I am an Associate Professor at the University of Cape Town and hold the South African Reserve Bank Research Chair in Financial Stability Studies. I also hold a part-time position as Research Economist at Deutsche Bundesbank. Please note that this is my private website and the views presented here do not necessarily reflect the views of the SARB, Deutsche Bundesbank or the ESCB.
Note that due to privacy concerns I will be phasing out my gmail address by January 2020. Please use my UCT address instead, encrypting messages with my public key.
Most of the code I am developing is on github. In particular, check out my teaching repo and the included wiki, which contains a lot of additional material. The 2019 slides for my Fintech and Cryptocurrencies course are quite large, so they are online here.
Teaching We have launched a fantastic online short course on Fintech: Disruption in Finance aimed at finance professionals in collaboration with GetSmarter. You can enroll here. We have also launched our second Coursera massive open online course on How Entrepreneurs in Emerging Markets can master the Blockchain Technology. You can enroll here. You can find our course on Financial Regulation in Emerging Markets and the Rise of Fintech Companies. Check out our awesome promo video. You can enroll here.
May 2017. "Information Contagion and Systemic Risk" (with Toni Ahnert, Bank of Canada), Journal of Financial Stability 35. [abstract] [paper]
We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint default of banks. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank and trigger information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases systemic risk overall. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.
Information contagion can reduce systemic risk if banks lend to each other because ex-post counterparty risk leads to more prudent ex-ante portfolio choice.
- January 2015.
"Contagious Synchronization and Endogenous Network Formation in Financial Networks" (with Christoph Aymanns, LSE), Journal of Banking and Finance 50(1) (2015). [abstract] [paper] [code available upon request]
When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning.
Banks act based on a private and a social signal in a simple extension of Bayesian learning. The social signal is stronger if banks observe a larger group of peers which leads to correlated investment strategies of highly interconnected banks.
- February 2013.
"The Effect of the Interbank Network Structure on Contagion and Common Shocks", Journal of Banking and Finance 37(7) (2013). [abstract] [paper] [code]
This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Evidence is provided that the central bank stabilizes interbank markets in the short-run only. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Systemic risk via contagion is compared to common shocks and it is shown that both forms of systemic risk require diﬀerent optimal policy responses.
A dynamic multi-agent model of the financial system. The interbank network structure does not always affect financial stability and central bank liquidity provision can stabilize the interbank market in the short-run only.
Papers Under Revision
June 2018. "Systemic Risk-Shifting in Financial Networks" (with Matthew Elliott, Cambridge, and Jonathon Hazell, MIT) [abstract] [paper available upon request] - Revision requested by the Journal of Economic Theory
Banks face different but potentially correlated risks from outside the financial system. Financial connections can help hedge these risks, but also create the means by which shocks can propagate. We examine this tradeoff in the context of a new stylised fact we present: German banks are more likely to have financial connections when they face more similar risks—potentially undermining the hedging role of financial connections and contributing to systemic risk. We find that such patterns are socially suboptimal, but can be explained by risk-shifting. Risk-shifting motivates banks to correlate their failures with their counterparties even though it creates systemic risk.
We provide a novel mechanism why banks would lend to other banks that have similar real exposures and show that predictions of our model are in line with empirical evidence from Germany.
August 2017. "A Network View on Interbank Liquidity" (with Silvia Gabrieli, Banque de France) [abstract] [paper] - Revision requested by the Journal of Banking and Finance
The euro area overnight interbank market is best described as a network of over-the-counter lending relationships. We study liquidity reallocation in this interbank network using a novel dataset of all interbank loans settled between European banks. We show the existence of a centrality premium when banks act as intermediaries of liquidity: banks with a one standard deviation higher betweenness centrality capture a 30% larger intermediation spread. Our results are in line with predictions from models of intermediation and bargaining in networks, but are difficult to reconcile with search based models of over-the-counter markets.
The euro area interbank market is an over-the-counter market with a non-trivial network structure. Banks in this market enjoy a centrality premium which can easily be understood in models of bargaining in networks.
