When a pair of Wall Street Journal reporters needed someone to review their analysis that major banks may have been misreporting their borrowing costs to manipulate one of the world’s most relied-upon benchmark interest rates, they called Stanford Graduate School of Business finance professor Darrell Duffie.
A few years later, when members of the Financial Stability Board, an international body that makes recommendations about the global financial system, wanted to explore alternatives to that rate, known as LIBOR, they asked Duffie to chair that effort.
And, in 2020, when the Group of Thirty, a decades-old organization that seeks to increase understanding of international economic and financial issues, wanted to examine the potential role of digital currencies in the global payment system, Duffie again was the go-to.
Maybe you can see the pattern. Across a wide range of issues — including many that are novel, complex, or key to ensuring global markets function efficiently and fairly, Duffie is a sought-after source. He regularly testifies before legislative bodies and as an expert in disputes between private parties. In August, he presented some of his recent work on U.S. Treasury market functionality at the Federal Reserve Bank of Kansas City’s annual economic policy symposium in Jackson Hole, Wyoming, one of the longest-standing central banking conferences in the world.
“If you asked who among financial economists has had a dramatic and important influence in academia, policy circles, and industry, Darrell would be one of the few,” says Haoxiang Zhu, PhD ’12, a former student of Duffie’s, who now directs the SEC’s Division of Trading and Markets. “He is able to write and research, and because of the research he has written, he is able to inform policy.”
Duffie’s work on LIBOR, which was used to calculate interest for consumers on everything from credit cards and car loans to home mortgages, is a great example of his influence. LIBOR was finally phased out in June; the U.S. replacement rate is the one Duffie and a team of dozens of other experts put forward in their 2014 report for the Financial Stability Board.
“That was an enormous project,” Duffie says. “LIBOR was embedded so deeply in the financial system that it was really difficult to get out. Like cleaning a stain out of the rug.”
Fixing the Plumbing
Duffie was drawn to academia in general and economics in particular for the chance to work on the “abstraction of real problems, distilling them into something you could model, and trying to solve the model,” he says.
His first efforts at problem-solving were in the economic planning unit of the telephone company Bell Canada, where he tried to project how much money the company would need for major infrastructure projects in the future.
“Economists generally work on two types of research: positive, or descriptive, research that asks why the world looks like it does and describes what it looks like; and normative economics, which asks how we can improve things,” Duffie explains. “I was doing normative decision-making, but I knew almost nothing about how to do it.
To learn more, he decided to return to school. He earned a master’s degree in economics from Australia’s University of New England before completing his PhD at Stanford in engineering economic systems. His dissertation was a theoretical look at asset trading and market efficiency; he also wrote a textbook while earning his PhD. When it turned out to be too abstract for his students, he wrote another, Dynamic Asset Pricing Theory, that is now in its third edition.
“Dynamic Asset Pricing is one of the classic courses that PhD students interested in finance take,” says Stanford GSB finance professor Peter M. DeMarzo, who studied under Duffie while earning his own doctorate. “His course and his textbook were the first comprehensive treatments of dynamic asset pricing (including continuous-time models, which required new methodology).”
Over the years, Duffie has expanded his inquiries into new areas of financial markets and how they might function better. A major turning point for his research was the 2008 financial crisis, which revealed flaws in what he has called “the pipes and valves” of financial systems.
“Many economists were pretty embarrassed about the lack of understanding we had about the weaknesses of the financial system,” he recalls. “I figured I had to do a better job understanding what is going on — what is wrong with the financial system and how we can improve it.”
Duffie’s latest work on the U.S. Treasury markets is emblematic of those efforts. Treasury securities — including bonds, bills, and notes — have long been seen as safe-haven investments because of their backing by the U.S. government. But the COVID-19 pandemic exposed the markets’ risks, as Duffie described in a 2020 piece for the Brookings Institution and in more detail in the paper he presented at Jackson Hole in August. Since the 2008 financial crisis, banks have been required to have more capital on hand in case of an emergency; those requirements limit the amount of treasury securities they can buy, which, when everyone wants to sell — as they did in March 2020 — can create havoc in the market.
“Even the regulators called it dysfunctional,” says Duffie, who in March finished a six-month sabbatical at the Federal Reserve Bank of New York to examine the issue more closely.
To calm the markets in 2020, the Federal Reserve repurchased about $1 trillion of Treasury securities in three weeks. But that solution isn’t sustainable, Duffie says.
