From November 2014 I am a Senior Lecturer at the School of Economics at the University of Cape Town and with AIFMRM, the African Institute of Financial Markets and Risk Management. I am also a Policy Associate at Economics Research Southern Africa, and a Research Economist at the Research Center of Deutsche Bundesbank. Please note that this is my private website and the views presented here do not necessarily reflect the views of Bundesbank or the ESCB.
- July 2014.
"Contagious Synchronization and Endogenous Network Formation in Financial Networks" (with Christoph Aymanns, Oxford), Journal of Banking and Finance (forthcoming). [abstract] [paper] [video (starts at ~20min)]
When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning.
- February 2013.
"The Effect of Interbank Network Structure on Contagion and Common Shocks", Journal of Banking and Finance 37(7) (2013). [abstract] [latest version]
This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Evidence is provided that the central bank stabilizes interbank markets in the short-run only. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Systemic risk via contagion is compared to common shocks and it is shown that both forms of systemic risk require diﬀerent optimal policy responses.
December 2014. New! "A Network View on Interbank Market Freezes" (with Silvia Gabrieli, Banque de France) [abstract] [paper]
We study the liquidity allocation among European banks around the Lehman Brothers’ insolvency using a novel dataset of all interbank loans settled via the Eurosystem’s payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.
Work in progress:
- "The Determinants of Interbank Lending" (with Marcel Bluhm, Xiamen, and Jan-Pieter Krahnen, Goethe University Frankfurt).
- "Financial contagion revisited: aggregate liquidity risk and optimal portfolio choice" (with Toni Ahnert, Bank of Canada).
Interdisciplinary, Policy, and Other Publications
- "Seven Questions on Financial Interconnectedness" (with Camelia Minoiu, IMF), IMF Research Bulletin, (2014), March. [.pdf]
"Complex Derivatives" (with Stefano Battiston, ETH Zurich, Guido Caldarelli, IMT Lucca, Robert M. May, Oxford University, and Joseph E. Stiglitz, Columbia University), Nature Physics Vol.9, No.3, (2013). [abstract] [focus]
The intrinsic complexity of the financial derivatives market has emerged as both an incentive to engage in it, and a key source of its inherent instability. Regulators now faced with the challenge of taming this beast may find inspiration within the budding science of complex systems..
- "Systemic Risk in the Financial Sector" (with Ian Goldin, Mike Mariathasan, Oxford, and Tiffany Vogel), in: Ian Goldin and Mike Mariathasan: "The Butterfly Defect - Globalisation and Systemic Risk", Princeton University Press, (2014)
"Note on interlinkages in the South African interbank system" (with Nicola Brink), Special Note in the Financial Stability Review, South African Reserve Bank (March 2011). [abstract] [fsr]
This paper analyses the network structure of the South African overnight interbank market by employing measures from network theory. A unique data set of interbank transactions from the South African Multiple Options Settlement (SAMOS) system is used. It is shown that the South African interbank system has been largely stable and resilient over the period from March 2005 to June 2010, even in times of great distress on the international financial markets. The number of banks participating in the interbank market was approximately constant over the analysed period, as well as the high level of interconnectedness. A low average path length and high clustering coefficient indicate a high level of liquidity allocation and risk sharing in the system. Furthermore a Network Systemic Importance Index (NSII) is developed to assess the systemic importance of individual banks in South Africa. This index measures each banks size, interconnectedness and substitutability by employing network theory. It is a relative index in the sense that the systemic importance of any given bank does not only depend on the properties of the bank itself, but rather on the properties of the whole network. This approach is therefore less prone to moral hazard and can be used as a tool for macroprudential oversight in addition to microprudential supervision. The NSII addresses the cross-sectional dimension of systemic risk. It has to be stressed, however, that it gives no indication of the default probability of individual banks and has therefore be accompanied by other macroprudential tools for a full picture of systemic risk.
"Basel III and Systemic Risk Regulation - What Way Forward?", Global Financial Markets Working Paper Series 17-2011, (2011). [abstract] [paper] Published in Arribas, I., and Tortosa-Ausina, E., Banking integration and financial crisis: Some recent developments. Bilbao: Fundación BBVA. 2014.
One of the most pressing questions in the aftermath of the financial crisis is how to deal with systemically important financial institutions (SIFIs). The purpose of this paper is to review the recent literature on systemic risk and evaluate the regulation proposals in the Basel III framework with respect to this literature. A number of shortcomings in the current framework are analyzed and three measures for future reform are proposed: counter-cyclical risk-weights, dynamic asset value correlation multipliers, and enhanced transparency requirements for SIFIs.
I am developing black_rhino, an open source financial network multi-agent simulation. You can find the most recent version (including a short tutorial) at sourceforge.
Together with Tarik Roukny and Jens Krause I am developing NetGen, an open source software suite to clean and analyze supervisory data on financial networks. We used NetGen to extract the German interbank network from large credit register data (taking care of format changes in the raw data, bank mergers, etc.), match it with supervisory information on bank balance sheets, and do a network analysis on the data. You can find the latest version here.
University of Cape Town
Other masters thesis supervision.I am also open to supervise a thesis in computer science (with Geoff Nitschke, UCT) on
Useful advise: Lasse Heje Pedersen has a most useful tutorial on "How to succeed in academia" which I urge all students to read. Before starting to write your thesis or dissertation, read John Cochrane's writing tips for PhD Students (also useful for MBA Students). Those interested in applied microeconomics should also check out Jesse Shapiro's Unauthoritive Notes and his Code and Data for the Social Sciences: A Practitioner's Guide (with Matthew Gentzkow). Details of how to give an academic talk can be found on Jonathan Shewchuk's website.
Summer Schools and Short Courses
Banking and Modern Financial Economics (University of Pretoria), 13.+14. September 2011. The course outline can be found here. The literature for the course can be found here. Some introductory material for statistics can be found in the book by Grinstead and Snell.
Contact:E-mail: email@example.com (please use PGP) | firstname.lastname@example.org | email@example.com
Telephone: +27 21 406 1025 | Skype: co.georg
Postal Address: University of Cape Town, AIFMRM, Private Bag X1, Cape Town 8000, South Africa