Research

Liquidity, Funding and Capital

In order to function properly, banks need funds. These funds can be in form of capital or debt, and both these forms have associated costs. The easiness to obtain these funds on the market is determined by how liquid said market is. In this sense, the 2007-2008 financial crisis was a liquidity crisis, i.e. banks were facing difficulties in obtaining funds on the market. The costs associated with liquidity, debt, and capital can alter the way banks decide to trade and invest. In my research I build models to incorporate the above mentioned costs in the market making and trading decisions of investment banks.

Credit Risk

If one of the two parties involved in a contract defaults, this may cause losses for the party not at fault which will recover only a fraction of what the defaulted party owed her. This is a typical example of how credit risk affects transactions, but it is not the only way. Banks indeed reevaluate their positions to reflect the credit quality of their counterparties. This reevaluation can cause big losses. For example, according to the Basel committee, during the financial crisis of 2007-2008 two-thirds of the losses were caused by a worsening in the credit quality of a counterparty and only one third by actual defaults. In my work I study how credit risk is priced by the market, and how it interacts with other the risks faced by financial institutions.

Systemic Risk

When we evaluate the soundness of banks, funds, insurances, and other financial actors we cannot do so in isolation. As the 2007-2008 financial crisis confirmed, ties between different financial entities can become liaisons dangereuses in turbolent times. It is therefore important to study how the financial network topology interacts with market shocks. In my work I investigate how the topology of a financial network affects its resilience and try to understand which structures lead to a more secure financial market.

Contact