Markus Brunnermeier

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Markus Konrad Brunnermeier
Nationality German
Institution Princeton University
Field Financial economics
Alma mater London School of Economics
Influences Ben Bernanke
Information at IDEAS/RePEc

Markus K. Brunnermeier is a financial economist specializing in financial crises and panics. His work focuses on the role financial frictions (e.g. transaction costs) play in the formation and collapse of economic bubbles. Brunnermeier is an associate editor of The American Economic Review as well as the Journal of Finance and a visiting scholar at the Federal Reserve Bank of New York. Prior to completing his PhD in economics at the London School of Economics he attended various universities in Germany and the United States. Upon graduating in 1999, Brunnermeier accepted an assistant professorship at Princeton University. He currently serves as Edwards S. Sanford Professor of Economics at Princeton University's Bendheim Center for Finance, a position he has held since 2008.

Education and academic career[edit]

Growing up in Landshut, Germany, Brunnermeier expected to follow his father into the business of carpentry.[1] A slump in the housing market pressured Brunnermeier into the tax office and the Army. In 1991 he enrolled in the University of Regensburg where he received his undergraduate degree in 1993.[2] He continued his studies in the masters program in economics at Vanderbilt University before returning to the Bonn Graduate School of Economics under the European Doctoral Program. He completed his PhD at the London School of Economics in 1998.[3]

While at the London School of Economics, Brunnermeier parlayed a survey paper into a book on asset prices and crashes.[2][4] He was subsequently hired by Princeton University as an assistant professor in 1998. In 2006 he was awarded tenure and in 2008 he assumed his current role as Edwards S. Sanford Professor of Economics. Brunnermeier was also named a Sloan Fellow in 2005,[5] and is a visiting researcher at the Federal Reserve Bank of New York and the Centre for Economic Policy Research in London.[6][7] In 2006, he joined the National Bureau of Economic Research as a research associate in their asset pricing division.[8] In 2008 he was awarded the Germán Bernácer Prize for his work on frictions and financial crises.[9]

Brunnermeier is an associate editor of The American Economic Review, the Journal of Finance, the Journal of the European Economic Association and the Journal of Financial Intermediation.[10][11][12][13]

Work on financial crises[edit]

Conventional wisdom in financial economics commonly takes the form of the Efficient market hypothesis (EMH), a proposition which argues that markets incorporate all information relevant to prices immediately and consequently the price of a given asset accurately represents the likely value of that asset.[note 1][14] Faced with the empirical evidence that asset prices diverged from their fundamentals during the dot-com bubble, Brunnermeier crafted a model of trading where participants in the market would recognize bubbles in asset prices but continue to trade "into the wind".[15] Traders would hold a belief (either justified or unjustified) that they could unwind their positions gracefully before the bubble burst, leading them to push up asset values rather than realize their gains immediately. Brunnermeier's paper, coauthored with Stefan Nagel on this phenomenon won the Smith Breeden Prize in 2004.[16][17]

However, in unwinding those positions, some traders may fear that their movements in the market may expose their intent and allow competitors to prey on their trades, short selling an asset they know a competitor must sell. Likewise, a trader who finds themselves in financial distress (e.g. Long Term Capital Management) due to unforeseen losses might face the same predation. Brunnermeier and Lasse Pedersen analyzed this particular form of liquidity risk and constructed a model which produced systemic risks from a small number of traders being forced to liquidate.[18] This paper won the Barclays Global Investors Prize for its original presentation at the European Finance Association in 2003.[19]

Work in general asset price bubbles caused Brunnermeier to examine the housing market to see if the same behaviors existed in the home price bubble and subsequent liquidity crisis in 2008. He determined that the same vicious cycles were at work. Home prices fell forcing margin calls on complex derivatives, which forced traders to close out more positions, further depressing prices.[20] Brunnermeier argued that a prime cause of this "liquidity spiral" were the frictionless models used by banks, central banks and elements of the shadow financial system.[21][22] While at the Federal Reserve, Brunnermeier created an alternative to value at risk which took into consideration spillover and contagion effects between assets and industries.[23]

Notes[edit]

  1. ^ There are multiple forms of the EMH, each with various levels of confidence among academics economists. Among the strong, semi-strong, and weak versions of the hypothesis, the latter have higher levels of support. See Beechey, Gruen & Vickery (2000) for more detail.

