Markus Brunnermeier
Encyclopedia
Markus K. Brunnermeier is a financial economist
specializing in financial crises
and panics. His work focuses on the role financial frictions (e.g. transaction cost
s) play in the formation and collapse of economic bubble
s. 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.
, Germany, Brunnermeier expected to follow his father into the business of carpentry. 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. 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.
While at the London School of Economics, Brunnermeier parlayed a survey paper into a book on asset prices and crashes. 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, and is a visiting researcher at the Federal Reserve Bank of New York and the Centre for Economic Policy Research
in London. In 2006, he joined the National Bureau of Economic Research
as a research associate in their asset pricing division. In 2008 he was awarded the Germán Bernácer Prize for his work on frictions and financial crises.
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.
(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.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. 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". 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.
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 Pederson 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. This paper won the Barclays Global Investors Prize
for its original presentation at the European Finance Association in 2003.
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. 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
. 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.
Financial economics
Financial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
specializing in financial crises
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
and panics. His work focuses on the role financial frictions (e.g. transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s) play in the formation and collapse of economic bubble
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
s. Brunnermeier is an associate editor of The American Economic Review as well as the Journal of Finance
Journal of Finance
The Journal of Finance is a peer-reviewed academic journal published by Wiley-Blackwell on behalf of the American Finance Association. It was established in 1946. Its current editors are Campbell R. Harvey and John R. Graham...
and a visiting scholar at the Federal Reserve Bank of New York
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
. Prior to completing his PhD in economics at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
he attended various universities in Germany and the United States. Upon graduating in 1999, Brunnermeier accepted an assistant professorship at Princeton University
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
. He currently serves as Edwards S. Sanford Professor of Economics at Princeton University's Bendheim Center for Finance
Bendheim Center for Finance
The Bendheim Center for Finance is an interdisciplinary research center established by Princeton University in 1998. -History:In 1998, Princeton University established the Bendheim Center for Finance to encourage interdisciplinary research in finance from a quantitative or mathematical perspective...
, a position he has held since 2008.
Education and academic career
Growing up in LandshutLandshut
Landshut is a city in Bavaria in the south-east of Germany, belonging to both Eastern and Southern Bavaria. Situated on the banks of the River Isar, Landshut is the capital of Lower Bavaria, one of the seven administrative regions of the Free State of Bavaria. It is also the seat of the...
, Germany, Brunnermeier expected to follow his father into the business of carpentry. A slump in the housing market pressured Brunnermeier into the tax office
Taxation in Germany
Taxes in Germany—being a Federal Republic—are levied by the Federation , the States as well as the Municipalities . Many direct and indirect taxes exist, whereof income tax and VAT are the most relevant. The German word for tax is die Steuer which originates from the Old High German word stiura...
and the Army
German Army
The German Army is the land component of the armed forces of the Federal Republic of Germany. Following the disbanding of the Wehrmacht after World War II, it was re-established in 1955 as the Bundesheer, part of the newly formed West German Bundeswehr along with the Navy and the Air Force...
. In 1991 he enrolled in the University of Regensburg
University of Regensburg
The University of Regensburg is a public research university located in the medieval city of Regensburg, Bavaria, a city that is listed as a UNESCO World Heritage Site. The university was founded on July 18, 1962 by the Landtag of Bavaria as the fourth full-fledged university in Bavaria...
where he received his undergraduate degree in 1993. He continued his studies in the masters program in economics at Vanderbilt University
Vanderbilt University
Vanderbilt University is a private research university located in Nashville, Tennessee, United States. Founded in 1873, the university is named for shipping and rail magnate "Commodore" Cornelius Vanderbilt, who provided Vanderbilt its initial $1 million endowment despite having never been to the...
before returning to the Bonn Graduate School of Economics
Bonn Graduate School of Economics
The Bonn Graduate School of Economics is an institution of the Economics Department within the Faculty of Law and Economics of the University of Bonn. The department’s research program has been aided by the grants from the German National Science Foundation , specifically in the range of the...
under the European Doctoral Program. He completed his PhD at the London School of Economics in 1998.
While at the London School of Economics, Brunnermeier parlayed a survey paper into a book on asset prices and crashes. 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, and is a visiting researcher at the Federal Reserve Bank of New York and the Centre for Economic Policy Research
Centre for Economic Policy Research
The Centre for Economic Policy Research , a registered charity founded in 1983 by Richard Portes , FBA, CBE, is a network of over 700 researchers based mainly in universities throughout Europe, who collaborate through the centre in research and its dissemination...
in London. In 2006, he joined the National Bureau of Economic Research
National Bureau of Economic Research
The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...
as a research associate in their asset pricing division. In 2008 he was awarded the Germán Bernácer Prize for his work on frictions and financial crises.
Brunnermeier is an associate editor of The American Economic Review, the Journal of Finance, the Journal of the European Economic Association
Journal of the European Economic Association
Journal of the European Economic Association is a general-interest journal in economics. Established in 2003, the JEEA is an outlet for theoretical and empirical work with global relevance and is published jointly by Wiley-Blackwell on behalf of the European Economic Association....
and the Journal of Financial Intermediation.
Work on financial crises
Conventional wisdom in financial economics commonly takes the form of the Efficient market hypothesisEfficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...
(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.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. Faced with the empirical evidence that asset prices diverged from their fundamentals
Fundamental analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and...
during the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
, Brunnermeier crafted a model of trading where participants in the market would recognize bubbles in asset prices but continue to trade "into the wind". 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
Smith Breeden Prize
The Smith Breeden Prize is an annual prize given to authors with the best finance research papers published in the Journal of Finance in any area other than corporate finance.-The Award:...
in 2004.
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 Pederson analyzed this particular form of liquidity risk
Liquidity risk
In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss .-Types of Liquidity Risk:...
and constructed a model which produced systemic risks from a small number of traders being forced to liquidate. This paper won the Barclays Global Investors Prize
Michael Brennan Award
The BlackRock Michael Brennan Award is an annual prize given to authors in recognition of important finance research papers published in the Review of Financial Studies . It is given annually to the best paper published in The Review of Financial Studies...
for its original presentation at the European Finance Association in 2003.
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
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
, which forced traders to close out more positions, further depressing prices. 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
Shadow banking system
The shadow banking system is the infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds, money market funds and Structured investment vehicles...
. While at the Federal Reserve, Brunnermeier created an alternative to value at risk
Value at risk
In financial mathematics and financial risk management, Value at Risk is a widely used risk measure of the risk of loss on a specific portfolio of financial assets...
which took into consideration spillover and contagion effects between assets and industries.