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Systemic Risk and Feedback to the Real Economy

Objective

In this proposal I present two research themes that apply endogenous risk analysis to identify channels for the creation of systemic risk via various feedback loops. These projects identify new ways to consider and measure systemic financial risks and, more importantly, the linkages between the financial risks and the real economy, and the welfare consequences.

In the first research theme, the focus will be on the effect of network externality on systemic risk formation. I plan to model and estimate network externality using uniquely available datasets on interbank payment flows in the UK; on 176 UK banks’ counterparty exposure with detailed breakdown of market instruments, and on the BIS bilateral bank capital flows respectively. These analyses are important to understand the role of network in dampening or amplifying shocks and provide quantitative measurement of network-originated systemic (liquidity/default) risks. The impact of these projects is not limited to academia but also has important policy implications.

The second research theme will focus on the feedback effects and coordination that lead to excessive systemic risks. In reality, channels for systemic risks arise from unintended consequences embedded in constraints, regulations and frictions that lead to feedback loops and undesirable coordination. For example, my earlier work on feedback between the financial markets and the real economy (Ozdenoren and Yuan 2008, Goldstein, Ozdenoren and Yuan 2011, 2013) has shown that feedback through information friction channels could create excessive financial and real volatilities. In the proposal, I outline a series of projects that examine feedback channels that are related to compensation contracts of CEOs, liquidity, firesales, and regulatory features such as bailouts on excessive correlated risk-taking in the economy.

Field of science

  • /social sciences/economics and business/business and management/commerce

Call for proposal

ERC-2013-CoG
See other projects for this call

Funding Scheme

ERC-CG - ERC Consolidator Grants

Host institution

LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Address
Houghton Street 1
WC2A 2AE London
United Kingdom
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 641 932
Principal investigator
Zhichao Kathy Yuan (Prof.)
Administrative Contact
Jonathan Deer (Mr.)

Beneficiaries (2)

LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
United Kingdom
EU contribution
€ 641 932
Address
Houghton Street 1
WC2A 2AE London
Activity type
Higher or Secondary Education Establishments
Principal investigator
Zhichao Kathy Yuan (Prof.)
Administrative Contact
Jonathan Deer (Mr.)
LONDON BUSINESS SCHOOL
United Kingdom
EU contribution
€ 57 006
Address
Regent S Park
NW1 4SA London
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Melanie Armstrong (Ms.)