Foreign investors and crises: There is no safe haven for all seasons
Maurizio Michael Habib, Livio Stracca 28 February 2014
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
The resilience of the international status of the US dollar remains surprising (Frankel 2013). At the peak of the global financial crisis which started in the US, in particular in the last quarter of 2008, US treasury yields fell and the US dollar appreciated. This has created the impression of a stronger demand for US securities in general. The evidence suggests, however, that non-US residents were instead relatively ‘picky’, fleeing into short-term US Treasury bills but reducing purchases of longer-dated Treasury bonds and shedding other US bonds.
Financial markets Global crisis
US, reserve currency, financial crisis, asset pricing, global crisis, risk aversion, home bias, safe haven, portfolio flows
Fama, Hansen, Shiller: Nobelists 2013
Marianne Andries, Bruno Biais 21 October 2013
The 2013 Nobel Prize in economics goes to Lars Hansen, Eugene Fama, and Robert Shiller. This column describes the significance of their contributions in the context of the broader literature. The prizes are well deserved. Their careful investigation of data – informed by deep understanding of theory – taught us much of what we know about asset pricing.
The 2013 Nobel Prize in economics has been awarded to Lars Hansen, Eugene Fama and Robert Shiller "for their empirical analysis of asset prices." These were three important actors in the asset-pricing literature whose contributions are given context herein.
Nobel Prize, asset pricing
Asset pricing in the frequency domain: Theory and empirics
Ian Dew-Becker, Stefano Giglio 20 October 2013
Stabilisation policy should focus on the frequencies consumers care most about. This column presents evidence from stock-market returns suggesting that consumers are willing to pay the most to avoid – and are therefore most concerned about – fluctuations that last tens or hundreds of years. Modern macroeconomic theory tends to view the role of monetary policy as smoothing out inflation and unemployment over the business cycle. The authors’ findings suggest that resources would be better spent on policies that smooth out longer-run fluctuations.
Economic fluctuations act at frequencies that range from the hourly or even minute-by-minute level – such as shifts in electricity demand due to temperature fluctuations – to shocks that last for decades or longer – such as large-scale technological changes. While economic policy can do little to change factors like the temperature at a particular time of day, it can affect the behaviour of the economy at a certain range of frequencies – for example by trying to stabilise the business cycle or encourage innovation that affects long-run growth rates.
Financial markets Macroeconomic policy Monetary policy
financial markets, business cycles, asset pricing, Stabilisation policy, fluctuations, habit formation
Capital market theory after the efficient market hypothesis
Dimitri Vayanos, Paul Woolley 05 October 2009
Have capital market booms and crashes discredited the efficient market hypothesis? This column says yes and suggests a new model that explains asset pricing in terms of a battle between fair value and momentum driven by principal-agent issues. Investment agents’ rational profit seeking gives rise to mispricing and volatility.
Forty years have passed since the principles of classical economics were first applied formally to finance through the contributions of Eugene Fama (1970) and his now-renowned fellow academics. Over the intervening years, capital market theory and the efficient market hypothesis have been developed and modified to form an elegant and comprehensive framework for understanding asset pricing and risk.
asset pricing, Behavioural economics, efficient market hypothesis
Understanding exchange rates as asset prices
Jian Wang 05 September 2008
A random walk is (in)famously a better predictor of short-term exchange rates than models emphasising economic fundamentals. This column explains recent literature that has addressed the puzzle by considering an asset-pricing approach. Fundamentals (and expectations of them) are still relevant.
The foreign exchange market is the largest and most liquid financial market in the world. Its average daily turnover exceeded $3 trillion as of April 2007. Currency trading is very important for individuals, firms, and governments that buy foreign goods and services, invest abroad, and seek profit or protection through speculation. Market supply and demand drive exchange rates up and down every day, imposing risks on participants of the foreign exchange markets.
exchange rates, forecasting, asset pricing