Michael Gofman

Assistant Professor of Finance
Michael Gofman

Research Interests: Financial Networks, Financial Intermediation, Financial Regulation, Production Networks, Trade Credit, Systemic Risk, Financial Stability, Payment Systems, Creative Destruction, Artificial Intelligence

Curriculum Vitae

Contact Information:

Simon Business School
University of Rochester
Rochester, NY 14627

INET Financial and Economic Networks Conference that I organized in August 2013

Working papers

Artificial Intelligence, Education, and Entrepreneurship with Zhao Jin (R&R Journal of Finance)

The scarcity of the human capital needed for R&D in Artificial Intelligence (AI) created an unprecedented brain drain of AI professors from universities in 2004-2018. We exploit this brain drain as a source of variation in students' domain-specific knowledge and provide causal evidence that domain-specific knowledge is important for startup formation, seed funding, round A funding, and funding growth rate. The effect is the largest for top universities, PhD students, and startups in the area of deep learning. These results contribute to the entrepreneurial finance literature and challenge the current view that entrepreneurs are jacks-of-all-trades, master of none (Lazear 2004).

AI Faculty Brain Drain

Trade Credit and Profitability in Production Networks with Youchang Wu (Forthcoming Journal of Financial Economics)

We construct a sample of over 200,000 supply chains to conduct a chain-based analysis of trade credit. Our study uncovers novel stylized facts about trade credit both within and across supply chains. More upstream firms borrow more from suppliers, lend more to customers, and hold more net trade credit. This upstreamness effect in trade credit is weaker for more profitable firms and for longer chains. Firms in more central or more profitable chains provide more net trade credit. Our results are generally consistent with the recursive moral hazard theory of trade credit. Evidence for the financing advantage theory is mixed.

Institutional Structure of Production in US

A Network-Based Analysis of Over-the-Counter Markets (R&R Review of Financial Studies)

I study how intermediation in over-the-counter markets affects their allocational efficiency. Over-the-counter markets are modeled as a trading network in which bilateral prices and trading decisions are jointly determined in equilibrium. Market efficiency depends crucially on the network structure and the split of surplus between traders. The probability that market allocations are always efficient tends to zero in large markets. The expected welfare loss can be substantial and it can increase even if the amount of intermediation decreases. A large interconnected financial institution can improve efficiency. This welfare gain should be considered when deciding whether large financial institutions are too-interconnected-to-exist.

Non-monotonic Relationship between Efficiency and Network Density

Interbank trading, collusion and financial regulation with Dean Corbae

We show theoretically and empirically that interbank markets provide a channel for banks to collude in the market for business loans. By lending funds to a competitor, a bank commits not to compete. Interbank interest rates allow banks to split the benefits from such collusion. Using global syndicated loans data, we find that firms paid 31bps higher spread on $239 billion of loans provided by banks that took an interbank loan from a competitor. We compare the decentralized solution with interbank market to the planner's solution and to the decentralized equilibrium without interbank market. The results suggest that restricting interbank trading may increase aggregate welfare.

Collusion using itnerbank market

High-frequency analysis of financial stability with James Chapman and Sajjad Jafri

We utilize 500 trillion CAD of interbank payments to compute high-frequency measures of systemic risk in Canadian Large Value Transfer System (LVTS). We find that banks started to delay provision of bilateral credit limits in the second half of 2005. During 2007-2009, LVTS experienced an abnormal increase in delayed and rejected payments due to binding collateral and credit constraints. Bank of Canada's injection of liquidity in 2008-2010 relaxed collateral constraints and reduced systemic risk in LVTS. Overall, our high-frequency risk measures help to identify vulnerabilities caused by the fundamental efficiency-stability trade-off in the design of payment systems.

High-frequency analysis of financial stability

An Empirical Evaluation of the Black-Litterman Approach to Portfolio Choice with Asaf Manela

We evaluate the Black-Litterman equilibrium model approach to portfolio choice. We quantify the improvement in portfolio performance of a privately informed investor who learns from market prices over an equally informed, but dogmatic investor who only uses private information. We extend the approach to any linear multi-factor asset pricing model (e.g. ICAPM) to examine how learning from prices using different equilibrium models affects portfolio performance. We find that even a misspecified asset-pricing model can improve portfolio performance when private signals are not extremely precise. As we increase the noise in private information, learning from prices is initially harmful and gradually becomes more beneficial.

Word Cloud

Published papers

Efficiency and Stability of a Financial Architecture with Too-Interconnected-To-Fail Institutions (Journal of Financial Economics)

The regulation of large interconnected financial institutions has become a key policy issue. To improve financial stability, regulators have proposed to limit banks' size and interconnectedness. I estimate a network-based model of the over-the-counter interbank lending market in US and quantify the efficiency-stability implications of this policy. Trading efficiency decreases with limits on interconnectedness because the intermediation chains become longer. While restricting the interconnectedness of banks improves stability, the effect is non-monotonic. Stability also improves with higher liquidity requirements, when banks have access to liquidity during the crisis, and when failed banks' depositors maintain confidence in the banking system.

Consequences of Failure of the Most Interconnected Bank(s)

Production Networks and Stock Returns: The Role of Vertical Creative Destruction with Gill Segal and Youchang Wu (Review of Financial Studies)

We study the relation between firms' risk and their upstreamness in a production network. Empirically, firms' average stock returns and aggregate productivity exposures increase monotonically with their upstreamness. We quantitatively explain these novel facts using a multi-layer general equilibrium model. These patterns arise from vertical creative destruction - innovations by suppliers devalue customers’ assets-in-place. We confirm several model predictions, and document additional new facts consistent with vertical creative destruction: a diminished value premium among downstream firms and a negative relation between downstream firms’ returns and their suppliers’ competitiveness. Overall, vertical creative destruction has a sizable effect on cross-sectional risk premia.

Vertical Position and Stock Returns

Teaching Resources

Since March 2014 I have been using Google Glass to provide video feedback to my students on their assignments.

Michael Gofman: Google Glass Usage for Providing Feedback to Students

Watch a 2 min Youtube video: Google Glass Inspires Students and Improves the Learning Experience