. In many games, equilibria can be describ...
25 July 2012
Article
Financial innovation and asset price volatility
EconomicsFinance
We compare asset prices in an overlapping generations model for incomplete and complete markets. Individuals within a generational cohort have heterogeneous beliefs about future states of the econo...
1 May 2012
Article
Optimal rules for patent races
Economics
There are two important rules to patent races: minimal accomplishment necessary to receive the patent and the allocation of the innovation benefits. We study the optimal combination of these rules....
22 February 2012
Insight for Executives
Five steps to avert further banking turmoil, without triggering a credit crunch
Article
Five steps to avert further banking turmoil, without triggering a credit crunch
Finance
Failures at First Republic and others could have been avoided with tougher supervision and treasury management, as well as targeted deposit insurance and “fair value” accounting.
23 May 2023
How to increase integrity in the voluntary carbon market
Article
How to increase integrity in the voluntary carbon market
Despite the scandals that discredited the market earlier this year, a transparent and regulated voluntary carbon market is an important tool to bring us back on our 1.5°C pathway.
16 May 2023
Executive pay: Balancing sustainability with profitability
Article
Executive pay: Balancing sustainability with profitability
LeadershipSustainabilityProfitability
 Progress on ESG goals can be encouraged by aligning compensation policies to the long-term impact that organizations have on financial, social, and environmental value creation.  
27 April 2023
Article
The fundamental problem with ESG? Conflicting letters
FinanceSustainability
The term ESG – short for environmental, social, and governance – is routinely used to capture organizations’ efforts to be more climate friendly and socially inclusive and to employ sound governanc...
1 April 2023
Fighting climate change may be right, but it also needs to be fair
Article
Fighting climate change may be right, but it also needs to be fair
Sustainability
Measures to safeguard the planet are expensive and tend to hit those on the lowest incomes hardest. So, when it comes to ESG, it is vital to take social factors into account as well as the environm...
25 October 2022
Article
FĂŒr einen "gerechten Übergang"
Sustainability
Finance and business have many tools at their disposal to combat climate change. The power of markets can be harnessed to make progress. But businesses and consumers also need to take a leading rol...
12 October 2022
Books to inspire, inform and entertain
Article
Books to inspire, inform and entertain
LeadershipSustainability
From dealing with burnout and bullsh*t to the joys of friendship and climbing mountains, IMD professors offer a varied choice of summer reading material.
16 June 2022
Carbon taxes need to explode to deal with the “mother of all externalities”
Article
Carbon taxes need to explode to deal with the “mother of all externalities”
Sustainability
Increasing the scope and price of carbon taxes is the most effective tool to reduce greenhouse gas emissions, says Professor Karl Schmedders.
28 March 2022
Article
Spring statement 2022: Quick analysis about standard of living, energy crisis and more – from experts
Economics
These are difficult times for European governments of all political colours. COVID forced them to open their coffers to support their economies, which resulted in strong increases in debt-to-GDP ra...
24 March 2022
Higher borrowing costs call for financial prudence
Article
Higher borrowing costs call for financial prudence
FinanceValue CreationMergers and Acquisitions
As the era of ultra-loose monetary policy ends imminently, corporates will need to act wisely and carefully to navigate a treacherous landscape. With inflation raging at near or above multi-year pe...
23 February 2022
Article
Why the NFT market will collapse
InvestmentTechnology Management
Prices of non-fungible tokens remain high for now and may continue to increase for some time, but a crash will come. With central banks set to tighten monetary policy in an effort to rein in inflat...
28 January 2022
Fed rate rise: Simple economics explain stock market sell-off
Article
Fed rate rise: Simple economics explain stock market sell-off
FinanceLeadership
The US Federal Reserve has signalled its intention to raise interest rates in March to curtail rampant inflation. The Fed’s move towards tighter monetary policy has sparked a sharp stock market sel...
28 January 2022
Without a just transition, we are heading for disaster
Article
Without a just transition, we are heading for disaster
SustainabilityInvestmentTransition
The world is more focused than ever on the measures needed to limit climate change and deal with its consequences, but the social impact of these measures — on people’s jobs, livelihoods and commun...
26 November 2021
Have you considered the actual relationship between E, S and G?
Article
Have you considered the actual relationship between E, S and G?
Sustainability
On the heels of the COP 26 UN Climate Change Conference there is global buzz about ESG goals, but many gaps remain between companies’ talk and their actions.
15 November 2021
Article
Autumn budget 2021: Experts react
FinanceSustainability
UK chancellor Rishi Sunak has unveiled his autumn budget as the nation wrestles with recovery at the tail end of the COVID pandemic, supply shortages and a mounting crisis in the cost of living. Ou...
27 October 2021
Article
Stock market: Many companies are choosing not to be listed – here’s why
FinanceInvestmentRegulation
Stock markets reached all-time highs in 2021, bringing huge value to the companies riding the wave, even when you allow for the dip in recent weeks. We are also in the midst of a boom year for flot...
7 October 2021
Why German business shouldn’t fear a greener government
Article
Why German business shouldn’t fear a greener government
SustainabilityPolitics
Should Germany’s Green party score a big enough share of the vote in a federal election on 26 September to enter the next coalition government, business should embrace the opportunity to accelerate...
21 September 2021
Article
Warum wir richtig rechnenden Kapitalismus brauchen
SustainabilityFinance
Anyone who demands that environmental damage should be priced into services and goods today is far from being a socialist. They are just canny, calculating capitalists.
18 September 2021
The reality of climate financial risk
Article
The reality of climate financial risk
FinanceEconomics
Those who argue that climate change has little to do with macroprudential risk management are offering a counsel of despair. If the 2008 global financial crisis revealed anything, it is that regula...
14 September 2021
Article
The reality of climate financial risk
FinanceSustainability
Those who argue that climate change has little to do with macroprudential risk management are offering a counsel of despair. If the 2008 global financial crisis revealed anything, it is that regula...
13 September 2021