NWO-VIDI grant for Mathijs van Dijk

Mathijs van Dijk, Associate Professor of Finance, Rotterdam School of Management, Erasmus University has received a NOW-VIDI grant for his project entitled “Liquidity Black Holes”. Van Dijk will receive a sum of up to € 600.000,-. This allows the researcher to develop his research and appoint one or more researchers for five years.

“Liquidity Black Holes”
Liquidity black holes arise when financial market liquidity suddenly dries up. Trading financial assets becomes prohibitively expensive and asset prices tank. Examples of liquidity black holes are the 1997 Asian crisis, the 1998 Russian debt / LTCM crisis, and the August 2007 subprime mortgage crisis.

Liquidity black holes are self-reinforcing. Falling prices lead to further selling because financial traders lose confidence or hit their loss limits. As a result, financial markets break down.

Liquidity black holes can have severe economic consequences. They can cause financial institutions to fail (consider the recent bank run on Northern Rock), undermining the trust in the financial system. They also disrupt the economy directly by blocking companies’ access to capital.

We know little about the causes and consequences of liquidity black holes. Under what circumstances do they arise? What is the role of different groups of investors? What is the impact on asset prices? How can financial regulators mitigate the damage to the economy?

This research will answer these vital questions. First, I will investigate liquidity black holes in international financial markets. Looking at a large number of countries over a long period of time will allow me to identify the conditions under which the liquidity and prices of many financial assets collapse simultaneously. Second, foreign investors (notably hedge funds) are often blamed for causing liquidity black holes in emerging markets. I will examine whether foreign investors indeed destabilize the financial system of emerging economies or whether they actually provide liquidity during crises. Third, I will develop a new technique to analyze the impact of liquidity black holes on asset prices.

This research will help financial institutions to anticipate liquidity black holes and financial regulators to design policies to deal with these episodes of financial turmoil.

The NWO-Vidi grant is intended for researchers who, after their defense have done several years of postdoctoral research. The researchers have also generated innovative ideas and successfully and independently developed those ideas. The scientists are among the best ten to twenty percent of their field.

More Information
<link people mathijs-van-dijk _blank>Personal Homepage Mathijs van Dijk
Homepage NWO-VIDI grant (dutch)