RIFIFI

Risk Incentives in Financial Institutions and Financial Instability

ERC grant n° 263673

Project summary

The last twenty years witnessed two important evolutions in financial markets. First, a rapid pace of financial innovation has made it possible to slice, transfer, and combine a large variety of risks by trading of a rich set of derivatives. Second, the management of increasing amounts of capital has been delegated to institutions and traders subject to few trading restrictions. Traders in hedge funds, other private investors, and proprietary desks of large banking and insurance conglomerates have a relatively free hand at taking positions in a variety of sophisticated exotic instruments. Further, little information regarding their trading strategies is disclosed to their ultimate suppliers of funds. In short, financial markets have become more complete, while the management of increasing amounts of capital is delegated through very elusive and incomplete contracts.

The objective of RIFIFI is to develop a new and appropriate framework for the study of this “generalized risk-shifting problem” that separates investors from such sophisticated traders in complete markets.
 

Project dates: 01/10/2010 – 30/09/2015

TSE contact : Guillaume PLANTIN