The summer camp went far beyond my expectations . . . I feel very inspired and motivated after attending this MFM meeting, specifically after a lunchtime talk by Andrew Lo in which he reminded all of us how important our research is and how much impact we, as academics, can have on the course of economic events.
Tetiana Davydiuk is a PhD candidate in finance at the University of Pennsylvania’s Wharton School of Business. Her research interests include macro-finance, asset pricing, bank industry regulation, and financial institutions. Prior to joining the PhD program, Tetiana completed her undergraduate studies at Kyiv-Mohyla Academy, Ukraine, and received a master’s in economics and finance from CEMFI, Spain. She is a 2016 MFM Fellowship awardee.
Can you describe your background and how you became interested in economics?
I grew up in the Western part of Ukraine, in a small town where my whole family still lives. Since my high school years, I have been intrigued by math and how pure of science it is. At the same time, it has always been important to me that my work has real impact, which is why I decided to pursue a career in economics. Midway through my masters program in Spain, I became involved in research and started to consider a PhD program. While working on my master thesis, I found research to be both very challenging and fulfilling. I enjoyed exploring my own abilities and pushing my intellectual boundaries. Via research, I can contribute to the field of finance and help shape financial policy.
You are actively working on a number of exciting projects. Can you summarize your current research on optimal bank capital requirements?
My research interests lie at the intersection of macro-finance and asset pricing. In particular, my job market paper focuses on new regulation of the banking industry.
My research was inspired by the financial collapse of 2007 – 2008, a time when each and every one of us was affected. In the aftermath of the Great Recession, it became clear that the existing regulatory tools, and specifically those targeting the banking industry, were too micro-prudential in their nature. They were inefficient in preventing the build-up of risks in the financial system, with subsequent spillovers to the real economy. The key question is, what should be done to prevent future market failures? In response, a number of macro-prudential policy instruments were introduced in 2010 with the Basel III Accord. In my paper, I focus on counter-cyclical capital buffers, an additional layer of capital that banks must hold depending on where the system is in the financial cycle. Effectively, banks are now facing time-varying capital charges. During periods of high credit growth, when the economy is overheating, capital regulation would be tightened to preclude excessive credit growth and build-up of risks. In contrast, during recessions the capital requirements would be relaxed to allow financial institutions to recapitalize and sustain lending. Despite a few trials within the European Union, it is still not clear whether this new regulation is working and indeed promotes a more resilient banking industry.
In my paper, I build a general equilibrium model, in which pro-cyclical capital requirements arise endogenously. The model enables me to analyze not only theoretical, but also quantitative welfare implications of counter-cyclical capital buffers. As of now, Basel III prescribes to use credit gap as a key anchor to adjust capital regulation over the cycle. My paper aims to understand whether this policy design is indeed optimal, what inefficiencies may arise when using credit gap as the only policy input to define time-variation in capital regulation, and how we can improve the current policy rule of bank capital.
Could you describe for a general audience what Macrofinancial Models are and why they are important?
In the last two decades, the financial sector has grown enormously and become an integral part of the economic system. On one side, financial institutions facilitate efficient allocation of resources in the economy, thereby allowing the most productive projects to be funded. Additionally, financial intermediaries satisfy household needs in safe, money-like assets and make homeownership feasible for lower income households. Inherent in the financial system, however, is a lot of risk. The build-up of risks during the periods of high economic growth could result in multiple bank failures simultaneously, causing a banking crisis and potentially leading to a recession. Macrofinancial models develop a unified framework to study the interrelatedness of the real and financial sectors. They help us understand how the risks stemming from the financial sector can become systemic and spill over into the real sector. Macrofinancial models allow economists to uncover the causes of recessions and to design regulatory policies aimed at building a more resilient economic system.
What were your expectations leading up to the MFM Summer Camp?
When I received the acceptance email from Lars Hansen and Andrew Lo, I was very pleased to hear that I would become part of MFM community. I was especially looking forward to Yuliy Sannikov’s talk. His pioneer work, "A Macroeconomic Model with a Financial Sector," joint with Markus Brunnermeier, was my inspiration to become involved with macro-finance. Additionally, given that my job market research focuses on the regulation of the banking industry, I was eager to learn the policymakers' prospective on the current regulatory tools and future amendments under consideration. I was also excited to hear what my fellow scholars are researching, especially those who are at the same stage as I am, working on their theses.
Can you describe your experience at the summer camp? Did you have a favorite speaker or session?
The summer camp went far beyond my expectations. The program was very well organized, with a nice combination of modeling techniques and empirical questions. The panel discussion with policymakers from the International Monetary Fund, Federal Reserve Bank of New York, and US Treasury was especially insightful.
In particular, I would also like to mention a talk by Anne Beatty from Ohio State University. She covered many important accounting peculiarities in the financial industry, with a great focus on negative externalities they can create. This material relates very closely with my interest in banking. The knowledge I acquired during her talk made me think about exciting new research questions and projects in this area. Moreover, I was happy to learn that my fellow students are working on developing new methodologies of estimating non-linear macro-financial models. There has always been a difficult choice between model complexity, how realistically it captures economic trade-offs, and the ease of estimation techniques, including how efficiently one can solve the model (within reasonable estimation time). Seeing young scholars working on advancing the existing quantitative tools is very promising; I could see myself using these tools in my future research agenda.
How will you incorporate the information that you learned at the MFM Summer Camp with your existing research? Did you establish any new collaborations?
During the summer camp, I was given a chance to present my research. Even though it was very challenging to explain my model and convey key results in 10 minutes, I gained a lot from this experience. It made me think about the big picture questions I am trying to answer in my work, specifically, why it is important and what my contribution is. Learning how to quickly pitch an idea is of utmost importance for my career, both during the job market process and later on during conferences. Most importantly, I received a lot of interesting questions and useful comments from other summer camp participants, giving me a clearer vision of what are the strengths and weaknesses of my model and in which direction should I work next. Even after I returned to Philadelphia, I received a couple of emails from my colleagues on how I might improve my paper. Their interest in my research has served as further reinforcement to continue working in this area.
During the four days on Cape Cod, I had a chance to meet many bright scholars who feel as passionate for macro-finance models as I do and to discuss many interesting ideas with them. I am positive that the contacts I made during the MFM Summer Camp will result in many fruitful collaborations in the near future.
Is there anything else you'd like to add about your research or the MFM Summer Camp?
I would like to thank all of the organizers of the MFM Summer Camp. They did an amazing job of assembling so many leading experts in macrofinance. I feel very inspired and motivated after attending this MFM meeting, specifically after a lunchtime talk by Andrew Lo in which reminded all of us how important our research is and how much impact we, as academics, can have on the course of economic events.
The Macro Financial Modeling Summer Session, offered under the auspices of the Becker Friedman Institute for Research in Economics, is one of a host of summer research activities highlighted in this series. To learn more, please visit our summer research hub.