Forschungsschwerpunkt

Pricing risk in incomplete markets is still a major challenge to our understanding of the functioning of markets, and financial markets in particular. It remains a challenge both to academic research, but also to market participants and market regulators. As the recent subprime mortgage lending crisis prominently illustrates, even most sophisticated markets participants as well as the most reputable regulators could not prevent it and are now struggling to resolve the unfolding crisis. Much sought academic advice is in short supply. In fact, the current state of financial theory does not provide guidance, which is fully satisfactory.

Therefore the most ambitious task of the suggested research group is to develop asset pricing theory further in order to encompass an increasingly larger set of sources of market incompleteness. In a first step so-called omitted risk factors, such as liquidity risk, may be incorporated into asset pricing. In a second step the even harder problem should be addressed to incorporate behavioral risks, such as the intensity of screening and information acquisition, into the pricing of risk. While omitted risk factors typically relate to exogenous risk, behavioral risk arises endogenously through the actions of market participants. Accordingly behavioral incentives will need to enter the pricing of assets (and risk).

This research agenda aims at illuminating our understanding of economic risk. Ultimately it will inform us about sources of market failure and the proper regulation and legislation necessary for implementing an efficient and growth enhancing financial system. It will contribute to constructing the foundations for a new and better order of a global financial system.

The research group will work in close cooperation with its initiators (Antragsteller) Professor Dr. Ernst Eberlein (Institut für Mathematische Stochastik) and Professor Thomas Gehrig, Ph.D.(Institut zur Erforschung der Wirtschaftlichen Entwicklung) and the Freiburger Zentrum für Datenanalyse und Modellentwicklung (FDM).