Finance Seminar Series
The Finance Seminar Series at the Federal Reserve Bank of New York invites the most prominent academic researchers in the field of finance to talk about their research and their views on the recent financial crisis. The aim is to provide an exchange of ideas between academics and central bankers–researchers as well as policy makers–to further the understanding of the financial crisis, discuss its implications and inform current and future reform efforts. The 90-minute seminar usually takes place about six times per year, with an hour for the invited speaker followed by a discussion by a specialist of the NY Fed and a subsequent open discussion.

2014 Seminar Schedule
There are no seminars scheduled; however, this schedule will be updated with topics and papers periodically. So please check back frequently.
2013 Seminar Schedule
(This schedule will be updated with topics and papers periodically. So please check back frequently.)
November 8, 2013


Oliver Hart
Andrew E. Furer Professor of Economics at Harvard University

Financial Contracting and Bail-In
Professor Hart will present a framework for analyzing the restructuring of large complex banking organizations in financial distress, drawing on his extensive research on financial contracting. Charles Gray will discuss recent and ongoing U.S. policy initiatives designed to facilitate the orderly resolution of large financial firms.

May 20, 2013


Bengt Holmstrom
Paul A. Samuelson Professor of Economics and Professor of Economics and Management, MIT Department of Economics (joint appointment with Sloan School of Management)

Banks as Secret Keepers
Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets not be revealed, so that bank money does not fluctuate in value, reducing its efficiency in trade. This need for opacity conflicts with the production of information about investment projects, necessary for allocative efficiency. How can information be produced and not revealed? Financial intermediaries exist to hide such information; they are created and structured to keep secrets. For the economy as a whole, this can be accomplished by a separation in how firms finance themselves; they divide into bank finance and capital market/stock market finance based on how well they can be used to maintain information away from liquidity markets. Firms with large projects, risky projects or projects easy to evaluate are less likely to be financed by banks.

April 22, 2013


Stephen Ross
Franco Modigliani Professor of Financial Economics and a Professor of Finance

The Recovery Theorem
We can only estimate the distribution of stock returns but from option prices we observe the distribution of state prices. State prices are the product of risk aversion – the pricing kernel – and the natural probability distribution. The Recovery Theorem enables us to separate these so as to determine the market’s forecast of returns and the market’s risk aversion from state prices alone. Among other things, this allows us to recover the pricing kernel, the market risk premium, the probability of a catastrophe, and to construct model free tests of the efficient market hypothesis.

March 7, 2013


Ricardo J. Caballero
Ford International Professor of Economics and Director of the World Economic Laboratory
2012 Seminar Schedule
Dec. 5, 2012


Lasse Pedersen
John A. Paulson Professor of Finance and Alternative Investments
NYU Stern School of Business

Systemic Liquidity Risk: Two Monetary Tools
The financial crisis showed that high leverage due to moral hazard makes the financial system vulnerable and how macro shocks are amplified by liquidity spirals. To understand this systemic liquidity risk, we consider a theory of how capital constraints affect asset prices and the real economy. Systemic liquidity risk can be monitored and managed by using aggregate leverage as a second policy tool and by incentivizing each financial institution to consider its contribution to the overall systemic risk.

Oct. 24, 2012


Douglas Gale
Silver Professor of Economics
New York University

Liquidity Regulation
The financial crisis revealed multiple weaknesses in the funding of the banking system, including the collapse of the asset-backed commercial paper market, the "run on repo," liquidity hoarding, and serious disruptions in the interbank market. There are many questions that remain to be answered, but economic theory can offer insights into the causes of market failures and the design of optimal regulation. In this talk, I'll review a number of papers on the liquidity provision, market freezes, and maturity transformation, with an emphasis on welfare economics and the sources of market failure. I will end with some comments on the liquidity regulations proposed by the Basel Committee and a discussion of the need for structural changes in the banking system.

Sep. 27, 2012 Ross Levine
Willis H. Booth Chair in Banking and Finance
Haas School of Business at UC Berkeley

Guardians of Finance: Making Regulators Work for Us
In Guardians of Finance, economists James Barth, Gerard Caprio and Ross Levine argue that the financial meltdown of 2007 to 2009 was not an accident. The current system, the authors write, is simply not designed to make policy choices on behalf of the public. It is virtually impossible for the public and its elected officials to obtain informed and impartial assessments of financial regulation and to hold regulators accountable. Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a “Sentinel” to provide an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public—rather than that of the financial industry, the regulators, or politicians.

