We are delighted to announce that Dimitri Vayanos, Director of the FMG and Professor at the LSE Finance Department, has been awarded an ERC Advanced Grant for his research proposal “Inefficient Capital Markets and the Macroeconomy”.
The proposed research is to develop theoretical models of inefficient capital markets and use them to understand how the inefficiencies affect the financial sector and the real economy.
The Efficient Markets Hypothesis (EMH) has impacted profoundly academic research, financial regulation and market practice. For example, (i) many macroeconomic models incorporate implications of EMH such as the Expectations Hypothesis and the Uncovered Interest Parity, (ii) regulators evaluate the solvency of many types of financial institutions based on the market value of their assets, and (iii) large pools of money track passively market indices, while active managers are evaluated based on such indices and are often constrained in their deviations from them. A large empirical literature documents, however, that asset prices deviate substantially from their EMH-implied fundamental values. Mispricing and its implications can be usefully studied within the “Limits of Arbitrage” (LoA) paradigm, which posits that agents differ in their expertise to access financial markets, and contracting frictions limit the capital of non-experts that experts can manage. The proposed research will provide better foundations for the LoA paradigm and use it to determine how implications for EMH for asset management, financial regulation and macroeconomics should be modified in inefficient markets.
The grant is for five years, beginning in the Autumn of 2022.
Dimitri said: "“I am delighted to have been awarded a highly prestigious ERC Advanced Grant. The grant will enable me and my collaborators to radically rethink asset management, financial regulation and macroeconomic policy in a world where capital markets are not efficient, as standard theories assume.”
Mariya Gabriel, European Commissioner for Innovation, Research, Culture, Education and Youth, said: “The ERC Advanced Grants support ground-breaking researchers throughout Europe. It gives our talents the possibility to realise their creative ideas. Their pioneering work contribute to solve the most pressing social, economic and environmental challenges.”
The ERC’s full press release is available here.
Dimitri’s grant is the third ERC grant awarded to FMG members in this year’s funding round. Liliana Varela, Assistant Professor at the LSE Finance Department, has been awarded an ERC Starting Grant for her proposal “A Micro to Macro Approach to International Capital Flows”. Ricardo Reis, Professor at the LSE Economics Department, has been awarded an ERC Advanced Grant for his proposal “The Distributional Consequences of Inflation”.
Dimitri is also Director of the LSE Paul Woolley Centre, Research Fellow at CEPR and Research Associate at NBER. His work focuses on financial markets, and especially on what drives market liquidity, why asset prices can differ from assets’ fundamental values, why bubbles and crises can occur, and what are appropriate regulatory and policy responses.