I am an Associate Professor with AIFMRM, the African Institute of Financial Markets and Risk Management at the University of Cape Town. I am also a Policy Associate at Economics Research Southern Africa, and a 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 Bundesbank or the ESCB.
Most of the code I am developing is on github.
May 2017. "Information Contagion and Systemic Risk" (with Toni Ahnert, Bank of Canada), Journal of Financial Stability (forthcoming). [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.
Update! December 2017. "Illiquidity Spirals in Over-the-Counter Repo Markets" (with Christoph Aymanns, St. Gallen, and Ben Golub, Harvard) [abstract] [paper]
Banks provide intermediation of two economically coupled assets, each traded on an OTC market — e.g., secured debt and the underlying collateral. We model banks' decisions to provide liquidity as a game of strategic complements on two coupled trading networks: incentives to be active in one network are increasing in its neighbors' activity in both networks. When an exogenous shock renders some banks inactive, other banks follow in an illiquidity spiral across the two networks. Liquidity can be improved if one of the two OTC markets is replaced by an exchange. For a class of market structures associated with random graphs, liquidity changes discontinuously in the size of an exogenous shock, in contrast to contagion on one network.
The extent of illiquidity spirals in over-the-counter repo markets depends on the network structure of the repo and collateral market.
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.
August 2017. "A Network View on Interbank Liquidity" (with Silvia Gabrieli, Banque de France) [abstract] [paper]
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.
June 2017. "Informal Intellectual Collaboration with Central Colleagues" (with Michael E. Rose and Daniel Opolot, University of Cape Town) [abstract] [paper]
Media coverage: Times HigherEd / LSE Impact Blog / World Economic Forum / Huffington Post
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.
December 2015. "Mirror, Mirror, on the Wall, Who is the Most Central of Them All?" (with Michael Rose, University of Cape Town) [abstract] [paper]
Media coverage: voxeu.org
In academia, informal collaboration is an integral element in the production of knowledge. We construct the social network of informal collaboration using acknowledgments of 2782 scholarly articles published in six journals in financial economics. We rank financial economists according to their centrality in the social network of informal collaboration and find that central commenters are not necessarily the most central or the most productive authors. We explore the determinants of high centrality rankings using detailed CV data for the most central academics. A PhD from a better ranked department is associated with a better centrality ranking. Seniority is associated with worse rankings, albeit at a decreasing rate.
Financial economists collaborate by commenting on each other's papers. We use the information captured in acknowledgements and construct the social network of informal collaboration to rank the most central and influential financial economists.
Work in progress:
- "The Cape of Good Homes: Foreign Demand and House Prices in Cape Town" (with Allan Davids, UCT).
- "Aggregate Liquidity Risk and Bank Portfolio Choice" (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:
Black Rhino 1.0 Released! 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)
- Jesper Riedler (PhD Giessen, 01/2018-)
- Daniel Opolot (PhD Maastricht, 09/2016-)
- Suraj Shekhar (PhD Penn State, 08/2016-)
- Christine Makanza (PhD UCT, 06/2016-09/2017, #: Lecturer UCT)
- Pawel Fiedor (PhD Krakow, 06/2015-06/2016, #: Trainee ECB)
- Hylton Hollander (PhD Stellenbosch, 06/2015-01/2016, #: Lecturer Stellenbosch)
- Sabine Bertram (MSc HU Berlin, 01/2018-)
- Nolwazi Hlophe (MCom Pretoria, 02/2017-, External PhD Student (Bank of Swaziland))
- Allan Davids (MSc Stellenbosch, 04/2017-)
- Chernay Johnson (MSc Wits), 02/2017-, co-advisor)
- Qobolwakhe Dube (MCom UCT, 02/2017-, co-advisor)
- Esti Kemp (MCom Pretoria, 04/2016-, External PhD Student (SARB))
- Tina Koziol (MCom Jena, 04/2016-)
- Michael Rose (MSc Kiel, 04/2015-)
- Gideon du Rand (MSc Stellenbosch, 04/2015-, co-advisor, PhD Student at Stellenbosch)
- Philippa Sigl-Gloeckner (2017, intern, Master Student Imperial College London)
- 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)
TeachingNew! I created a github repository for all my teaching material. In particular, I have uploaded the slides for my course on Financial Regulation and Fintech and Cryptocurrencies. Comments welcome.
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 | email@example.com | firstname.lastname@example.org
Telephone: +27 21 406 1025 | Skype: co.georg | Twitter: @co_georg
Postal Address: University of Cape Town, AIFMRM, Private Bag X1, Cape Town 8000, South Africa