May 18, 2012 Andrew Lo
Charles E. and Susan T. Harris Professor of Finance and Director of the Laboratory for Financial Engineering
MIT Sloan School of Management

An Empirical Comparison of Systemic Risk Measures
In a recent survey paper, Bisias et al. (2012) provide a summary of 31 proposed measures for systemic risk in the financial system. In this paper, we perform an empirical comparison of a subset of these measures to determine their time series properties before, during, and after the Financial Crisis of 2007--2009. By comparing their empirical properties over time, we hope to identify which measures were most informative for navigating through the 1998 and the 2007--2009 crises. By constructing rolling-window estimates of these measures using only prior data, we control for the most blatant forms of look-ahead bias to assess the value of these measures as "early-warning signals". Finally, we explore the possibility of combining these measures to produce even more informative indicators of systemic risk.

April 27, 2012 John H. Cochrane
AQR Capital Management Distinguished Professor of Finance
University of Chicago Booth School of Business

Towards a Run-Free Financial System
I want to take seriously the Darrell Duffie (“Failure mechanics of dealer banks”) and Gary Gorton (“run on repo”) view that the central feature of our financial crisis was a “systemic run” starting in the shadow banking system. That view implies a strong limitation on what regulation should attempt to do. We don’t have to “regulate everything.” We just need to stop systemic runs. If that is accomplished we can go back to allowing companies to lose money or even fail. Rather than identify a large swath of the financial industry as “too big to fail”, or regulate all possible assets like mortgages, or try to have the Fed identify and clairvoyantly prick “bubbles,” all we need to do is to address contract externalities that lead to runs, and “systemic runs” in particular. That thought leads to a contract-focused rather than institution-focused structure of regulation. It requires rethinking our current basic approach to runs: insured or guaranteed liabilities, plus discretionary regulation to avoid moral hazard. The main lesson of the crisis should be that this system is broken and needs to be replaced. New technology can alleviate many of the standard objections to alternative approaches. For example, with instantaneous electronic transactions, “liquid” no longer need imply “fixed value” and hence “run prone.” You could pay for coffee by swiping a share of a mutual fund that trades at NAV.

March 15, 2012 Olivier Blanchard
Economic Counselor and Director of the Research Department
International Monetary Fund

The State of the World Economy: Where we are, and the Challenges we Face
The presentation will be on the state of the world economy and the challenges we face on the path to recovery. The presentation will feature discussions of the global economic slowdown, saving and deleveraging in advanced economies, the challenges that lie ahead for advanced economies such as the US, Japan and Europe and the emerging economies for recovery from the crisis, with an emphasis on the vulnerabilities in the Euro area.

Nov. 3, 2011 Maureen O’Hara
Robert W. Purcell Professor of Finance
Johnson Graduate School of Management at Cornell University

Flow Toxicity and Liquidity in a High Frequency World
Order flow is regarded as toxic when it adversely selects market makers, who may be unaware that they are providing liquidity at a loss. Flow toxicity can be measured by the Probability of Informed Trading (PIN). We present a new procedure to estimate PIN based on volume imbalance and trade intensity (the VPIN* flow toxicity metric). VPIN is updated in volume-time, rather than clock-time, making it applicable to the high frequency world. Estimating the VPIN metric does not require the intermediate estimation of non-observable parameters describing the order flow or the application of numerical methods. It does require trades classified as buys or sells as an input. We classify trades using a new bulk volume classification procedure that we argue is more useful in high frequency markets than the standard tick-by-tick classification procedures. We show that the VPIN metric is a useful indicator of short-term, toxicity-induced volatility.

