January 2016 Newsletter

January 29, 2016

By Nirvikar Singh, Director of CAFIN and Distinguished Professor of Economics  

CAFIN gathers a diverse group of collaborators, research affiliates and workshop participants across industry, academia and the world to provide forward thinking and groundbreaking analysis of some of the most important issues impacting the global economy.
Distinguished Professor of Economics and Director of the Center for Analytical Finance, Nirvikar Singh talks with a PhD student about using Bloomberg data for doctoral research.


The idea for CAFIN goes back to 2008, when prominent investment bank Lehman Brothers went bankrupt, financial markets froze, stock markets collapsed, and the global economy was on the edge of an abyss. We were able to pull back, but full recovery has been slow and difficult. We are still assessing what happened and why, but we do know that simplistic searches for villains are not the answer. In particular, blanket condemnations of finance as an economic activity, or of its practitioners and scholars – popular after the global financial crisis and its aftermath – really do not advance our understanding. Finance is the lifeblood of a modern economy; it is complex but essential.
CAFIN focuses on three features of finance that will help avoid future problems, while maintaining and even enhancing the benefits of finance for our economic well-being. One underlying contributor to the crisis was the minutiae of financial market structures, involving hyper-innovation and hyperactivity in some areas with major gaps in information and disclosure in others. A second contributor was goals of increasing financial access and inclusion, laudable but also subject to distortion without careful policy design. A third was largely a consequence of the first two, the build-up of risk in the financial system, spilling over into the rest of the economy. CAFIN seeks to advance our knowledge of financial market design, financial access and systemic risk, and to educate future practitioners in the financial sector to reduce the risk of future crises. While other efforts in studying finance abound, CAFIN’s combination of foci is unique.
Building the Foundations

CAFIN was officially founded in July 2013, but it was preceded by another initiative funded by a generous alumnus (see the acknowledgments at the end of this newsletter). Building on that previous effort, we quickly formed a steering committee composed of faculty from the Economics and Applied Mathematics and Statistics departments, and a global network of prominent and up-and-coming researchers, several of whom had previously delivered public lectures on finance at UC Santa Cruz.
The CAFIN Research Affiliates provide the intellectual backbone of our effort, and have participated actively in our growth. The group includes leading scholars in financial market design, behavioral finance, forecasting and quantitative modeling, international finance, monetary policy, and crowdfunding. Its membership features a former President of the Asian Finance Association, a former Principal Economic Adviser to India’s Finance Ministry, a member of the Chinese Academy of Social Sciences, and an Executive Vice President of Turkey’s Central Securities Depository, along with many leading professors of finance.

In 2014, CAFIN inaugurated its activities with an international workshop that featured several prominent Research Affiliates as speakers, as well as senior researchers from the Federal Reserve Bank of San Francisco and the International Monetary Fund. The workshop papers examined all three of CAFIN’s theme areas: market design, financial access and systemic risk. One of the highlights of the event was a keynote talk by Michael Melvin, a Managing Director at BlackRock, Inc., the world’s largest investment manager. Dr. Melvin, himself a former academic, spoke on the challenges of investing in a world where unconventional post-crisis monetary policies are being unwound.
Building on the issues raised in the inaugural workshop, in 2015 CAFIN went on to organize three more specialized workshops, one on aspects of each of its three major themes. “Financial Access: New Platforms for Finance” explored the impacts of digital technologies on equity crowdfunding, peer-to-peer lending and online IPOs. In addition to research papers, the workshop featured a practitioner panel with three prominent Silicon Valley VCs (Scott Alberts, James Hardiman and Dean (Kip) Witter III, as well as an evening keynote by Mike Cagney, co-founder and CEO of SoFi and a UCSC alumnus.
CAFIN’s second workshop for 2015 focused on high frequency trading in the context of the design of financial market rules and institutions that govern trading activity. Research papers (including two by UCSC researchers) explored the welfare consequences of current institutions, and possible improvements in trading rules. The keynote talk was given by Sayee Srinivasan, Chief Economist of the Commodity Futures Trading Commission, who provided a rich and detailed discussion of regulatory issues and responses to the challenges of high frequency trading.
A final workshop in 2015 examined the mechanisms leading to systemic risk, through interconnectedness of financial institutions, and the instability of expectations that can create bubbles. Research papers provided analyses ranging from detailed models of networks with hundreds of interconnections, and aggregate mathematical dynamics of economies driven by financial decision-making. Specialists from the International Monetary Fund provided comprehensive presentations on global policymakers’ understanding of systemic risk from the perspectives of financial network interactions and spillovers, as well as the formation of asset price bubbles. Steering committee member and author of the book Morals and Markets, Prof. Daniel Friedman gave an evening keynote discussing the role of social norms in shaping market evolution and the possibility of financial crises.
CAFIN has also sponsored public lectures by prominent researchers whose work has influenced practitioners and policymakers. Speakers have included Prof. Ila Patnaik, who examined the impacts of quantitative easing in advanced economies on emerging markets, Prof. Rajnish Mehra, on financial predictability in modern economies, and Prof. Ingrid Werner, on the consequences of “dark pools” for the quality of financial markets.
A donation of a Bloomberg license from Mike Cagney has enabled many UCSC doctoral students to pursue research in finance-related topics that would otherwise not have been possible, and is providing students in our new professional Master’s program in Applied Economics and Finance with opportunities to work with financial data to prepare for careers in the industry.

