On 22 October, SFI External Professor John Geanakoplos (Yale University) received the eighth Stephen A. Ross Prize from The Foundation for Advancement of Research in Financial Economics (FARFE) along with Ana Fostel (University of Virginia) for their paper Leverage Cycles and the Anxious Economy. Published in 2008 in the American Economic Review, the paper provides an innovative analysis of financial booms and busts based on changes in leverage.
"It is of particular pleasure for me to receive a prize named after my dear departed friend, Steve Ross, and to share it with my student, Ana Fostel. The Prize is connected to the subject of my 2017 SFI Ulam Lecture,” says Geanakoplos. “Many financial crises are caused by a sudden change in the amount of collateral lenders require to back their loans. When collateral requirements are easy, asset prices rise, when they get tight, asset prices fall, sometimes precipitously.” Geanakoplos’s 2017 Ulam Lecture was a two part lecture series revolving around debt.
Given out biennially by FARFE, the Stephen A. Ross Prize recognizes significant contributions to research in financial economics. Geanakoplos and Fostel’s paper shows how simultaneous leverage cycles can cause contagion, flight to collateral, and issuance rationing in a frequently recurring phase the authors call the anxious economy. Geanakoplos’ earlier work on leverage focused on how a single leverage cycle, say in housing, could lead to crisis economies, as in 2008. Leverage cycle theory carries policy implications and serves as an early indicator of potential economic difficulties.