Rohan Williamson began researching credit derivatives four years ago when the market exuded a more stable appearance. Back then, he didn’t realize the full relevance his work would have 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 it and see what you can learn.”
Williamson had begun analyzing the role of credit derivatives -- financial assets for which the price is driven by the credit risk of banks and other financial institutions.
“At the time, the use of these instruments was increasing,” Williamson says. So, the finance scholar began to investigate why the credit derivatives were being utilized at such a high rate.
His research with professors at Ohio State University was accepted quickly for publication in October 2008, just after major financial markets went into a freefall the previous month. His paper, “How Much Do Banks Use Credit Derivatives to Hedge Loans?” appeared in the December issue of the Journal of Financial Services Research and later published in the print edition’s February 2009 issue.
“We think the market just grew too fast,” he explains. “It’s not that credit derivatives are bad instruments; it’s just that monitoring the system and controlling growth were not done.”
Nearly a year has passed since the effects of the economic downturn first rippled across the nation. Where much has not changed in the way of legislation, banks are beginning to take more responsibility, Williamson says.
“Financial institutions are starting to watch the way they do business with the amount of risk they take,” he explains. “And that’s starting to create more confidence in the economy.”
His research on credit derivatives led him to examine two other areas linked to the economic downturn -- corporate governance and executive compensation.
“His research is very well recognized and extensively cited by peer researchers. He has published in the best journals in our field,” says
Reena Aggarwal, the McDonough Professor of Business Administration.
Williamson, who has taught and conducted research at the McDonough School of Business since 1997, views research as an important instrument for teaching.
Lily Cua (MSB’11) is one student who has benefited from that belief.
Cua worked as Williamson’s research assistant during the spring semester and continued some work over the summer. She says working with the finance scholar has given her a clearer view of research opportunities.
“I was very surprised by how easy it was to interact with professor Williamson. He is very knowledgeable in the field of finance, as well as what’s going on at Georgetown,” says Cua, who plans to take an independent research study under the professor this fall. “He introduced me to the idea of taking the independent research study and readily offered his help in crafting it.”
In addition to cultivating grounds for undergraduate research, Williamson will be teaching two courses this fall – international finance and corporate risk management.
“He is able to take his research into the classroom and give his students first-hand information on particular topics,” adds Aggarwal, who has worked with Williamson on several research topics.
Most recently, the two have researched international corporate governance where they compared governance within U.S. firms to those found in other countries. Their research appeared in the August 2009 issue of Review of Financial Studies.
“The idea is that the U.S. has better governance than the rest of the world -- more disclosure, for instance, board independence, protection of minority shareholders and other factors we think of as positive,” Williamson says. “We look at the value of governance throughout the world using the U.S. as a benchmark.”
Williamson has also turned his focus to executive pay. The finance professor is taking a look at what drives corporate decision-making by questioning whether executives make riskier decisions if their reward structures are based on the company’s performance rather than a flat salary.
The goal in asking these questions is not to point fingers or create scapegoats, Williamson says. It’s to identify what structures and processes maximize value and control risk at an acceptable level.
“This is a stress test of our financial system, and it’s a test of some of the theories and practices we’ve had out there for years,” he says. “We just want to know what works and what doesn’t.”
This story was excerpted from the Spring/Summer 2009 issue of Georgetown Business magazine.