Having created a strong intellectual foundation in its mission and its team, CAFIN is now moving toward deepening our understanding of the different aspects of finance that make up its major theme areas. We have recently funded nine mini-grants to support cutting-edge research by our faculty, Research Affiliates and doctoral students. Research topics include new trading rules to mitigate the inefficiencies of high frequency trading, improved models of firm valuation, peer-to-peer-lending platforms in China, diversity and the wisdom of crowds in crowdfunding, and the value and information content of credit ratings made by credit rating agencies. Results from these projects will begin to emerge and be made public by this summer.
CAFIN is also providing seed funding for a major project that will be led by Prof. Daniel Friedman and CAFIN Research Affiliate Prof. Peter Cramton of the University of Maryland, with collaborators from UCSC, Maryland and the University of Cologne, Germany. This project will use capabilities developed in Prof. Friedman’s internationally renowned experimental economics laboratory (LEEPS) to build a platform of simulated exchanges for competitive international tournaments between alternative market formats. This study will shed new light on which market formats best promote liquidity and stability. It will contribute to fundamental knowledge of financial markets and, as a practical matter, will provide crucial evidence for improving the design of major financial markets worldwide.
We foresee continued development and strengthening of CAFIN’s intellectual network, particularly around this major new research initiative, which builds on all of UCSC’s unique strengths. We will continue to sponsor lectures and workshops to provide education and knowledge diffusion to benefit out students and practitioners in the financial services industry as well.
A final and significant expansion of our activities related to education and professional development will be the launching of a program in the coming months to assist our undergraduate and Master’s students in qualifying as “Charterholders” of the Chartered Financial Analyst (CFA) Institute. The non-profit CFA Institute oversees worldwide admittance into its University Recognition Program, leading to the CFA professional credential or “Charter.” UC Santa Cruz is the only UC currently to achieve this recognition. Our support program will include professional development seminars and guess speakers from the financial services industry.

CAFIN owes its existence to the continued support and guidance of Prof. Sheldon Kamieniecki, Dean of Social Sciences at UCSC, who has provided not only financial support, but all kinds of encouragement and advice, including giving us our name and acronym. Sharath Sury, a UCSC alumnus, generously provided support for a previous initiative in finance, SIGFIRM, which in many ways laid the groundwork for CAFIN. UCSC alumni Stephen Bruce and James Hutchinson have provided generous individual financial support for CAFIN, and Mr. Bruce has sponsored us for further support from the UCSC Foundation Board. Mike Cagney, as noted earlier, generously donated a Bloomberg license for our students and faculty to use. Members of the Steering Committee (Professors Daniel Friedman, Michael Hutchison, Raquel Prado, Athanasios Kottas, Abel Rodriguez and Eric Aldrich) have been very generous with volunteering their time. Melissa De Witte, Mario Gonzalez, Evan Smith, Joni White and numerous other staff and students have also helped us in multiple ways.