Oct. 20, 2011 Robert Merton
School of Management Distinguished Professor of Finance
MIT Sloan School of Management

Observations from the Financial Crisis: Financial Innovation, Macrofinancial Risk Propagation, and Structural Systemic Risks
Professor Merton’s presentation will cover the following topics: Financial innovation and the risk of crisis: Fact and Fantasy; Macrofinancial risk: structure of credit risk propagation and integrated risk balance sheets for evaluating government policies; On the need for integrated systemic risk policy: how the superposition of benign processes can create substantial systemic risk in housing finance; Systemic risk differences between capital infusion-and-takeover versus bankruptcy policies for failing financial institutions: LTCM in 1998 vs. Lehman in 2008; Systemic risks arising from the inevitable incompleteness of models.

June 30, 2011 Thomas Philippon
Associate Professor of Finance
NYU Stern School of Business

The Evolution of the US Financial Industry from 1860 to 2007: Theory and Evidence
The share of finance in U.S. GDP displays large historical variations. I argue, using evidence and theory, that corporate finance is a key factor behind these evolutions. Corporate demand for intermediation depends crucially on the relative investment opportunities of firms with low cash flows (young firms) and firms with high cash flows (incumbents). A simple general equilibrium model is developed in order to separate demand and supply factors in the market for financial intermediation. The demand parameters accord well with historical evidence on the importance of entrants during technological revolutions. The supply parameters suggest financial regress in the 1930s and progress in the 1990s. The model accounts for much of the variation in the income share of the financial sector from 1860 to 2001. Only the period 2002-2007 appears puzzling.

May 25, 2011 David Scharfstein
Edmund Cogswell Converse Professor of Finance and Banking
Harvard Business School

The Economics of Housing Finance Reform: Privatizing, Regulating, and Backstopping Mortgage Markets
This paper analyzes the two leading types of proposals for reform of the housing finance system: (i) broad-based, explicit, priced government guarantees of mortgage-backed securities (MBS) and (ii) privatization. Both proposals have drawbacks. Properly-priced guarantees would have little effect on mortgage interest rates relative to unguaranteed mortgage credit during normal times, and would expose taxpayers to moral-hazard risk with little benefit. Privatization reduces, but does not eliminate, the government’s exposure to mortgage credit risk. It also leaves the economy and financial system exposed to destabilizing boom and bust cycles in mortgage credit. Based on this analysis, we argue that the main goal of housing finance reform should be financial stability, not the reduction of mortgage interest rates. To this end, we propose that the private market should be the main supplier of mortgage credit, but that it should be carefully regulated. This will require new approaches to regulating mortgage securitization. Moreover, we argue that while government guarantees of MBS have little value in normal times, they are valuable in periods of significant stress to the financial system, such as the recent financial crisis. Thus, we propose the creation of a government-owned corporation that would play the role of “guarantor-of-last-resort” for MBS during periods of crisis.

Apr. 26, 2011 Robert Engle
Michael Armellino Professor of Finance
NYU Stern School of Business

Volatility, Correlation and Tails for Systemic Risk Measurement
The Great Recession of 2007/2009 has motivated market participants, academics and regulators to better understand systemic risk. Regulation is now designed to reduce systemic risk. However, it is not yet clear how to measure systemic risk and in particular to determine which firms are the major contributors to the overall risk of the economy. This paper focuses on constructing measures of systemic risk based on public market data and consequently provides a quick and inexpensive approach to determining which firms deserve more careful scrutiny and regulation. The measure examined in this paper is the Marginal Expected Shortfall or MES. This is the expected loss an equity investor in a financial firm would experience if the overall market declined substantially. This measure can then be extrapolated to estimate equity losses for this firm in a future crisis and consequently the capital shortage that would be experienced as a consequence of the initial leverage. The contribution to systemic risk is then estimated as the percentage of capital shortfall that can be expected in a future crisis. MES depends upon the volatility of a firm equity price, its correlation with the market return and the comovement of the tails of the distributions. These in turn are estimated by asymmetric versions of GARCH, DCC and non-parametric tail estimators. Empirical results with 102 US financial firms find predictability in both time series and cross section and useful ranking of firms at various stages of the financial crisis.

Apr. 20, 2011 Raghuram Rajan
Eric J. Gleacher Distinguished Service Professor of Finance
University of Chicago Booth School of Business

Illiquid Banks, Financial Stability, and Interest Rate Policy
Do low interest rates alleviate banking fragility? Banks typically finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may choose to bail out banks being run. Unconstrained bailouts undermine the disciplinary role of deposits. Moreover, competition forces banks to make even higher promises to depositors, increasing intervention. By contrast, constrained intervention to lower rates maintains private discipline, while offsetting contractual rigidity. It may, however, still lead banks to make excessive liquidity promises. Anticipating this, central banks should raise rates more in normal times to offset their propensity to reduce rates in adverse times.

