Can Credit Default Swaps Predict Financial Crises?

Hekuran Neziri

Quiet and humble in person, Hekuran Neziri delivered a timely message with the presentation of his paper, entitled “Can Credit Default Swaps Predict Financial Crises?” His efforts garnered him recognition by the Steering Committee as an outstanding participant in the 8th Annual Carroll Round.

Originally hailing from Kosovo, Hekuran, or “Hek” as he was known by conference participants, was one of two students from the American University in Bulgaria to present at the 2009 Carroll Round.

Observing a relationship between high credit default swap prices and instability in capital markets, Neziri sought to test whether these financial instruments could serve as predictors for crises in stock markets and currency markets. He hoped to contribute to the understanding of the current global phenomenon that is puzzling economists and policymakers alike.

Regarding credit default swaps as an indicator of risk perception, Neziri finds that – at least in emerging market economies – they do indeed explain the periods preceding financial crises in equity markets.

Vigorously questioned by Georgetown Professor Matthew Canzoneri after presenting his work, Neziri demonstrated impressive knowledge of his topic and defended his paper well, receiving praise from fellow participants. When asked about the length of the journey from Bulgaria to Washington, DC, Hek simply smiled and expressed that the trip was well worth it.

Aid and Public Finance: A Missing Link?

Markus Gstoettner & Anders Jensen

Markus Gstoettner and Anders Jensen from the London School of Economics (LSE) were honored along with two others for their distinguished participation at the 8th Annual Carroll Round. Both did a remarkable job of presenting at the conference and fielding difficult questions during discussion of their work. Their paper, entitled “Aid and Public Finance: A Missing Link?,” explores the connection between multilateral aid flows and the quality of public finance institutions in developing countries. They construct a new composite index to measure the quality of public financial institutions(PFIQ), which takes into account factors such as quality of institutions, government corruption, efficiency of the tax system, and budget surpluses/deficits.

Their surprising conclusion is that multilateral aid-flows seem to have a negative impact on a recipient country’s quality of public finance. However, a higher PFIQ due to exogenous circumstances seems to have a positive effect on multilateral aid receipts.

Gstoettner, who hails from Austria, graduates from the LSE this year with a degree in Economics. He will intern for McKinsey & Co. in Munich, Germany this summer. He is the founder of LSE’s Microfinance Society. Jensen, who is from Denmark but has studied in both the United States and France, will graduate in 2010. He has previously interned at the World Bank.

Testing the NATREX Model

Rebecca Freeman

A Dynamic Model of Equilibrium Real Exchange Rates

Rebecca Freeman, a recent graduate of Smith College, was honored as a distinguished participant at the 8th Carroll Round. In her paper, “Testing the NATREX Model: A Dynamic Model of Equilibrium Real Exchange Rates,” Freeman uses vector error correction to test the explanatory capacity of this model for exchange rate fluctuations. She finds that this model is not suitable for generalization to large groups of countries.

An Economics major and African Studies minor, Freeman spent time during her undergraduate years studying in Niger and France, and working for the Organization for Economic Cooperation and Development. After graduation she hopes to work in Europe.