This course provides an introduction to themes regarding the ability of the financial system to withstand shocks with the potential of affecting the functioning of the whole economy. By the end of the course, the students will be familiar with a variety of topics, including the main critical developments in contemporary financial history, the major sources of market dysfunctionalities, the feedbacks between financial and economic imbalances and, finally, an array of micro-prudential and macro-prudential tools that regulators use with the purpose of anticipating the collapse of individual financial institutions and the occurrence of financial crises. The course comprises three parts.
Part I provides background and institutional details regarding the origins of major critical events in financial history along with policy responses and arrangements: from the Great Depression of the 1930s to the Bretton Woods system and its collapse; from the 1987 crash to the ‘flash crashes’ and related dysfunctionalities of the last decade; from the 1992-93 European speculative attacks to the 1997 Asian speculative attacks; from the 1998 collapse of LTCM to the internet bubble of the late 1990s; from the credit bubble of the 2000s to the subsequent Global Financial Crisis and European Debt Crisis. This part examines the role of the regulatory framework underlying these developments as well as slowly moving causes such as the ‘global saving glut’ and faster-moving explanations regarding the very microstructure of financial markets.
Part II provides the main explanations for many of the episodes learnt in Part I: ‘bank runs’, speculative attacks, pro-cyclicality and endogenous risk, feedback effects and market discontinuities, international imbalances, public debt, sovereign default, and bubbles.
Part III describes the main analytical tools that policymakers rely on to implement both micro-prudential and macro-prudential policies. It overviews the current regulatory framework while defining new measures of individual and systemic risk relying on (i) notions of market volatility such as the VIX on a variety of asset classes and (ii) measures of market and credit risk such as VaR, Credit VaR, marginal expected and capital shortfall, market connectedness, global systemically importance, Co-VaR. This part ends with a succinct overview of the main evaluation models of sovereign default.
An extensive and dedicated array of lecture notes are distributed in class.
The course equips the students with notions and tools that are useful to monitor adverse developments affecting individual financial institutions and the whole financial system. It includes an overview of contemporary financial history and describes the main mechanisms at the origins of critical events such as financial crises, bubbles and other market dysfunctionalities. Finally, it reviews the main micro-prudential and macro-prudential tools in order to judge the resilience of individual institutions and the global system.
Regular lectures and classes as well as invited lectures from guest speakers including industry leaders and high representatives of regulatory and policy bodies.
Class participation (35%); individual project (35%); compulsory oral examination of at least 20 minutes (30%). The exam is invalid without the performance of the oral examination.
- Bordo, Michael, Meissner, Christopher. Fiscal and Financial Crises: Fiscal and Financial Crises. National Bureau of Economic Research, 2016.
- Gale, Douglas, Allen, Franklin. Understanding financial crises. Oxford: Oxford University Press, 2007.
- Hull, John. Risk management and financial institutions. Fifth edition. Hoboken, New Jersey: John Wiley & Sons, Inc., 2018.
- Mele, Antonio. Financial Economics. MIT Press, 2022.
- Oehmke, M., Brunnermeier, M. K.. “Fiscal and Financial Crises and Systemic Risk”. Handbook of Finance and Economics, Vol. 2B, Chapter 18, 1221-1288., 2013. (In G.M. Constantinides, R. Stulz and M. Harris (eds.))
- Shin, Hyun Song. Risk and liquidity. Oxford: Oxford University Press, 2019.
- Valavanis, S, Flood, M., Bisias, D, Lo, A. W.. “A Survey of Systemic Risk Analytics". Annual Reviews 4, 255-296, 2012.
- Master of Science in Economics in Finance, Lecture, Electives o Field Project o Semestre all'estero (Banking and Finance), Elective, 2nd year
- Master of Science in Economics in Finance, Lecture, Electives o Field Project o Semestre all'estero (Digital Finance), Elective, 2nd year
- Master of Science in Economics in Finance, Lecture, Electives o Field Project o Semestre all'estero (Quantitative Finance), Elective, 2nd year
- Master of Science in Financial Technology and Computing, Lecture, SFI accreditation (min 45 ECTS), 2nd year