Mar. 24, 2011 Andrei Schleifer
Professor of Economics
Harvard University

A Model of Shadow Banking
We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model, outside investor wealth drives the demand for riskless debt and indirectly for securitization, intermediary assets and leverage move together as in Adrian and Shin (2010), intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the diversification strategies that stabilize finance under rational expectations expose intermediaries to massive losses, the financial system becomes extremely fragile, and insurance sold to investors misallocates risks. The model delivers financial instability and extreme fluctuations in market liquidity when tail risks are neglected.

2010 Seminar Schedule
Dec. 9, 2010 Hyun Song Shin
Hughes-Rogers Professor of Economics
Princeton University

Balance Sheet Capacity and Endogenous Risk
Banks operating under Value‐at‐Risk constraints give rise to a well‐defined aggregate balance sheet capacity that depends on expected risk. We derive a closed form solution for equilibrium risk in a dynamic banking model as the fixed point of the mapping that takes expected risk to actual risk. Fluctuations in bank balance sheet capacity closely mirror fluctuations in market risk premiums and amplification of shocks through feedback effects. Correlations in returns emerge even when underlying fundamental shocks are independent. We derive closed‐form solutions for market risk premiums, correlation and volatility and discuss implications for stochastic volatility and option pricing.

Nov. 22, 2010 Jeremy Stein
Moise Y. Safra Professor of Economics
Harvard University

Monetary Policy as Financial-Stability Regulation
This paper develops a model that speaks to the goals and methods of financial stability policies. There are three main points. First, from a normative perspective, the model defines the fundamental market failure to be addressed, namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short-term debt and leave the system excessively vulnerable to costly financial crises. Second, it shows how in a simple economy where commercial banks are the only lenders, conventional monetary-policy tools such as open-market operations can be used to regulate this externality, while in more advanced economies it may be helpful to supplement monetary policy with other measures. Third, from a positive perspective, the model provides an account of how monetary policy can influence bank lending and real activity, even in a world where prices adjust frictionlessly and there are other transactions media besides bank-created money that are outside the control of the central bank.

Oct. 6, 2010 Francis Longstaff
Allstate Professor of Insurance and Finance
UCLA Anderson School of Management

Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle
This paper shows that the price of a Treasury bond and an inflation-swapped TIPS issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS–Treasury mispricing has exceeded $56 billion, representing nearly eight percent of the total amount of TIPS outstanding. TIPS–Treasury mispricing is strongly related to supply factors such as Treasury debt issuance and the availability of collateral in the financial markets, and is correlated with other types of fixed-income arbitrages. These results pose a major puzzle to classical asset pricing theory. In addition, they raise the issue of why the Treasury issues TIPS, since in so doing it both gives up a valuable fiscal hedging option and leaves large amounts of money on the table.

May 25, 2010 Markus Brunnermeier
Edwards S. Sanford Professor of Economics
Princeton University

A Macroeconomic Model with a Financial Sector
This paper studies a macroeconomic model in which financial experts borrow from less productive agents in order to invest in financial assets. We pursue three set of results: (i) Going beyond a steady state analysis, we show that adverse shocks cause amplifying price declines not only through the erosion of net worth of the financial sector, but also through increased price volatility, leading to precautionary hoarding and fire sales. (ii) Financial sector’s leverage and maturity mismatch is excessive, since it does not internalize externalities it imposes on the labor sector and other financial experts due to a fire-sale externality. (iii) Securitization, which allows the financial sector to offload some risk, exacerbates the excessive risk-taking.

