Each week, Daniels is featuring a researcher who conducts meaningful research that impacts their field and the wider community. Learn more about their work in Q&As with the Daniels Research team and email them to nominate yourself or a colleague for a future Q&A. 
Peter Lung is an associate professor in the Reiman School of Finance at the Daniels College of Business.
What do you research?
My research focuses on derivatives, such as futures, options, swaps and any other OTC market products. Most recently I have been looking at risk premiums in the equity and options markets. Here’s an example for the equity market: the market may say that the risk premium for a certain security should be 1%. But the options market doesn’t agree; that market defines the risk premium at 5%. So my business isn’t which one is wrong and which one is right–it’s the arbitrage. The big deal is that people can use big leverage because the risk is very high.
In general I focus on market inefficiency. The mainstream kind of players in the finance world don’t believe there should be opportunities in arbitrage because the market is efficient. However, the market makers in the stock market versus the options market, etc., use different supply-and-demand information and have different purposes in those markets, so there is always going to be a difference in risk premiums.
How did you become interested in that line of work?
The risk skill in investment is risk management. The volatility is the most important factor in risk management. As I work on the risk management all the time, I find the structure of volatility can not only hedge against the market, but also reduce hedging cost.
How do you bring your research into the classroom?
Students are paying tuition and choosing to spend four or five years here, so I want to be sure that I’m not just showing them some complicated theories and models, but how to really use and apply practical knowledge in the market. I want to be sure that they know how to profit in the market. In my graduate and undergraduate classes, every student has to write individual projects so that I know they understand these concepts.
Let’s talk about two market big shots–Warren Buffet and Bill Gates. Both of them think that business school, and in particular investment finance, goes too far in talking about theories and models. I bet if you ask Warren Buffet to calculate partials or differentials, he wouldn’t be able to do it. But he knows how to invest efficiently. And that’s what I want for my students–to be able to gain real world skills and apply the knowledge they gain here directly to the market.
How would you like to see your research impact the world?
My study is a very narrow stream of academic research, but very practical in financial industries. Practitioners have been looking for an efficient and effective way to reduce the downside risk. My study helps practitioners to hedge the market risk at a much lower cost than the current hedging tools allow.