The ‘fear factor’: Personal experience and risk aversion in times of crisis

Peter Koudijs, Hans-Joachim Voth 12 April 2014

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To paraphrase Larry Summers, some people are scared – just look around. The crisis of 2007–08 took a toll on a lot of people, investors included. What seemed to be a new age of steady, moderately high growth and stable equity returns suddenly turned into the biggest economic crisis since the 1930s:

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Topics:  Economic history Financial markets

Tags:  financial markets, crisis, behaviour, risk aversion, lending

The price of political uncertainty

Bryan T. Kelly, Lubos Pastor, Pietro Veronesi 31 March 2014

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Amid the 2008 financial crisis, political uncertainty around the world reached record levels and has remained elevated ever since (Baker et al. 2013). While uncertainty is a natural feature of even the healthiest political processes, its recent surges have been in large part self-inflicted, for example, by the stubbornly dysfunctional discourse in the US Congress. What is the price we pay for cultivating an uncertain political climate?

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Topics:  Politics and economics

Tags:  financial markets, political uncertainty

Asset pricing in the frequency domain: Theory and empirics

Ian Dew-Becker, Stefano Giglio 20 October 2013

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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.

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Topics:  Financial markets Macroeconomic policy Monetary policy

Tags:  financial markets, business cycles, asset pricing, Stabilisation policy, fluctuations, habit formation

The Fractal Market Hypothesis and its implications for the stability of financial markets

Nicola Anderson, Joseph Noss 03 September 2013

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Financial prices appear to exhibit ‘fractal’ properties over time. A defining property of fractals is the tendency of an object to be similar to parts of itself.1  To fix ideas before turning to financial markets, consider a well-known natural example – an oak tree (Figure 1).

Figure 1. A fractal tree

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Topics:  Financial markets

Tags:  financial markets, Fractal market hypothesis, self-similarity

Stock market turnover and corporate governance

Alex Edmans, Vivian W Fang, Emanuel Zur 16 February 2013

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The stock market is a powerful tool for controlling corporation’s behaviour. But what is best:

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Topics:  Financial markets

Tags:  financial markets, liquidity, corporate governance, firms, stocks

Limits to currency momentum trading

Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf 31 March 2012

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Momentum trading, ie buying past winners and selling past losers, is a very popular trading strategy in many assets. In foreign exchange high returns to momentum trading have been documented since the 1970s and have fuelled concerns about destabilising speculation. However, such concerns may be a bit one-sided because it is not really obvious whether there is too much momentum trading or possibly even not enough.

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Topics:  International finance International trade

Tags:  financial markets, currency trading, speculation, momentum trading

Innovations in the real economy thrive on modern financial markets

Thomas Meyer 19 August 2011

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There is by now a fairly large literature arguing that modern financial markets are very important drivers of innovations in the real economy. Efficient financial markets should allocate capital towards up-and-coming sectors, promising companies, and exciting business ideas but away from declining industries. This role is easy to see when it comes for instance to venture capital, which supports innovative start-ups, but should also hold when looking at established companies.

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Topics:  Financial markets Productivity and Innovation

Tags:  financial markets, innovation

Contingent capital and risk taking: Evidence from Britain’ banks 1878-1912

Richard S. Grossman, Masami Imai 07 September 2010

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From the enactment of the first commercial banking codes in the nineteenth century through the adoption of the Basel and Basel II accords in recent years to the anticipated adoption of Basel III, policymakers have argued that holding increased amounts of capital promotes bank “soundness and stability” (Basel Committee on Banking Supervision 1988, 2004).

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Topics:  Economic history Financial markets Global crisis

Tags:  financial markets, financial regulation, global crisis

The US financial reform bill: Hit or flop?

Thorsten Beck 16 June 2010

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A few weeks ago, the US Senate passed its version of the Financial Reform Bill. While it still has to be reconciled with the House version, the outline of the regulatory reform in the US is slowly becoming clear. A thorough assessment of the Bill, however, is made difficult by the sheer size of the Bill with over 1,000 pages, compared to 53 pages of the Glass-Steagall Act.

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Topics:  Financial markets Global crisis Microeconomic regulation

Tags:  financial markets, global crisis, microeconomic regulation

Financial markets regulation: The tipping point

Venkatachalam Shunmugam 18 May 2010

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While over-the-counter markets for collateralised debt obligations and credit default swaps are blamed for the financial crisis of 2007-2009, what has been overlooked is the menace of rising opacity in the exchange-traded market. This raises questions about the fundamentals of this market’s very existence, i.e. transparency and equal access to one and all in the price discovery process.

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Topics:  Financial markets Global crisis

Tags:  financial markets, financial regulation, derivatives, dark pools

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