The Becker Friedman Institute hosted the inaugural Chicago Initiative in Theory and Empirics (CITE) conference to air and enhance important new work at the intersection of finance and macroeconomics.
The conference was designed specifically to encourage sharing of new ideas and early-stage models of financial markets with macroeconomic linkages, particularly by young economists. A main goal was to begin to refine the work through active discussion and lively exchanges.
The conference is a new counterpart to a program within the Stanford Institute on Theoretical Economics. While that annual event has shifted to explore other topics, organizers felt that that the challenges posed by the financial crisis and subsequent recession presented a clear need for active and continued discussion of empirical and theoretical work in this area, giving rise to this new event in Chicago. This event was supported with funding from the CME Group Foundation.
“This CITE conference is a forum for work in progress to develop new quantitative models of financial markets,” said conference co-organizer Monika Piazzesi of Stanford University. “We planned plenty of time for questions, comments, and informal discussions, so presenters benefited from different perspectives and participants had ample opportunities to converse and take part in developing promising new work.”
Piazzesi said this innovative format was initially implemented by CITE specifically to nurture young scholars. “I am glad that the Becker Friedman Institute is continuing this format, and understands the value of presenting preliminary work,” she added.
The research addressed in this three-day conference spanned an impressive array of topics in financial economics. “The range of models and approaches discussed show that this is a stimulating time for young researchers,” said Lars Peter Hansen, research director of the institute. “We’re pleased to facilitate the training of and expand the perspectives of scholars studying these difficult questions and challenges.”
One strand of research discussed explored new mechanisms linking investor preferences, opportunities, and choices to asset prices. These discussions included implications of alternative ways investors confront risk and uncertainty and the consequences of learning about long-term growth prospects with limited information. Participants discussed the empirical challenges of distinguishing risk aversion from beliefs and the behavior implications of investor struggles with making probabilistic assessments. A further component of the discussion was the impact of heterogeneous beliefs both for market outcomes and for economic welfare.
A second strand of research explored how different shocks to the macroeconomy alter economic aggregates and security prices. Explicit dynamic models of how shocks alter the economy over time were developed with an eye on the implications for pricing in bond and equity markets. New methods for characterizing risk pricing over alternative investment horizons were proposed, and new evidence about how the risk-return tradeoffs differ across investment horizons was presented.
Other work highlighted empirical investigations that explored financial market puzzles, asking whether there are specific trading strategies that have historically made positive returns. For example, there are puzzling persistent returns to international investment strategies linked to mergers and acquisitions strategies. During discussions and breaks, conference participants expressed a need for more evidence on transaction costs surrounding these trades, and whether these regularities reflect some fundamental domestic or international market imperfections.
Finally, scholars presented new research on how monetary policy could respond to data from asset markets in socially productive ways.
The models and evidence highlighted at this event furthered our understanding of the macro-finance linkages and as a whole provided food for thought for emerging young scholars in this field, as well as for some veteran observers and participants.