Update! August 2019. "The Cape of Good Homes: Exchange Rate Depreciations, Foreign Demand and House Prices" (with Allan Davids, UCT) [abstract] [paper]
We study how foreign buyers in the housing market react to large local exchange rate depreciations and the subsequent impact on house prices using novel transaction level data for Cape Town, South Africa. Foreign purchases are more likely to be in cash and concentrate in luxury suburbs. Foreign buyers pay higher prices and realize lower capital gains than locals. These cannot be explained by differences in property characteristics, how buyers choose to finance their purchases, or market timing. Using historically large depreciations as positive shocks to foreign non-resident demand, we find that areas with a large pre-existing population of foreign born residents experience quality-adjusted price increases relative to other geographically close areas in the month following the depreciations. These effects are larger and more precisely estimated in more affluent areas.
Following historically large exchange rate depreciations, foreign demand for property in Cape Town increases. This does not drive up prices for locals, though. Instead, foreigners realize lower capital gains upon resale.
September 2018. "What 5,000 Acknowledgements Tell Us About Informal Collaboration in Financial Economics" (with Michael Rose, MPI for Innovation and Competition) [abstract] [paper] [New! data repo]
Media coverage: voxeu.org
We present and discuss a novel dataset on informal collaboration in Financial Economics. The data is derived from acknowledgement sections of papers. We focus on the network of informal collaboration, connecting authors and commenters. The network contains useful information when studying various outcomes (academic productivity, citation count), even above co-author networks. Among other things, we ﬁnd that authors connecting otherwise distinct research communities publish less in top journals, but receive above journal-average citations, and that female researchers are less often acknowledged than comparable male counterparts. Finally, we list the most central researchers in Financial Economics and study determinants of centrality.
Financial economists collaborate by commenting on each other's papers. We use the information captured in acknowledgements, construct the social network of informal collaboration, and highlight several interesting stylized facts.
September 2018. "Similar Investors" (with Diane Pierret, HEC Lausanne, and Sascha Steffen, Frankfurt School) [abstract] [paper]
We study the effect of strategic complementarities among investors on their decisions to continue to invest in a security issuer. Using detailed security level holdings of U.S. Money Market Mutual Funds (MMFs), we construct a novel measure of portfolio similarity among institutional investors (i.e. MMFs) who are exposed to the same security issuer. Consistent with correlated liquidity needs of more similar investors, the similarity of a fund to other investors in an issuer induces a correlation between the default states of the issuer and the states where the fund's liquidity demand is high. Among funds investing in the same issuer at the same time, we find that the funds reducing their exposure to the issuer are the most similar funds. At the issuer level, the average similarity of the funds investing in an issuer predicts the issuer's total funding flows in the next period. In other words, issuers cannot substitute this loss in funds from similar investors, particularly during crises, and are thus exposed to greater funding liquidity risk.
Mutual funds reduce their exposure to a security issuer more if they are more similar to other funds investing in the same security issuer. This increases issuers' liquidity risk.
September 2018. "Illiquidity Spirals in Over-the-Counter Repo Markets" (with Christoph Aymanns, St. Gallen, and Ben Golub, Harvard) [abstract] [paper]
We model intermediaries trading economically coupled assets, each asset in its own over-the-counter market--e.g., secured debt and the underlying collateral. Incentives to provide liquidity in one market are increasing in counterparties' activity in both markets. The intermediaries' activity is thus the outcome of a game of strategic complements on two coupled trading networks. We model a crisis as an exogenous change to network structure, as well as the exogenous exit of some intermediaries. This causes an illiquidity spiral across the two networks. We find that in coupled networks, in contrast to uncoupled ones, illiquidity spirals can be so severe that liquidity vanishes discontinuously as we vary the shock. Liquidity can be improved if one of the two OTC markets is replaced by an exchange, or if the two OTC markets have more links in common.
The extent of illiquidity spirals in over-the-counter repo markets depends on the network structure of the repo and collateral market.
