Emil N. Siriwardane

In studying the U.S. credit default swap (CDS) market, Professor Siriwardane has discovered that the selling of CDS protection is extremely concentrated, with five sellers accounting for nearly half the market. Further, in contrast to what neoclassical theory suggests, he finds that capital losses among the largest sellers cause the price of default insurance to rise across the entire economy. In addition, he shows that the concentration of the market creates fragility—higher concentration leads to more volatility in the market.

Professor Siriwardane has co-developed a new econometric model that captures the link between equity volatility and financial leverage, driven by the desire to incorporate the record levels of both leverage and volatility that characterized the 2008 financial crisis into standard volatility models. His model identifies precautionary capital, a new measure of systemic risk that quantifies the efficacy of such preventive measures as leverage limits to avoid future financial crises.

Another defining feature of financial crises is consumption disasters, or large drops in aggregate consumption. Rather than taking the standard approach of seeking implications of such rare disasters for asset pricing in consumption data, Professor Siriwardane asks how options markets should behave if such disasters do in fact drive long-run asset prices. The results of his analysis provide empirical support for the rare consumption disasters paradigm.