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Market Beliefs and Optimal Policy in the Presence of Disasters

Descrizione del progetto

Una nuova metodologia si rivolge al comportamento del mercato in caso di catastrofi

Quando si tratta di prevedere il comportamento del mercato e di affrontare le catastrofi, i metodi tradizionali non sono all’altezza. Il progetto Disasters, finanziato dal Consiglio europeo della ricerca, propone una soluzione innovativa in questo ambito. Considerando che l’incertezza del mercato è guidata da shock normali o moti browniani, l’approccio del progetto esamina la possibilità di salti e disastri. Un’altra preoccupazione che viene affrontata è la mancanza di un quadro di riferimento per l’allocazione delle risorse a fronte di varie potenziali catastrofi. Disasters propone di utilizzare dati osservabili sui prezzi dei beni e di fornire ai decisori politici un quadro di riferimento per mitigare i rischi associati. Questo lavoro ha grandi potenzialità per quanto riguarda il miglioramento della nostra comprensione della gestione dei disastri.

Obiettivo

My proposal consists of two strands linked by a common theme--namely a concern for the impact of disasters, in financial markets and more generally--and by a shared methodology.

In the first of these strands, I propose to develop ways of using observable asset price data to infer the beliefs of market participants about various quantities that are central to financial economics, including (i) the equity premium; (ii) the forward-looking autocorrelation of the market (i.e. time-series momentum); (iii) the risk premia associated with individual stocks; (iv) the correlation between stocks; and (v) measures of asymmetric risk, such as the forward-looking probability of a significant downward jump in the stock market over some prescribed time period.

This work will exploit theoretical techniques that I have developed in previous research, and that allow for the possibility of jumps and disasters in financial markets. I will therefore be able to avoid the unpalatable assumption—which is made, implicitly or explicitly, in much of the finance literature—that uncertainty is driven by conditionally Normally distributed shocks (or, in continuous time, by Brownian motions). The importance of doing so is underscored by the turmoil in financial markets over the last few years.

These techniques will also be applied in the second strand of my proposal, which focuses on issues related to catastrophes more generally, including for example climate change; highly contagious viruses on the scale of the influenza pandemic of 1918; or nuclear or bio-terrorism. This project will be joint with Professor Robert S. Pindyck of MIT. The goal is to provide a framework within which policymakers, faced with multiple different types of potential catastrophe, can determine how society’s limited resources should best be used to alleviate the associated risks.

Meccanismo di finanziamento

ERC-STG - Starting Grant

Istituzione ospitante

LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Contribution nette de l'UE
€ 1 287 755,00
Indirizzo
Houghton Street 1
WC2A 2AE London
Regno Unito

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Regione
London Inner London — West Westminster
Tipo di attività
Higher or Secondary Education Establishments
Collegamenti
Costo totale
€ 1 287 755,00

Beneficiari (1)