Apr. 1, 2010 John Campbell
Morton L. and Carole S. Olshan Professor of Economics and Chairman of the Economics Department
Harvard University

The Regulation of Consumer Financial Products
The recent financial crisis has led many to question how well businesses deliver and how well regulatory institutions address problems in consumer financial markets. In response, the Obama administration has proposed creating a new Consumer Financial Protection Agency. Other regulatory reforms have been proposed, and in some cases adopted, in recent years, at both the federal and state level. These include credit card reforms, new regulations on mortgage lending, provisions in the Pension Protection Act des-igned to increase savings in employer sponsored savings plans, and restrictions on payday loans. In this paper, we provide an overview of consumer financial product markets, detailing the purposes they serve, the extent to which they suffer from market failures or other deficiencies, and how they are currently regulated. We then consider various issues in regulatory reform, including when intervention is most likely to be warranted, potential instruments for correcting failures in these markets and when they are most likely to be appropriate and effective, the limits on government intervention, and how to measure whether government intervention is successful. Our discussion focuses on markets which have been subject to recent reforms or would be significantly impacted by proposed reforms, including home mortgages, payday lending, tax-favored savings accounts, and insurance.

Forced Sales and House Prices
This paper uses data on house transactions in the state of Massachusetts over the last 20 years to show that houses sold after foreclosure, or close in time to the death or bankruptcy of at least one seller, are sold at lower prices than other houses. Foreclosure discounts are particularly large on average at 27% of the value of a house. The pattern of death-related discounts suggests that they may result from poor home maintenance by older sellers, while foreclosure discounts appear to be related to the threat of vandalism in low-priced neighborhoods. After aggregating to the zipcode level and controlling for regional price trends, the prices of forced sales are mean-reverting, while the prices of unforced sales are close to a random walk. At the zipcode level, this suggests that unforced sales take place at approximately efficient prices, while forced-sales prices reflect time-varying illiquidity in neighborhood housing markets. At a more local level, however, we find that foreclosures that take place within a quarter of a mile, and particularly within a tenth of a mile, of a house lower the price at which it is sold. Our preferred estimate of this effect is that a foreclosure at a distance of 0.05 miles lowers the price of a house by about 1%.

Mar. 16, 2010 Franklin Allen
Nippon Life Professor of Finance and Economics
Wharton School of Business at the University of Pennsylvania

Financial Connections and Systemic Risk
We develop a model where financial institutions form strategic connections through overlapping portfolio exposures weighing the benefits of risk diversification against the costs of due-diligence. We study the effects of different network structures for systemic risk and welfare depending on whether financial institutions issue long or short term debt. Clustered networks where banks hold very similar portfolios are compared with unclustered networks where they hold less correlated portfolios. The network structure plays a role only in the case of short term financing, when investors condition their debt rollover decision on a signal revealing potential future bank defaults. We show that, depending on the size of costs banks incur when they default, the arrival of a negative signal can lead to early liquidation in a clustered network but not in an unclustered one so the latter can be superior. But if such a signal leads to early liquidation in both networks then the clustered network can be superior.

2009 Seminar Schedule
Dec. 16, 2009 Gary Gorton
Frederick Frank Class of 1954 Professor of Management and Finance
Yale School of Management

Securitized Banking and the Run on Repo
The Panic of 2007-2008 was a run on the sale and repurchase market (the “repo” market), which is a very large, short-term market that provides financing for a wide range of securitization activities and financial institutions. Repo transactions are collateralized, frequently with securitized bonds. We refer to the combination of securitization plus repo finance as “securitized banking”, and argue that these activities were at the nexus of the crisis. We use a novel data set that includes credit spreads for hundreds of securitized bonds to trace the path of crisis from subprime-housing related assets into markets that had no connection to housing. We find that changes in the “LIB-OIS” spread, a proxy for counterparty risk, was strongly correlated with changes in credit spreads and repo rates for securitized bonds. These changes implied higher uncertainty about bank solvency and lower values for repo collateral. Concerns about the liquidity of markets for the bonds used as collateral led to increases in repo “haircuts”: the amount of collateral required for any given transaction. With declining asset values and increasing haircuts, the U.S. banking system was effectively insolvent for the first time since the Great Depression.

Oct. 26, 2009 Darrell Duffie
Dean Witter Distinguished Professor of Finance
Stanford Graduate School of Business

The Failure Mechanics of Dealer Banks I explain the key failure mechanics of large dealer banks, and some policy implications. This is not a review of the financial crisis of 2007-2009. Systemic risk is considered only in passing. Both the financial crisis and the systemic importance of large dealer banks are nevertheless obvious and important motivations.

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