Risk Pricing & Trading

"The topics of the research group can be divided into more classical themes and topics, which have come up in recent years, partly due to the financial crisis. Looking at the more classical group of topics, we find two subtopics of equal overall importance. The first one represents the micro view of capital markets in the sense of an analysis of the institutional details and the actual structure of the markets on which assets are traded (market microstructure) with respect to their implications for price dynamics, market quality, and market stability. The other deals with the macro perspective of capital markets in the sense of the structure and dynamics of risk premia. There is a large variety of risks which are relevant in this context. The classical types of risk are macro risks (e.g., GDP growth, inflation, monetary policy shocks etc.), but there are also risk considerations in the context of dense network relationships between firms or sectors in an economy, which can lead to faster and more pronounced shock propagation. A thorough understanding of risk dynamics is important for a sound assessment of which returns can actually be distributed to, e.g., pension funds or individuals saving for retirement on their own.

New topics which have recently moved to the center of public attention are issues related to sustainability and the role of the financial industry in promoting more sustainable behavior in the corporate sector. The prime example in this context are Green bonds, which are issued in increasing volumes by both sovereigns and corporates. The question is whether capital market participants value the promise behind the Green bond that its proceeds will be used for environmentally useful projects. This is by no means clear, and the empirical evidence so far is very mixed, so that this issue needs more thorough investigation, among other things based on better (larger and more detailed) data sets. A second topic the research group will deal with is the issue of potential increases in systemic risk due to the large amounts of capital accumulated in exchange traded funds (ETFs). The argument that is often put forward relates to the concern that in times of large negative macro shocks ETFs will suffer large and sudden outflows, which they have to finance via large-scale asset sales, potentially fire sales, which would in turn fuel further price decreases and so on. Although this is a popular line of argument, there is so far no hard evidence on whether this concern is actually justified. The answer to this question obviously also has substantial policy implications. Finally, there is growing interest in the role and relevance of financial intermediaries in the context of price dynamics on financial markets (“intermediary asset pricing”). Since most investments on markets are actually intermediated, it is important to understand if characteristics of these intermediaries matter for the properties of risk and expected return. To a certain degree, this topic is linked to market microstructure as described above, but its scope is much wider. "