Crisis

Blickle, Kristian, Markus K. Brunnermeier, and Stephan Luck. “Micro-Evidence From a System-Wide Financial Meltdown: The German Crisis of 1931”. (Working Papers). Web. Publisher's VersionAbstract
In this paper, we use hand-collected monthly bank balance sheet data during a system-wide run on the German banking system in 1931 to study the determinants of bank stability. We derive three key insights. First, demand deposits are — despite the absence of deposit insurance — largely stable and the run is centered around the collapse of interbank and wholesale funding. Second, while aggregate deposits are contracting, deposits are also partially reshuffled within the system with some banks receiving deposit inflows during the run. Third, we show that both, better capitalized and more liquid banks, are more stable and less likely to be subject to deposit outflows during the run. However, only higher bank capital is associated with higher credit provision in the crisis.
Macro, Money and Finance: A Continuous-Time Approach
Brunnermeier, Markus K., and Yuliy Sannikov. “Macro, Money and Finance: A Continuous-Time Approach”. Handbook of Macroeconomics. North-Holland, 2017. 1497-1546. Print.Abstract

This paper puts forward a manual for how to set up and solve a continuous time model that allows to analyze endogenous (1) level and risk dynamics. The latter includes (2) tail risk and crisis probability as well as (3) the Volatility Paradox. Concepts such as (4) illiquidity and liquidity mismatch, (5) endogenous leverage, (6) the Paradox of Prudence, (7) undercapitalized sectors (8) time-varying risk premia, and (9) the external funding premium are part of the analysis. Financial frictions also give rise to an endogenous (10) value of money.

The Euro and the Battle of Ideas
Brunnermeier, Markus K, Harold James, and Jean-Pierre Landau. The Euro and the Battle of Ideas. Princeton, NJ, USA: Princeton University Press, 2016. Web. Chapter 1:

Endorsements by Larry Summers (former US Treasury Secretary), Ben Bernanke (former Chairman of the US Fed), Wolfgang Schäuble (German Finance Minister) and Jean Tirole (Nobel Prize Laureate)

Brunnermeier, Markus K., and Ricardo Reis. “A Crash Course on the Euro Crisis”. (Working Papers). Print.Abstract

The financial crises of the last twenty years brought new economic concepts into classrooms discussions. This article introduces undergraduate students and teachers to seven of these models: (i) misallocation of capital inflows, (ii) modern and shadow banks, (iii) strategic complementarities and amplification, (iv) debt contracts and the distinction between solvency and liquidity, (v) the diabolic loop, (vi) regional flights to safety, and (vii) unconventional monetary policy. We apply each of them to provide a full account of the euro crisis of 2010-12.

Bubbles, Financial Crises, and Systemic Risk
Brunnermeier, Markus K, and Martin Oehmke. “Bubbles, Financial Crises, and Systemic Risk”. Handbook of the Economics of Finance. Amsterdam: Elsevier, 2013. Print.Abstract

This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.

Abreu, Dilip, and Markus K Brunnermeier. “Synchronization risk and delayed arbitrage”. Journal of Financial Economics 66 (2002): , 66, 341-360. Print.Abstract

We argue that arbitrage is limited if rational traders face uncertainty about when their peers will exploit a common arbitrage opportunity. This synchronization risk—which is distinct from noise trader risk and fundamental risk—arises in our model because arbitrageurs become sequentially aware of mispricing and they incur holding costs. We show that rational arbitrageurs “time the market” rather than correct mispricing right away. This leads to delayed arbitrage. The analysis suggests that behavioral influences on prices are resistant to arbitrage in the short and intermediate run.

Models the Wile E. Coyote effect, since synchronization risk leads to market timing by arbitrageurs and delays arbitrage.

Abreu, Dilip, and Markus K Brunnermeier. “Bubbles and Crashes”. Econometrica 71 (2003): , 71, 173-204. Print.Abstract

We present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to temporarily coordinate their selling strategies. This synchronization problem together with the individual incentive to time the market results in the persistence of bubbles over a substantial period. Since the derived trading equilibrium is unique, our model rationalizes the existence of bubbles in a strong sense. The model also provides a natural setting in which news events, by enabling synchronization, can have a disproportionate impact relative to their intrinsic informational content.

Bubbles persist since each rational arbitrageur does not know when other arbitrageurs will attack.

Brunnermeier, Markus K. “Deciphering the Liquidity and Credit Crunch 2007-2008”. Journal of Economic Perspectives 23 (2009): , 23, 77-100. Print.Abstract

This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.