Under the scientific leadership of Gilles Saint-Paul (PSE, ENS) and the executive leadership of Nicolas Dromel (PSE, CNRS), the SCOR-PSE Chair, created in June 2018, aims to promote the development and dissemination of research into macroeconomic risk, in particular rare events and uncertainties that remain difficult to model. It publishes articles, organizes an annual conference and presents the Young Researcher Award each year.
2020 Young Researcher Award
The selection committee headed by Gilles Saint-Paul, scientific director of the SCOR-PSE Chair, awarded the 2020 prize to Ludwig Straub and Robert Ulbricht, respectively Assistant Professor at Harvard and Assistant Professor at Boston College. The award is in recognition of their work titled "Endogenous Uncertainty and Credit Crunches”. In this paper, Ludwig and Robert develop a model with uncertainty and financial frictions to understand why financial crises usually generate large and persistent economic contractions.
At the heart of the paper lies the idea that greater uncertainty and bad economic conditions reinforce each other, channeled through financial constraints and learning dynamics. An initial tightening of credit constraints restricts firms’ access to funding: Some firms exit, which results in an increase in uncertainty as investors cannot learn about the productivity of inactive firms. Increased uncertainty fuels investors’ pessimism, which restricts even more firms’ access to funding, and further amplifies the recession. Taken together, this model explains why a temporary financial shock can develop into a large and persistent “funding freeze”. The paper, which highlights the role played by the interaction of informational and financial frictions, also has important policy implications: for instance, direct transfers to firms should be favored over banks’ recapitalization.
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2019 Young Researcher Award
The selection committee headed by Gilles Saint-Paul, scientific director of the SCOR-PSE Chair, awarded the 2019 prize to Maryam Farboodi, Assistant Professor of Finance at the MIT Sloan School of Management for her recent paper titled “International and Voluntary Exposure to Counterparty Risk”. In this paper, Maryam develops a model of the financial sector in which endogenous intermediation among debt-financed banks generates excessive systemic risk.
There is overwhelming evidence that interbank markets exhibit a core-periphery structure, which may increase systemic risk. In line with this observation, this work provides a new theoretical framework to analyze the endogenous formation of networks in the financial sector. Maryam then shows that the interbank network generated by the model is socially inefficient: Banks who make risky investments overconnect, exposing themselves to excessive counterparty risk, while banks who mainly provide funding end up with too few connections. Overall, her work suggests that explicitly modeling the interaction between banks’ incentives to capture higher returns, with intermediation, a necessary mechanism to allocate liquidity within the financial system, jointly explains the stylized facts about global structure of interbank networks, interbank interconnectedness, and gross and net exposures among financial institutions. Moreover, by providing sharp predictions about sources of inefficiency in interbank relationships, the model contributes to the heated policy debate on how to regulate the financial market.
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