Tebaldi studies liquidity and systemic risks in centralized and decentralized markets

Claudio Tebaldi, Associate Professor in Quantitative Methods for Economics, Finance and Insurance at Bocconi University and Scientific Director of Fintech Lab of the Baffi Centre, is also the principal investigator of the research project “Liquidity and systemic risks in centralized and decentralized markets”. We have asked him some questions about the project.

Professor Tebaldi, could you briefly introduce the research project “Liquidity and systemic risks in centralized and decentralized markets”?

The project Liquidity and systemic risks in centralized and decentralized markets is a National Research Project developed within the implementation phase of the Italian National Recovery and Resilience Plan (PNRR) and funded by the European Union under the NextGenerationEU program. The project focuses on understanding how liquidity risk and systemic risk evolve in modern financial markets, especially in light of digital innovation, blockchain technologies, and the rapid growth of decentralized finance (DeFi).

Liquidity and systemic risk are classic topics in financial economics, but recent regulatory reforms following the Global Financial Crisis, combined with the emergence of digital platforms and crypto-asset markets, have profoundly changed how markets operate. These changes have opened new investment opportunities while also creating new vulnerabilities that are not yet fully understood.

What are the main research questions you are addressing?

At the core, we ask how financial innovation reshapes market stability. More specifically, we investigate how liquidity is provided and how risks propagate in both centralized exchanges (CEX) and decentralized exchanges (DEX). We study how leverage—especially forms of leverage that are not immediately visible on balance sheets—affects market fragility.

A key contribution of the project is the analysis of embedded and synthetic leverage. These concepts help capture risk exposures of retail investors and of financial entities created by derivatives, margin requirements, and contingent contracts. We also examine how retail investors interact with these instruments, how platform design influences behavior, and how shocks can spread from crypto and non-bank financial intermediaries to the broader financial system.

Why have you decided to investigate this topic now?

Timing is crucial. Financial markets are undergoing a structural transformation. Digital platforms and blockchain technologies allow investors to trade complex and leveraged products with unprecedented ease. At the same time, a growing share of financial intermediation is carried out by non-bank institutions and decentralized platforms that operate outside traditional regulatory perimeters. Recent episodes—from crypto-market collapses to liquidity crises involving non-bank intermediaries—have shown that traditional tools for measuring and regulating risk are often inadequate. Our research responds to this gap by developing analytical frameworks that are better suited to today’s market structures.

Why does this topic matter for ordinary people, not just for experts and regulators?

It matters because financial markets increasingly affect households directly. A new wave of retail investors — often younger and digitally savvy — is entering markets through mobile apps, online brokers, and crypto platforms. These investors are gaining access to derivatives, leveraged products and decentralized financial instruments that were once reserved for professionals. While this democratization of access has clear benefits, it also exposes individuals to risks they may not fully understand. Empirical evidence shows that many retail traders consistently incur losses, particularly when trading leveraged instruments. Understanding liquidity risk and leverage is therefore not an abstract academic exercise — it directly affects people’s savings, financial security, and trust in markets.

What is the concrete impact of these developments on people?

The impact is mixed. On the positive side, digital finance lowers entry barriers, reduces transaction costs, and expands investment opportunities. On the negative side, it amplifies exposure to volatility and sudden market disruptions. When liquidity dries up, markets can move abruptly. Retail investors are often the most exposed in such situations, as they may be forced to liquidate positions at unfavorable prices. Moreover, platform-driven trading can amplify behavioral biases, such as herding or overconfidence, increasing the likelihood of sharp losses during periods of stress.

What are the implications of your research for policymakers?

One key implication is that regulation must evolve from an institution-based approach to an activity- and risk-based one. Today, bank-like risks increasingly arise outside the banking system, in non-bank financial intermediaries and decentralized platforms.

Our research highlights the importance of monitoring synthetic and off-balance-sheet leverage, liquidity preparedness, and margin dynamics. Policymakers also face a difficult trade-off: they must protect financial consumers, enable large-scale market participation, and ensure inclusive governance. These objectives are hard to reconcile simultaneously, much like the well-known “blockchain trilemma” in technology design.

What data are you using in your analysis?

We focus on recent and high-frequency data from derivatives markets, crypto-asset markets, and non-bank financial intermediaries which have been made available from commercial providers and from the ECB where I spent my sabbatical. This includes information on prices, margins, liquidity conditions, and trading behavior. The emphasis is on the most recent period, characterized by rapid growth in retail participation, fintech innovation, and decentralized finance. Using these data, we develop empirical measures of synthetic leverage and test how well they explain observed episodes of market stress.

What is the current state of the project?

The project is in an advanced stage. We have developed the main analytical frameworks and are actively conducting empirical analyses. We are comparing centralized and decentralized market structures, studying how liquidity shocks propagate, and assessing how well our measures capture systemic vulnerabilities. The work also involves re-evaluating traditional regulatory tools — such as margin requirements and liquidity buffers — in light of new market realities. For the interested reader, my contribution in the CEPR e-volume “Frontiers of Digital Finance” edited by Dirk Niepelt, (CEPR Press, Paris & London 2025), examines the key challenges and technological trade-offs that legislators face in responding to the emerging landscape of digital finance and financial stability. 

Can you already share some conclusions?

While the research is ongoing, several conclusions are emerging clearly. First, liquidity risk in modern markets is often hidden in off-balance-sheet structures and digital financial design. Second, retail trading and non-bank intermediation can act as powerful amplifiers of systemic risk. Third, traditional regulatory frameworks are often ill-suited to decentralized and platform-based finance.

Overall, the evidence suggests that safeguarding financial stability in the digital era requires new metrics, new governance standards, and a careful balance between innovation and protection. This is precisely the challenge our project aims to address.