Yves Zenou, Thursday, January 8, 2015 - 00:00
Robert Townsend, Weerachart Kilenthong, Sunday, November 9, 2014 - 00:00
Peter Koudijs, Hans-Joachim Voth, Saturday, April 12, 2014 - 00:00
Human behaviour in times of financial crises is difficult to understand, but critical to policymaking. This column discusses new evidence showing that personal experience in financial markets can dramatically change risk tolerance. A cleanly identified historical episode demonstrates that even without losses, negative shocks not only modify risk appetite, but can also create ‘leverage cycles’. These, in turn, have the potential to make markets extremely fragile. Remarkably, those who witnessed this episode but were not directly threatened by it, did not change their own behaviour. Thus, personal experience can be a powerful determinant of investors’ actions and can eventually affect aggregate instability.
Bryan T. Kelly, Lubos Pastor, Pietro Veronesi, Monday, March 31, 2014 - 00:00
Despite obvious ties between political uncertainty and financial markets, the nature of this connection has not been studied in detail. This column describes a theoretical framework for evaluating the influence of political uncertainty on financial markets. Political uncertainty commands a risk premium, especially when the economy is weak. By raising firms’ cost of capital, it depresses investment and real activity. Furthermore, by raising risk premia, political uncertainty destroys market value.
Ian Dew-Becker, Stefano Giglio, Sunday, October 20, 2013 - 00:00
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.
Nicola Anderson, Joseph Noss, Tuesday, September 3, 2013 - 00:00
Financial prices display ‘fractal’ properties. This column conjectures that this is caused by interactions among agents with different horizons and interpretations of information. This structure appears to be associated with a special sort of stability that can be disrupted – leading to price crashes – if these interaction breaks down. While embryonic, this thinking may have important implications for the regulation of financial markets.
Alex Edmans, Vivian W Fang, Emanuel Zur, Saturday, February 16, 2013 - 00:00
The stock market is a powerful tool for controlling corporations’ behaviour. But which is better, a highly liquid market or a number of large blockholders? This column argues in favour of liquidity. Evidence suggests that policymakers should not reduce stock liquidity through greater regulation. While the idea that liquidity encourages short-term trading – rather than long-term governance – sounds intuitive, deeper analysis shows that liquidity is beneficial because it encourages large shareholders to form in the first place, and allows shareholders to punish underperforming firms through selling their stake.
Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf, Saturday, March 31, 2012 - 00:00
Momentum trading – buying past winners and selling past losers – is a popular trading strategy in many assets. In foreign exchange high returns to momentum trading have fuelled concerns that it is little more than destabilising speculation. This column argues that, for better or worse, such strategies are likely to continue.
Thomas Meyer, Friday, August 19, 2011 - 00:00
Against the backdrop of noise about the damage financial markets can cause, this column focuses on the positives. It presents an analysis of innovation at 1,200 firms worldwide and finds that financial markets usually award a premium to innovative firms, though this premium differs across countries. Economies with more active financial markets have higher innovation – which may be a driver of faster productivity growth.
Richard S. Grossman, Masami Imai, Tuesday, September 7, 2010 - 00:00
One of the striking features in the buildup to the global crisis was the extent of risk taken on by highly leveraged financial institutions. This column blames such behaviour on the limited liability status of these institutions. Using data on British banks from 1878 to 1912, it finds that the banks with greater liability for their debts took on less risk.
Thorsten Beck, Wednesday, June 16, 2010 - 00:00
Will the upcoming Financial Reform Bill in the US help prevent the next crisis or at least reduce its probability? This column argues that the answer is a firm “no”. It says this is not because the reform steps are damaging or wrong, but simply because they only provide the framework and do little to change incentives for banks and regulators.
Venkatachalam Shunmugam, Tuesday, May 18, 2010 - 00:00
Over-the-counter markets for derivatives have been a subject of blame for the global crisis. This column argues that the rising opacity and barriers to entry in these markets have been sorely overlooked leading to dark pools, flash trading, and front-running. These unfair practises can – at any time – cripple markets. They undermine the premise of free markets and should be stopped.
Richard Olsen, Saturday, March 6, 2010 - 00:00
Why should high-frequency finance be of any interest to policymakers interested in long-term economic issues? This column argues that the discipline can revolutionise economics and finance by turning accepted assumptions on their head and offering novel solutions to today’s issues.
Eduardo Cavallo, Wednesday, February 24, 2010 - 00:00
Recent evidence suggests that Latin American counties have been shifting their public debt from foreign to domestically issued liabilities. This column argues that the change in debt composition does not guarantee less exposure to external shocks. Without a stable domestic investor base, Latin America will remain vulnerable to swings in global financial markets.
Giuseppe Bertola, Anna Lo Prete, Wednesday, December 3, 2008 - 00:00
Globalisation seemingly erodes governments’ ability to redistribute wealth. This column presents new evidence of the tradeoff between integration and redistribution, showing that financial development has filled in where government has receded. The current crisis may pose political challenges to both financial development and economic integration.
John Muellbauer, Thursday, November 27, 2008 - 00:00
This column explains the logic behind a radically new form of monetary policy – a new central-bank tool for stabilising the credit cycle. By buying bank stocks and credit instruments at the bottom of the cycle and selling at the top, the new policy could moderate the boom-and-bust credit cycle independently of interest rate policy. The Fed action on 25 November is a good step in this direction.
Salvatore Rossi, Thursday, November 20, 2008 - 00:00
Finance, the market and globalisation are at risk of being jointly demonised by the crisis. This column argues that the these three elements are neither good nor bad; they are just opportunities for individuals, for societies and for economies that must be understood and regulated.
Erik Berglöf, Friday, October 17, 2008 - 00:00
Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD), talks to Romesh Vaitilingam about the interlinkages between food markets, financial markets and development, particularly in the countries in which the EBRD operates, from central Europe to central Asia. The interview was recorded at the EBRD headquarters in London in October 2008 following a public discussion meeting on ‘Rising food prices: causes, consequences and remedies’.
Mare Sarr, Erwin Bulte , Christopher M. Meissner, Tim Swanson , Saturday, September 27, 2008 - 00:00
It is well known that resource wealth may be a “curse” for some countries, as resource booms are translated into lingering ill effects. This column blames unstructured financial investments.
Fabrizio Coricelli, Friday, July 18, 2008 - 00:00
Financial development is key to an economy’s long-run growth. This column argues that it is asymmetrically important – while not key to economic expansion, financial development is a critical shock absorber that helps prevent sharp economic contractions. Moreover, avoiding such drops improves long-run growth prospects.