August 2018. "A privacy-preserving system for data ownership using blockchain and distributed databases" (with Sabine Bertram, UCT) [abstract] [paper]
Blockchain technology has the potential to revolutionize the way we store, use, and process data. Even if blockchains were designed to store data, this information can–usually–be viewed by every node hosting the blockchain which means that blockchains cannot handle private data. Decentralized databases exist that guarantee privacy by encrypting user data with the user’s private key, but this prevents easy data sharing altogether. In many real world applications, from student data to medical records, it is, however, desirable that user data is anonymously searchable. In this paper we present a novel system that gives users ownership over their data while at the same time enabling them to make their data searchable within previously agreed upon limits. We discuss applications of our methods to university’s student records and medical data.
We present a novel system for storing sensitive personal information such as student data and medical records that ensures privacy, searchability, and a weak notion of data ownership.
August 2017. "Fake News in Social Networks" (with Christoph Aymanns, St. Gallen, and Jakob Förster, Oxford) [abstract] [paper]
Media coverage: Bloomberg / Defense One
We model the spread of news as a social learning game on a network. Agents can either endorse or oppose a claim made in a piece of news, which itself may be either true or false. Agents base their decision on a private signal and their neighbors' past actions. Given these inputs, agents follow strategies derived via multi-agent deep reinforcement learning and receive utility from acting in accordance with the veracity of claims. Our framework yields strategies with agent utility close to a theoretical, Bayes optimal benchmark, while remaining flexible to model re-specification. Optimized strategies allow agents to correctly identify most false claims, when all agents receive unbiased private signals. However, an adversary's attempt to spread fake news by targeting a subset of agents with a biased private signal can be successful. Even more so when the adversary has information about agents' network position or private signal. When agents are aware of the presence of an adversary they re-optimize their strategies in the training stage and the adversary's attack is less effective. Hence, exposing agents to the possibility of fake news can be an effective way to curtail the spread of fake news in social networks. Our results also highlight that information about the users' private beliefs and their social network structure can be extremely valuable to adversaries and should be well protected.
We model the spread of fake news as a learning game on a social network and use deep learning methods to solve the model. When an attacker has access to information about the strength of users' private beliefs, fake news spread faster.
June 2017. "Informal Intellectual Collaboration with Central Colleagues" (with Michael Rose, MPI for Innovation and Competition, and Daniel Opolot, University of Cape Town) [abstract] [paper]
Media coverage: Times HigherEd / LSE Impact Blog / World Economic Forum
When preparing a research article, academics engage in informal intellectual collaboration by asking their colleagues for feedback. This collaboration gives rise to a social network between academics. We study whether informal intellectual collaboration with an academic who is more central in this social network results in a research article having higher scientific impact. To address the well-known reflection problem in estimating network effects, we use the assignment of discussants at NBER summer institutes as a quasi-natural experiment. We show that manuscripts discussed by a discussant with a 10% higher than average Bonacich centrality rank results in 1.4% more citations and a 5% higher probability that an article is published in a top journal. To illustrate our results, we develop a structural model in which a positive externality from intellectual collaboration implies that collaborating with a more central colleague results in larger scientific impact of the research article.
Getting feedback increases the impact of research, and even more so if the person giving feedback plays an important role in the profession’s social network.
June 2016. "Interbank Intermediation" (with Marcel Bluhm, Xiamen University, and Jan-Pieter Krahnen, Goethe University Frankfurt) [abstract] [paper]
This paper explores the economics of interbank lending and borrowing using bank-balance sheet data for Germany, the largest European economy. Our 2002-2014 panel data set allows us to analyze the cross section and the dynamics of the observed interbank exposures. Our findings suggest a genuine intermediation process within the banking system, with implications for allocative efficiency and financial stability. A typical bank in our sample holds a significant amount of term and overnight interbank positions on both sides of the balance sheet simultaneously, and at any point in time. The average contract length in the German interbank market is well above one year, which stands in contrast to the widely held view that interbank exposures are largely overnight. Based on panel regressions, we find the build-up of the interbank book to be driven by innovations in the client book (i.e. non-bank deposit taking and lending). The resulting interbank book affects the bank’s duration gap, the maturity disparity between bank assets and bank liabilities. A bank’s duration gap is often seen as its major macroeconomic risk factor. Overall our findings lend support to a theory of banking that involves leverage stacks, i.e intermediation among banks.
