Events
Tinbergen Institute Finance Lectures 2011
Holmström and Perotti: Liquidity and financial crises
Bengt R. Holmström is the Paul A. Samuelson Professor of Economics at Massachusetts Institute of Technology. He is a fellow of the American Academy of Arts and Sciences, the Econometric Society and an elected foreign member of the Royal Swedish Academy of Sciences and the Finnish Academy of Sciences and Letters. He is a research associate of the National Bureau of Economic Research, a member of the executive committee for the Center of Economic Policy Research and second Vice President of the Econometric Society.
Professor Holmström’s research interests are in the fields of contracting and incentives. He has contributed to the development of the theory of contracting and incentives, the theory of the firm, corporate governance the most recently to the understanding of liquidity problems and financial crises.
Enrico Perotti is Professor of International Finance at UvA. His research interests include Corporate governance and intermediation; political economy of finance; innovation theory; privatization; leadership and strategic investment timing.
Lecture title: Liquidity and financial crises
Popular accounts of the global financial crisis have mainly been looking for guilty parties. Greedy investment bankers, captive regulatory agents and ignorant consumers have been among the main characters implicated.
Before blaming human weaknesses, it is all important to understand to what extent the crisis was due to fundamental weaknesses in the financial system. No single, coherent theory or narrative has emerged that would adequately answer the many questions related to the financial crisis. But a set of identifiable approaches and set of models, building mainly on insights from modern corporate finance and contract theory, have emerged that have proved helpful in thinking about the financial crisis in a more structured way. The purpose of this lecture series is to present some representative models that can help us analyze financial crises.
The lectures will be structured around three topics:
- The demand for and supply of liquidity;
- The role of debt;
- Fragility and panics.
Date: September 26-29, 2011
Venue: Tinbergen Institute Amsterdam
Gustav Mahlerplein 117, Amsterdam
Programme
| Monday, September 26: The demand for and supply of aggregate liquidity | ||
| 09:30-10:00 | Registration and coffee | |
| 10:00-10:05 | Opening | |
| 10:05-12:00 | Lecture 1 | |
| 12:00-14:00 | Lunch | |
| 14:00-16:00 | Lecture 2 | |
| 16:00-17:30 | Drinks | |
| Tuesday, September 27: Information insensitivity and liquidity | ||
| 09:30‐10:00 | Coffee | |
| 10:00‐12:00 | Lecture 3 | |
| 12:00‐14:00 | Lunch | |
| 14:00‐16:00 | Lecture 4 | |
| 16:00‐17:00 | Consultations | |
| 17:00‐20:00 | Reception with buffet dinner | |
| Wednesday, September 28: Leverage, fire sales and financial crises | ||
| 09:30-10:00 | Coffee | |
| 10:00-12:00 | Lecture 5 | |
| 12:00-14:00 | Lunch | |
| 14:00-16:00 | Lecture 6 | |
| 16:00-17:00 | Consultations | |
Course structure and reading list
Introductory lecture for MPhil students (September 9, Prof Perotti)
Theories of debt
Gale, D. and M. Hellwig (1985), “Incentive-compatible debt contracts: The one period problem,” Review of Economic Studies, 52: 647-663.
Myers, S.C. and N.C. Majluf (1984), “Corporate financing and investment decisions when firms have information that investors do not have,” Journal of Finance, 39: 187-222.
Townsend, R. (1979), “Optimal contracts and competitive markets with costly state verification,” Journal of Economic Theory, 21 (2): 265-293.
Lectures 1 and 2 (Sept 26, Prof. Holmström)
The demand for and supply of aggregate liquidity
Holmström, B. and J. Tirole (2010), Inside and Outside Liquidity. Cambridge: MIT Press, chapters 3 and 5.
Diamond, D. and P. Dybvig (1983), “Bank runs, deposit insurance and liquidity,” Journal of Political Economy, 91: 401-419.
Holmstrom, B. and J. Tirole (1998), “Private and Public Supply of Liquidity”, Journal of Political Economy
Additional readings:
Caballero, R. and A. Krishnamurthy (2001), “International and domestic collateral constraints in a model of emerging market crisis,” Journal of Monetary Economics, 48: 513-548.
Woodford, M. (1990), “Public debt as private liquidity,” American Economic Review, Papers and Proceedings, 80: 382-388.
Holmström, B. and J. Tirole (2010), Inside and Outside Liquidity, chapter 7-8.
Lectures 3 and 4 (Sept 27, Prof. Holmström)
Information insensitivity and liquidity
Gorton, G. and G. Pennacchi (1990), “Financial intermediaries and liquidity creation,” Journal of Finance, 45 (1): 49-72.
Dang, T., G. Gorton and B. Holmström (2011), “Ignorance and the optimality of debt for liquidity provision”, mimeo, MIT and Yale University.
Dang, T., G. Gorton and B. Holmström (2011), “Repo, haircuts and liquidity”, mimeo, MIT and Yale University.
Pagano, M. and P. Volpin (2010), “Securitization, transparency and liquidity,” WP, London Business School.
Additional readings:
deMarzo, P. and D. Duffie (1999), “A liquidity-based model of security design,” Econometrica, 67 (1): 65-100.
deMarzo, P. I. Kremer and A. Skrzypacz (2005), “Bidding with securities: Auctions and security design,” American Economic Review, 95 (4): 936-959.
Yang, M. (2011), “Optimality of securitized debt with endogenous and flexible information acquisition,” mimeo, Princeton University.
Gorton, G. and A. Metrick (2010) “Haircuts,” Yale School of Management.
Lecture 5 and 6 (September 28, Prof. Holmström)
Leverage, fire sales and financial crises
Holmström, B. and J. Tirole (1997), “Financial intermediation, loanable funds and the real sector,” Quarterly Journal of Economics, 112 (3): 663-692
Adrian, T. and H. Shin (2010), “Liquidity and leverage,” Journal of Financial Intermediation, 19, 418-437.
Giannoli N., A. Shleifer and R. Vishny (2010), “Neglected risks, financial innovation, and financial fragility,” WP, Harvard University, December.
Additional readings:
Geanakoplos J. (2010), “The leverage cycle,” Cowles Foundation DP (also in NBER Macroeconomics Annual, 2009).
Giannoli N., A. Shleifer and R. Vishny (2010), “A model of shadow banking,” WP, Harvard University, December.
Caballero, R. and A. Simsek (2010) “Fire sales in a model of complexity,” WP, MIT.
Hanson, S. and A. Sunderam (2010), “Are there too many safe securities? Securitization and the incentives for information production,” mimeo, Harvard University.
Stein, J. (2010). “Monetary policy as financial stability regulation,” WP, Harvard University.