Markus Brunnermeier studies mispricings. His research focuses on financial crises, bubbles and significant mispricings due to institutional frictions, strategic considerations and behavioral trading. It explains why liquidity dries up when it is needed the most, and it has important implications for risk management and financial regulation.
He questions the market assumption of rational expectations, arguing instead for a framework of optimal expectations. In a key paper, he posits that agents’ optimism about risky events may lead them to prefer an uncertain probability distribution to the objective distribution. Pleasant surprises—anything from a birthday gift to an unexpected stock buyback—make an agent better off by introducing the uncertainty of more such surprises in the future. But by impairing predictions, the preference for such uncertainty explains observed departures from a rational expectations distribution. Brunnermeier's theory applies to phenomenon ranging from procrastination to preference for stocks that do extremely well with small probabilities.
Brunnermeier and Lasse Pedersen coauthored a seminal paper in 2005 showing that predatory trading leads to reduced liquidity, sparking a crisis that spreads across traders and markets. Their work was borne out in the financial crisis of 2007.
Brunnermeier is a faculty member in Princeton‘s Department of Economics and is currently affiliated with Princeton's Bendheim Center for Finance and the International Economics Section. He is the director of Princeton's Julis Rabinowitz Center for Public Policy and Finance." and was previously on the editorial board of the Review of Financial Studies and the Journal of Financial Intermediation.
He is also a research associate at the Center for Economic and Policy Research, the National Bureau for Economic Research, and CESifo (Munich Society for the Promotion of Economic Research). He is a Sloan Research Fellow and a visiting scholar at the Federal Reserve Bank of New York. He won the Bernácer Prize granted for outstanding contributions in the fields of macroeconomics and finance and recently received a Guggenheim Fellowship for studying the impact of financial frictions on the macroeconomy. He is an associate editor of The American Economic Review as well as the Journal of Finance.
He earned his PhD at the London School of Economics, where he was also affiliated with its Financial Markets Group.
Brunnermeier's term as a visitor was supported by generous funding from a 2010-11 CME Group Foundation Visiting Fellowship.