Banks use the interbank market to manage their duration gap. As a consequence, the average maturity of an interbank debenture in Germany is more than one year.
Work in progress:
- "Contagious Zombies" (with Christian Bittner, Bundesbank, and Falko Fecht, Frankfurt School).
- "Anticipated Financial Contagion" (with Toni Ahnert, Bank of Canada, and Gideon du Rand, Stellenbosch).
- "Measuring Regulatory Complexity" (with Jean-Edouard Colliard, HEC Paris).
Interdisciplinary, Policy, and Other Publications
- "Revealing patterns of local species richness along environmental gradients with a novel network tool" (with Mara Baudena, Utrecht, Angel Sanchez, UC3M, Paloma Ruiz-Benito, Alcala, Miguel A. Rodriguez, Alcala, Miguel A. Zavala, Alcala, and Max Rietkerk, Utrecht), Nature Scientific Reports 5 (2015). [paper]
- "Seven Questions on Financial Interconnectedness" (with Camelia Minoiu, IMF), IMF Research Bulletin, (2014), March. [.pdf]
"Complex Derivatives" (with Stefano Battiston, ETH Zurich, Guido Caldarelli, IMT Lucca, Robert M. May, Oxford University, and Joseph E. Stiglitz, Columbia University), Nature Physics Vol.9, No.3, (2013). [abstract] [focus]
The intrinsic complexity of the financial derivatives market has emerged as both an incentive to engage in it, and a key source of its inherent instability. Regulators now faced with the challenge of taming this beast may find inspiration within the budding science of complex systems..
- "Systemic Risk in the Financial Sector" (with Ian Goldin, Mike Mariathasan, Oxford, and Tiffany Vogel), in: Ian Goldin and Mike Mariathasan: "The Butterfly Defect - Globalisation and Systemic Risk", Princeton University Press, (2014)
"Note on interlinkages in the South African interbank system" (with Nicola Brink), Special Note in the Financial Stability Review, South African Reserve Bank (March 2011). [abstract] [fsr]
This paper analyses the network structure of the South African overnight interbank market by employing measures from network theory. A unique data set of interbank transactions from the South African Multiple Options Settlement (SAMOS) system is used. It is shown that the South African interbank system has been largely stable and resilient over the period from March 2005 to June 2010, even in times of great distress on the international financial markets. The number of banks participating in the interbank market was approximately constant over the analysed period, as well as the high level of interconnectedness. A low average path length and high clustering coefficient indicate a high level of liquidity allocation and risk sharing in the system. Furthermore a Network Systemic Importance Index (NSII) is developed to assess the systemic importance of individual banks in South Africa. This index measures each banks size, interconnectedness and substitutability by employing network theory. It is a relative index in the sense that the systemic importance of any given bank does not only depend on the properties of the bank itself, but rather on the properties of the whole network. This approach is therefore less prone to moral hazard and can be used as a tool for macroprudential oversight in addition to microprudential supervision. The NSII addresses the cross-sectional dimension of systemic risk. It has to be stressed, however, that it gives no indication of the default probability of individual banks and has therefore be accompanied by other macroprudential tools for a full picture of systemic risk.
"Basel III and Systemic Risk Regulation - What Way Forward?", Global Financial Markets Working Paper Series 17-2011, (2011). [abstract] [paper] .
One of the most pressing questions in the aftermath of the financial crisis is how to deal with systemically important financial institutions (SIFIs). The purpose of this paper is to review the recent literature on systemic risk and evaluate the regulation proposals in the Basel III framework with respect to this literature. A number of shortcomings in the current framework are analyzed and three measures for future reform are proposed: counter-cyclical risk-weights, dynamic asset value correlation multipliers, and enhanced transparency requirements for SIFIs.