References[edit]

  1. ^ "Young Guns: Five Hot Minds in Economics: Markus Brunnermeier". Yale Economic Review (Yale University). 
  2. ^ a b Lahart, Justin (May 16, 2008). "Bernanke's Bubble Laboratory". The Wall Street Journal. Retrieved 2009-08-15. 
  3. ^ Brunnermeier, Markus. "Markus Brunnermeier Profile". Retrieved 2009-08-15. 
  4. ^ Brunnermeier, Markus (2001). Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis and Herding. Oxford, UK: Oxford University Press. ISBN 978-0-19-829698-0. 
  5. ^ "Sloan Research Fellowships". The Alfred P. Sloan Foundation. Retrieved 2009-08-16. 
  6. ^ "Visiting Scholars". Federal Reserve Bank of New York. Retrieved 2009-08-16. 
  7. ^ "Professor Markus K Brunnermeier". Researcher Contact Details. Centre for Economic Policy Research. Retrieved 2009-08-16. 
  8. ^ "Markus K. Brunnermeier". National Bureau of Economic Research. Retrieved 2009-08-16. 
  9. ^ "The Bernácer Prize 2008". Retrieved 2009-08-16. 
  10. ^ "Minutes of the Meeting of the Executive Committee". American Economic Association. April 24, 2009. Retrieved 2009-08-16. 
  11. ^ "Journal of Finance Editorial Board". The American Finance Association. February 18, 2009. Retrieved 2009-08-16. 
  12. ^ "Journal of the European Economic Association Editorial Board". MIT Press. Retrieved 2009-08-18. 
  13. ^ "Journal of Financial Intermediation Editorial Board". Elsevier. Retrieved 2009-08-18. 
  14. ^ Beechey, Meredith; Gruen, David; Vickery, James (January 2000). "The Efficient Market Hypothesis: A Survey" (pdf). Research Discussion Papers (Reserve Bank of Australia). 2000-01. 
  15. ^ Brunnermeier, Markus; Hong, Harrison; Rose, Charlie (Host); Xiong, Wie (2008). Charlie Rose (Television). Public Broadcasting Service. 
  16. ^ "Brattle and Smith Breeden Prizewinners". The American Finance Association. Retrieved 2009-08-16. 
  17. ^ Brunnermeier, Markus; Nagel, Stephan (2004). "Hedge Funds and the Technology Bubble". Journal of Finance (The American Finance Association) 59 (5): 2013–2040. doi:10.1111/j.1540-6261.2004.00690.x. 
  18. ^ Brunnermeier, Markus; Pedersen, Lasse Heje (2005). "Predatory Trading". Journal of Finance (The American Finance Association) 60 (4): 1825. doi:10.1111/j.1540-6261.2005.00781.x. 
  19. ^ "Best Paper Awards". European Financial Association. Retrieved 2009-08-16. 
  20. ^ Norris, Floyd (July 18, 2008). "High and Low Finance: Got a Fix? Please, Call the Fed". The New York Times. Retrieved 2009-08-16. 
  21. ^ "The state of economics: The other-worldly philosophers". The Economist. July 16, 2009. Retrieved 2009-08-16. 
  22. ^ Brunnermeier, Markus (2009). "Deciphering the Liquidity and Credit Crunch 2007–2008". Journal of Economic Perspectives (American Economic Association) 23 (1): 77–100. doi:10.1257/jep.23.1.77. 
  23. ^ "The revolution within". The Economist. May 16, 2009.