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Finance Scholar Examines Risk and Economic Stability

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August 27, 2010 – When business professor Rohan Williamson began studying credit derivatives in 2006, he had no idea how relevant his work would become.

In today’s unsettled economic climate, “it’s a very interesting time to be a financial researcher,” says Williamson, associate professor and Stallkamp Research Fellow at the McDonough School of Business. “You don’t hope for things like this to happen, but when they do, you take advantage of [the situation] and see what you can learn.”

In 2006], Williamson started investigating the high – and increasing – use of credit derivatives, financial assets for which the price is driven by the credit risk of banks and other financial institutions.

His article, “How Much Do Banks Use Credit Derivatives to Hedge Loans?,”co-authored with Ohio State University professors, appeared in the Journal of Financial Services Research in December 2008 – three months after the major financial markets went into a freefall.

“We think the market just grew too fast,” he explains. “It’s not that credit derivatives are bad instruments; it’s just that [banks and other financial institutions and investors] didn’t monitor the system and control growth.”

Focus on Corporate Governance and Executive Pay

His current focus includes two other areas linked to the economic downturn ­– corporate governance and executive compensation.

Williamson and McDonough Professor of Business Administration Reena Aggarwal analyzed the value of corporate governance globally using the United States as a benchmark in an oft-cited study in the August 2009 Review of Financial Studies.

In the area of executive compensation, Williamson is investigating what drives corporate decision-making – whether executives make riskier decisions if their reward structures are based on company performance rather than flat salaries.

He says the purpose of this research is to identify the structures and processes that maximize value and control risk, and not to lay blame.

Research as Teaching Tool

Williamson sees research as an important instrument for teaching. Lily Cua (MSB’11), his research assistant last spring and summer, credits Williamson with introducing her to a range of research opportunities.

“He is very knowledgeable in the field of finance, as well as what’s going on at Georgetown,” says Cua. “He introduced me to the idea of taking the independent research study and readily offered his help in crafting it.”

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