ERC FUNDED PROJECTS

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.

1 287 755 €

Start date: 2015-05-01, End date: 2020-04-30

Why do ethnic differences matter in some cases and not in others? What determines the strength of ethnic self-identification? This question is central to understanding the consequences of ethnic divisions for conflict and economic development and their policy implications but it was neglected by economic research until now. This project aims at filling this gap by endogenizing ethnic identity. We study how the salience of ethnic differences depends on economic and social context and policies of nation building. Our research program is organized around 3 pillars focusing on social, economic, and political determinants of ethnic tensions, respectively. The first pillar tests social psychology theories of ethnic identity using natural experiments, generated by forced mass movements of ethnic groups in Eastern Europe and from Eastern Europe to Central Asia as a result of WWII. The second pillar studies how market interactions between representatives of different ethnic groups and, in particular, ethnic occupational segregation affects ethnic tensions in the context of historical anti-Jewish violence following agro-climatic income shocks in the 19th and 20th century Eastern Europe. The third pillar focuses on the effects of political manipulation on ethnic conflict in the context of the historical experiment of nation building in Central Asia. It studies how political empowerment of a certain ethnic elite in a multi-ethnic traditional society coupled with a set of nation-building policies affects ethnic conflicts depending on the pre-existing ethnic mix and the distribution of political power among ethnic elites. This research will shed light on factors that make ethnic diversity important for conflict and economic development.

1 598 308 €

Start date: 2015-11-01, End date: 2020-10-31

The objective of the proposal is to examine ways to increase European growth through technological and managerial innovation. The technological innovation aspect is focused on examining the lifecycle of innovators and entrepreneurs across several advanced countries. We will examine the impact of financial constraints, tax and schooling policies on stimulating greater innovation. The second theme will examine by how much managerial practices can account for differences in the wealth of nations and how management quality can be improved, focusing on randomized control trials of business support polices. In addition to conducting our own surveys and drawing on administrative data, we will use Big Data techniques to measure management and corporate culture within firms. As a package this will constitute a ground-breaking piece of social science that will change the way we think about what drives prosperity across firms and countries. We are confident that this will lay foundations for better policies in Europe and elsewhere to help improve growth.

1 957 592 €

Start date: 2015-11-01, End date: 2020-10-31

My project consists of three lines of work. 1. Incentives of Money Managers and Asset Pricing The leading theories of asset pricing stipulate that prices in financial markets are determined by households who seek to optimise lifetime consumption (or by the so-called representative consumer ). This approach leaves no role for important institutional frictions such as, e.g., financial constraints and contract-induced incentives that played a major role in the 2008 crisis. An analysis of such frictions will add vastly to our understanding of how institutions make decisions and will also allow us to explore the implications of these decisions for asset prices. I propose to depart from the representative agent paradigm and introduce explicitly institutional investors into asset-pricing models. My goal is to understand how institutions affect financial markets and the real economy and to help develop appropriate policy responses. 2. International macro-finance In the past two decades, economic globalisation has produced an unprecedented rise in cross-border equity holdings. Accounting for capital gains on these equity holdings, currently disregarded both in the official statistics and in traditional international macroeconomics, may potentially overturn implications and policy recommendations of the leading theories. In this project, I seek to enrich the field by incorporating explicitly portfolio choice and capital gains on financial assets. Such a theory marries two fields of research: international economics (Economics) and asset pricing (Finance). 3. Combining the above two areas The 2008 crisis was sparked by banks and lead to a worldwide recession. Combining the insights from the first two projects, I intend to research how the instability spreads across countries and how incentives of institutions ought to be designed to limit the consequences of their actions for asset values and the real economy.

925 910 €

Start date: 2010-11-01, End date: 2016-10-31