Software and Web Projects:
Registree MVP Online! We are building Registree, a decentralized student data platform that enables students to take ownership of their personal data. You can find our white paper here and a demo of our prototype here.
We are developing Black Rhino, an open source financial network multi-agent model framework. You can find the latest release (including a short tutorial) in our github repository.
Michael Rose and I have developed a website to accompany our paper on informal collaboration in financial economics. Here you will find a ranking of financial economists based on their centrality in the network of informal collaboration. To our website.
Together with a group of MCom and PhD students we have developed the first comprehensive systemic risk ranking for South African financial institutions. You can find details on our website.
I am fortunate to work with a group of outstanding students and postdoctoral researchers. If your contacts are missing or outdated, it is time to get in touch again!
University of Cape TownPostdoctoral Researchers (#: First placement)
- Joeri Schasfoort (PhD Groningen, 10/2019-)
- Suraj Shekhar (PhD Penn State, 08/2016-06/2019, #: Ashoka University, New Delhi)
- Jesper Riedler (PhD Giessen, 01/2018-12/2018, #: ZEW Mannheim)
- Christine Makanza (PhD UCT, 06/2016-09/2017, #: Lecturer UCT)
- Pawel Fiedor (PhD Krakow, 06/2015-06/2016, #: Research Economist, Bank of Ireland)
- Hylton Hollander (PhD Stellenbosch, 06/2015-01/2016, #: Lecturer Stellenbosch)
- Sabine Bertram (MSc HU Berlin, 01/2018-)
- Allan Davids (MSc Stellenbosch, 04/2017-)
- Esti Kemp (MCom Pretoria, 04/2016-, External PhD Student (SARB))
- Tina Koziol (MCom Jena, 04/2016-)
- Michael Rose (MSc Kiel, 04/2015-04/2018, #: Max Planck Institute for Innovation and Competition Munich)
- Gideon du Rand (MSc Stellenbosch, 04/2015-, PhD Student at Stellenbosch, #: Lecturer, Stellenbosch)
- Alexander Valentin (2019, intern, PhD Student Goethe University Frankfurt)
- Xiangling (Flora) Meng (2018, intern, Master Student MIT CSAIL)
- Philippa Sigl-Gloeckner (2017, intern, Master Student Imperial College London. Her thesis can be found here.)
- Sabine Bertram (2016, intern, Master Student HU Berlin)
- Ali Josue Limon (2016, intern, Master Student NYU)
- Dieter Wang (2015, intern, Master Student Tinbergen Institute, Amsterdam)
- Andrea Deghi (2015, intern, PhD Student Siena)
- Dr. Raphael Flore (2014, intern, PhD Student Cologne)
- Christoph Aymanns (2013, intern, PhD Student Oxford)
- Niccolo Stamboglis (2013, intern, PhD Student City University London)
- Florian Urbschat (2013, intern, Master Student at University of Hamburg)
- Tarik Roukny (2013, intern, PhD Student ULB)
New! We have now launched our second Coursera massive open online course on How Entrepreneurs in Emerging Markets can master the Blockchain Technology. You can enroll here. You can find our course on Financial Regulation in Emerging Markets and the Rise of Fintech Companies. Check out our awesome promo video. You can enroll here.
Useful advise: Lasse Heje Pedersen has a most useful tutorial on "How to succeed in academia" which I urge all students to read. Before starting to write your thesis or dissertation, read John Cochrane's writing tips for PhD Students (also useful for MBA Students). Those interested in applied microeconomics should also check out Jesse Shapiro's Unauthoritive Notes and Matthew Gentzkow's Code and Data for the Social Sciences: A Practitioner's Guide (with Jesse Shapiro). Details of how to give an academic talk can be found on Jonathan Shewchuk's website.
ContactE-mail: firstname.lastname@example.org | Public key
PGP: 9C5F 4812 9A6A 6717 F285 3825 ED2B 8B83 BC96 CCAB
Postal Address: University of Cape Town, School of Economics, Private Bag X1, Cape Town 8000, South Africa