“Although the Fed accomplished what it needed to do, it is unacceptable that the structure of a private market like the secondary market for U.S. Treasury debt should rest on the hope that the Fed will rescue it as a last resort if need be,” Duffie wrote in his policy paper for Brookings.
The majority of trades for U.S. Treasuries are settled between two parties rather than through a central clearinghouse. To protect against future similar disruptions, Duffie argues, U.S. Treasuries deals should be centrally cleared the way most exchange-traded derivatives, equities, and swap-market transactions are. That way, in addition to improving the safety of the market, commitments to deliver securities and pay cash wouldn’t clutter up dealer banks’ balance sheets.
Deep Dives into Diverse Topics
One of the hallmarks of Duffie’s career is his ability — and willingness — to pivot to timely and important topics, as he has recently done with his work on central bank digital currencies.
Prompted by the explosion of private cryptocurrencies and so-called stablecoins, central banks in countries around the world have begun to explore their own digital currencies in recent years. These currencies are expected to be safe, efficient, and less expensive forms of payment — including cross-border payments — for a wider percentage of the population.
Duffie, whose initial work on the subject was for the Group of 30 in 2020, argues central banks — and especially the United States — should do more research on CBDCs, not just for the possible improvements and efficiencies they might provide on their own but for the improvements and efficiencies they might prompt in the conventional, private bank-supported payment system, which charges fees to merchants and consumers to move and exchange money.
In testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs in 2021, Duffie also pointed out that a U.S. CBDC could be part of a “strategy for deflecting undesirable and invasive types of cryptocurrencies” and provide a counterbalance to China’s eCNY, “which U.S. foreign policy experts may wish to consider carefully.”
Last year, Duffie co-edited Digital Currencies: The US, China, and the World at a Crossroads, a book published by the Hoover Institution, that examines the implications of China’s digital yuan. The report focuses on potential geopolitical threats from China’s CBDC — although its acknowledgments note that the more than two dozen contributors do not necessarily agree with every finding or recommendation.
Zhu says Duffie has “the impressive ability” to develop expertise in new topics quickly and is known for being able “to present issues on their merits, to rise above political or ideological differences.”
“Many economists have philosophical or academic rivals,” Zhu says. “Darrell is widely liked. Everyone respects him. He’s very objective: If it’s a fact, it’s a fact.”
This fall, Duffie added another award to his growing portfolio of acclaim: the Onassis Prize. Awarded every three years to “distinguished personalities and organizations of international prestige,” according to the Onassis organization, the prize comes with a $200,000 award. Duffie, who was chosen for his work in finance, will receive the honor on November 7, 2023 at a ceremony in London.
Mentoring the Future Leaders of Finance
As influential as Duffie has been because of his research, his footprint is just as large in the classroom.
Last year, Professor DeMarzo, looking for a way to celebrate Duffie’s career so far, organized a celebration of his PhD mentorship and the work of his former students. It was, DeMarzo admits, a way to honor someone who is near retirement age but has no plans to step away from his work.
“We were looking for an excuse to celebrate him, but how do you throw a retirement party for someone who’s never going to retire?” he laughs. “So we said, ‘How about we celebrate all your students?’ And he finally relented.”
The two-day event featured presentations by Duffie’s former advisees, a reception and dinner, and a 6:15 a.m. hike of the Stanford Dish led by Duffie.
“He’s mentored so many students, and the breadth of topics that he’s mentored and advised them on ranges all across the field of finance,” DeMarzo says. “It’s pretty cool to see.”
Hala Moussawi, PhD ’25, says that when she came to Duffie with questions about a newsworthy financial development as a first-year student, he immediately directed her to several sources to explore the issue further. He now advises her on her dissertation work, in which she is investigating competition between the U.S. and China on international loans. Moussawi has also taken classes with Duffie and served as a teaching assistant for a course he teaches to MBA students.
“He is fantastic at blending teaching material with real market analysis and research,” she says. “And he communicates it all in such a no-barrier way.”
According to Moussawi and others, Duffie also teaches with no notes, comes up with assignments on the fly, responds to emails almost instantaneously, and can cite other people’s research in casual conversations.
“He’s able to pull these things seemingly out of thin air,” Moussawi says.
DeMarzo says the joke when he was a student was that Duffie’s super-human productivity could only be explained by an undisclosed twin. Decades later, the “urban legend” was that Duffie “must always fly west,” former student Zhu says. “That’s how he’s always up earlier than the rest of us.”
“He’s truly a remarkable individual,” Zhu adds. “I feel very fortunate to have worked with him.”
Photos by Nancy Rothstein