Research Lecture by Bengt Holmstrom, Paul A. Samuelson Professor of Economics at MIT, and the current president of the American Economic Association.

12.00 AM Registration and a small lunch
12.30 PM Lecture by Bengt Holmstrom

Academic research had established, even before the crisis, a fundamental trade-off between full transparency and current market liquidity in markets for nominal claims. Liquidity is enhanced by coarse information, as it results in less asymmetric information.

Money markets rely on high velocity trading with high roll over frequency. The nature of liquidity provision is based on immediate market confidence, and it is very different from stock markets, where maturities are such that investors can time their trades to avoid rushed sales.

Liquidity for nominal claims packaged to bear minimal risk is enhanced by coarse information. Encouraging securities that are insensitive to private information reduce incentive to inside trading, and broadens market appeal. As a result, debt is the instrument of choice for fund assets with low volatility of collateral (e.g. mortgages), and enables securitization to mobilize more credit.

At the same time, this enhancement to liquidity entails the creation of residual tail risk, which adds to the cost of crises when confidence is undermined by unexpected losses.

The role of public policy choices thus has to recognize that limited transparency has its clear advantages in supporting smooth market trading and enhance credit during expansions. At the same time, as it creates tail risk in adverse circumstances while hiding it in present circumstances, it raises a fundamental macroprudential question.

1.30 PM Discussion with Enrico Perotti

Professor Enrico Perotti will challenge to debate. Enrico Perotti is the Research Director at Duisenberg school of finance, Professor of International Finance at the University of Amsterdam and the Houblon-Norman Fellow of the Bank of England.

1.45 PM Open questions
2.30 PM End

To register for the lecture on Thursday 29 September : http://www.dsf.nl/home/events/upcoming_events