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Marco Valerio Geraci Profile


Marco Valerio Geraci’s research interests lie in the field of financial econometrics. In particular, his work has focused on applying econometric techniques to study two key aspects of complexity in the financial system: interconnectedness and non-linear relationships.

The financial system has become more interconnected and therefore more complex during the last half-century. Globalization and technological advancements have increased the investment possibilities of firms and the number of financial products offered in the market. Enlarged investment opportunities have increased the number of bilateral exposures between financial institutions. Moreover, firms have become more connected because they share common assets in their portfolios. In his paper “Measuring interconnectedness between financial institutions with Bayesian time-varying vector autoregressions”, Marco develops a market-based measure of financial interconnectedness that can be used for monitoring financial stability. The measure allows connections, representing channels of distress (e.g., contractual obligations or common portfolio holdings), to evolve continually through time. Paired with graph theory, the framework allows reconstructing a continually evolving network of directed spillover effects. Marco uses the framework to study the evolution of interconnectedness of the US financial system over the past two decades.

Financial institutions share among each other several layers of non-trivial and non-linear relationships. For example, the network of derivative contracts can give rise to highly unpredictable outcomes, whereby small disturbances can be transformed into large losses due to the internal dynamics of the system. In another research paper, Marco studies the non-linear relationship between asset price returns of the largest financial institutions and short selling activity underlying those assets. Short selling is the sale of a security that is not owned by the seller at the time of the trade agreement. Most of the academic literature converges around the consensus that short selling has mostly positive effects. However, regulators have introduced short selling bans during times of crisis under the concern that in a falling market short selling that can exacerbate price downfalls. Rather than analyzing the relationship that occurs on average, as done by most of the literature, Marco adopts a measure of tail correlation to analyze the relationship that occurs during exceptional times.

In recent work, Marco explores the relationship between asset price commonalities and short selling. Technological advances in financial markets and higher interconnectedness of economies are seen as possible causes for the increased co-movement of financial assets. It is well known that correlation varies continually through time and becomes higher during periods of crisis. In theoretical models, correlation is often modeled as an endogenous function of stocks supply and demand generated by investors. In this work, Marco aims to assess the impact of short selling activity on excess correlation of asset returns.