Financial markets – risky business
“Ever tried. Ever failed. No matter. Try again. Fail again. Fail better... My first academic mentor was a professor from the University Carlos III of Madrid, where I was an undergraduate. He believed in me and took me under his wing. Among many things he taught me this quote from Samuel Beckett, which I believe captures the determination and patience that drive me,” says David Veredas, who recently joined us as professor of financial markets.
His research focuses more specifically on (1) systemic risk and (2) tail risk and tail correlation.
Insurance companies and systemic risk
In the area of systemic risk, he is currently investigating the role of insurers. The increasingly interrelated and interconnected nature of the banking and insurance sectors has prompted calls for stronger macro-prudential regulation of the insurance industry as it is considered potentially systemically risky. “Ultimately systemic risk of financial institutions impacts the real economy and my research measures this risk by estimating the interconnectedness of banking, insurance and real economy firms,” explains David. “While banks are arguably the most consistently systemically risky firms in the economy, insurance firms are a readily identifiable group displaying substantial systemic risk, which calls for a careful macro-prudential supervision.”
Understanding tail events
He has also developed significant expertise in the modelling of tail risk and tail correlation. “The 2007-2010 financial crisis and the 2009-2012 European sovereign debt crisis highlighted the importance of tail events in financial markets and the economy in general. Tail events are rare, they’re extreme by definition, but when they do occur their effect is profound and ripples through the economy and the financial system. And although we’re well aware of the impact of these events, we still don’t fully grasp their role in the global financial and economic system.”
The two sides to short selling
Besides determined and patient, David is also passionate as he continues to talk about his research: “One of the hot topics today in financial markets is short selling – the sale of assets, for example securities, not owned by the seller at the time of the sales agreement. The techniques we’ve developed to measure tail correlations can also be used to address the issues of short selling.”
Short selling is surrounded by ambiguity. “It’s often associated with financial distress, which explains, rightly or wrongly, its current negative perception in the financial media. In most academic literature, however, there’s a consensus that short selling is a market practice that has mainly positive effects: it may contribute to market liquidity, increase market efficiency and aid price discovery,” says David. “But there’s a concern that prices in a falling market are more vulnerable to potentially predatory short selling, which could exacerbate price falls and even lead to market crashes.”
He points out that financial firms, and banks in particular, are especially vulnerable to potential adverse effects of short selling: “Amid extreme market uncertainty and widespread concerns about the quality of banks’ balance sheets, short selling of bank shares has the potential to trigger and reinforce downward price spirals. Bank share prices can fall significantly below their book value and this could aggravate the situation by alarming both counterparties and clients and by hindering banks’ efforts to recapitalise themselves through the issue of new shares.”
During the 2007-2010 financial crisis, these very concerns about potential adverse effects prompted several policymakers and regulators around the world to prohibit short selling. So, despite the academic consensus about the positive effects, policymakers and regulators hold the view that short selling bans are justified and necessary measures under exceptional circumstances, such as a severe financial crisis. “These bans reflect their concern that a large increase in short selling can cause a huge decline in prices,” David says. “I believe this concern is relevant and warrants further empirical research.”
In for the long haul
David joined us first and foremost because he believes the School is ambitious and forward-looking and because it provides the ideal environment for people to give their very best. “I’m committed not only to excelling in teaching and research but also to collaborating with colleagues in order to boost existing projects and create new ones that will add value for the School.” And as far as David is concerned, he’s in for the long haul: “I’ve been working for the same organisation since I finished my post-doctoral studies, now 11 years ago. It shows how dedicated and committed I am,” he concludes smiling.
- Elected member of the European Shadow Financial Regulatory Committee (since 2015)
- Professor at Solvay Brussels School of Economics and Management, Belgium (2004-2015)
- Bank of Santander Chair of Excellence at the Carlos III University of Madrid, Spain (2014)
- Honorary Visiting Professor at Cass Business School, London, UK (2011-2013)
- Visiting scholar at Stern School of Business - New York University, USA (spring 2010)
- Founding member of the Society for Financial Econometrics (SoFiE), founded in 2007
- Marie Curie Post-Doc Researcher at the departments of Econometrics & OR and Finance at Tilburg University, the Netherlands (2002-2004)
- Ph.D in Economics, Université catholique de Louvain (CORE), Belgium (2002)