Final Report Summary - SYSTEMICRISK (Systemic Risk and Feedback to the Real Economy)
Under the second theme, we have built an influential model that studies the feedback effect from the financial market to the real economy using the information channel. The outcome of this project is already published in the leading academic journal. It has been applied to explain the Great Recession where the volatility in the financial market causes the changes in the real economy. This one is with Emre Ozdenoren, a co-PI of the grant. It shows that the systemic risk arises endogenously from contractual and information frictions, highlighting the role of a central planner in moderating the impact of these frictions. I have also completed an innovative methodological paper with Georgy Chabakauri and Konstantinos Zachariadis . It is on “Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims,” under review at a top economic journal. It develops a new framework in modeling asset price formation in the presence of information frictions where assets can be any types of derivatives. It formulates an information spanning condition that results in a M-M equivalent result of information irrelevant theorem.