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CME Group-MSRI Honor Innovative Quantitative Applications

  1. September 17, 2010
  2. By Christine Nielsen
  4. http://www.johnlothiannewsletter.com/

Put a group of luminaries in markets and mathematics in economics in a panel discussion shortly after central bankers and regulators agreed new rules to strengthen banks' reserves and what will you get? A very thoughtful and impassioned discussion about the implications of changes. That's what occurred at the CME Group early this week as the exchange hosted a seminar and award reception connected with the 2010 CME Group - Mathematical Sciences Research Institute (MSRI)
Prize In Innovative Quantitative Applications.

Here are a few notable quotes and ideas from the event and a panel entitled, “Macro-prudential regulation of the financial system: Implications of recent financial legislation and the ongoing Basel process on new capital and liquidity requirements.”

CME Group Chairman Emeritus and CME Group-MSRI Prize Selection Committee member Leo Melamed struck a serious tone by telling attendees that "mathematics is under attack," and that there are some who are "anti anything" that represents an advancement in technology - innovation that's based on mathematics. He said the latest example of this is an attack on high-frequency trading.

But "you're not going to stop innovation," he said. "You're not going to stop technology." Melamed added that this was one of the reasons the panel was assembled.

On the subject of banking reform, panelist Anat Admati, a financial economist at Stanford University who has written primarily on issues related to information in financial markets, said it seems to be presumed that we will see less lending as time goes on. Admati, who has been teaching at Stanford since 1983, currently researches areas related to corporate governance and bank regulation, said that there is a perception among regulators and governments that leverage is bad, “therefore we should have less of it.” “The way it has been presented is that there is this terrible, terrible tradeoff where we can get this safety and soundness, but we have to pay this cost,” Admati said. “The cost is, we’re told, is that banks will have to shrink their balance sheets, they are going to stop lending, there will be some contraction and we can’t grow, at least in the short run.

But Admati isn’t about to jump on the popular press’ bandwagon yet.

“We don’t know if this will be true,” Admati said. “We just don’t know what banks will do if capital requirements are 15 percent or 20 percent. The other thing is that when they say less lending, we don’t know that all lending is necessarily good. We want good lending. We want economically sensible lending, not too much lending.”

Panelist Douglas Diamond, a Merton H. Miller distinguished service professor, University of Chicago Booth School of Business who specializes in the study of financial intermediaries, financial crises and liquidity, said financial crises are everywhere and stand as an example of how short-term debt is needed. “Financial crisis are everywhere and always about short-term debt,” Diamond said. “And that is the reason short-term debt is needed. The nice thing about short-term debt is that it’s a cheap way to borrow. And if it’s not guaranteed by the government, its something that if you try to impose any losses in the short term, debt holders will demand payment today and a run will start. That’s a good thing because companies will then want to be on the straight and narrow. So in normal times, short-term debt is a discipline device.”

But Diamond counters that “in aggregate, there is way too much incentive for the financial sector to use short-term debt…”The trouble is that when there is a limit to aggregate liquidity and you get into a rollover crisis, you sort of get into, rather than an individual punishment, you get a group punishment, sort of like the military when everyone has to run laps because one soldier’s shoes are not well shined.”

Kevin Stiroh, an economist in banking studies at the New York Federal Reserve Bank said Basel 3 and the Dodd-Frank Act have shifted the focus toward “financial stability and macro-prudential issues” and limiting “extermalities.”

“If there is an externality, then the private outcome is not socially sufficient, but the flipside is that systemic risk should not be regulated that there is zero systemic risk.”

The panel session preceded an awards ceremony. Through its Center for Innovation, CME Group partnered with MSRI to award the fifth annual CME Group-MSRI Prize, which recognizes individuals who contribute original concepts and innovation in the use of mathematical, statistical or computational methods for the study of the behavior of markets and, more broadly, of economics.
This year, the award was awarded to Professor Jean Tirole, scientific director of Industrial Economics Institute (IDEI) and Member of the Toulouse School of Economics.

In acknowledging the award, which includes an MSRI Prize medal and a $25,000 cash award, Tirole said that analyses of financial regulation and the markets are "more important than ever in today’s landscape." Tirole’s fields of interest consist of industrial organization, regulation, organization theory, game theory, finance, macroeconomics, economics and psychology.

Among other honors, he received the Yrjo Jahnsson prize of the European Economic Association in 1993, the gold medal of the French National Centre for Scientific Research in 2007 and was the inaugural winner of the BBVA Frontiers of Knowledge Awards in economics, finance and management in 2008. He has presented more than 60 lectures and has published approximately 180 articles in economics and finance publications, as well as 10 books.

Tirole is the chairman of the Foundation JJ Laffont-Toulouse School of Economics and scientific director of IDEI, University of Toulouse Capitole. He is also affiliated with Massachusetts Institute of Technology (MIT), where he holds a visiting position. Before moving to Toulouse in 1991, Tirole was professor of economics at MIT. In 1998, he was president of the Econometric Society, whose executive committee he had served on since 1993. He was also president of the European Economic Association in 2001.

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