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Professor Dimitri Vayanos awarded ERC Advanced Grant

26 April 2022

We are delighted to announce that Professor Dimitri Vayanos of the LSE Department of Finance has been awarded an ERC Advanced Grant for his research proposal 'Inefficient Capital Markets and the Macroeconomy'.

Dimitri said: “I am delighted to have been awarded an ERC Advanced Grant. This highly prestigious grant will enable me and my collaborators to radically rethink asset management, financial regulation and macroeconomic policy in a world where capital markets are not efficient.”

Professor Vayanos' proposed research will develop theoretical models of inefficient capital markets and use them to understand how the inefficiencies affect the financial sector and the real economy.

The Efficient Markets Hypothesis (EMH) has impacted profoundly academic research, financial regulation and market practice. For example, (i) many macroeconomic models incorporate implications of EMH such as the Expectations Hypothesis and the Uncovered Interest Parity, (ii) regulators evaluate the solvency of many types of financial institutions based on the market value of their assets, and (iii) large pools of money track passively market indices, while active managers are evaluated based on such indices and are often constrained in their deviations from them. A large empirical literature documents, however, that asset prices deviate substantially from their EMH-implied fundamental values. Mispricing and its implications can be usefully studied within the “Limits of Arbitrage” (LoA) paradigm, which posits that agents differ in their expertise to access financial markets, and contracting frictions limit the capital of non-experts that experts can manage. The proposed research will provide better foundations for the LoA paradigm and use it to determine how implications for EMH for asset management, financial regulation and macroeconomics should be modified in inefficient markets.

Proposals for ERC Advanced Grants are evaluated by selected international peer reviewers, who assess them on the basis of excellence as the sole criterion. The grant is for five years, beginning in the Autumn of 2022.

ERC Advanced Grants support ground-breaking researchers throughout Europe

Mariya Gabriel, European Commissioner for Innovation, Research, Culture, Education and Youth, said: “The ERC Advanced Grants support ground-breaking researchers throughout Europe. It gives our talents the possibility to realise their creative ideas. Their pioneering work contribute to solve the most pressing social, economic and environmental challenges.”

Read the ERC’s full press release.

Dimitri’s grant is the second ERC grant awarded to LSE Finance faculty in this year’s funding round. Assistant Professor Liliana Varela has been awarded an ERC Starting Grant for her proposal 'A Micro to Macro Approach to International Capital Flows'. Liliana is also a Research Associate at CEPR.

LSE has secured two ERC Advanced Grants in this year’s funding round. The second Advanced Grant has been awarded to Professor Ricardo Reis of the LSE Department of Economics for his proposal 'The Distributional Consequences of Inflation'.

Dimitri Vayanos is a Professor of Finance, Director of the Financial Markets Group, and Director of the LSE Paul Woolley Centre. He is also Research Fellow at CEPR and Research Associate at NBER. His work focuses on financial markets, and especially on what drives market liquidity, why asset prices can differ from assets’ fundamental values, why bubbles and crises can occur, and what are appropriate regulatory and policy responses.

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