Topic: Financial Entanglement: A Theory of Incomplete Integration, Leverage, Crashes, and Contagion
Speaker: Jianfeng Yu, Associate Professor of Finance, Carlson School of Management, University of Minnesota
Date: March 14th, 2014 (Fri.)
Time: 1:00-2:30pm
Location: Building 4, Room 101
Language: English
Abstract:
We propose a unified model of limited market integration, asset-price determination, leveraging, and contagion. Investors and firms are located on a circle, and access to markets involves participation costs that increase with distance. Despite the ex-ante symmetry of investors, their strategies may (endogenously) exhibit diversity, with some investors in each location following high-leverage, high-participation, and high-cost strategies and some unleveraged, low-participation, and low-cost strategies. The capital allocated to high-leverage strategies may be vulnerable even to small changes in market-access costs, which can lead to discontinuous price drops, de-leveraging, and portfolio-flow reversals. Moreover, the market is subject to contagion, in that an adverse shock to investors at a subset of locations affects prices everywhere.
About the speaker:
Dr. Jianfeng Yu is an Associate Professor of Finance in Carlson School of Management at University of Minnesota. Dr. Yu received his Ph.D. in Finance from The Wharton School, University of Pennsylvania in 2008, and also had his doctoral studies in Statistics at Yale University from 2000 to 2003. Dr. Yu’s current research interests focus on behavioral asset pricing, asset pricing in RBC models, asset pricing with frictions and international markets. His research has been published in leading academic journals, such as Journal of Financial Economics, Journal of Monetary Economics and Management Science .
