What does the market think? A general approach to inferring market expectations from futures prices

Christiane Baumeister, Lutz Kilian 19 November 2014

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There has been rapid growth in the volume of trading on futures exchanges in recent years. For example, Irwin and Sanders (2012) document that trading volumes in agricultural futures markets have increased by a factor of 3 since 2000. Futures contracts allow market participants to lock in today the price of future transactions covering a wide range of commodities and financial assets. The price of such futures contracts is a potentially valuable source of information about market expectations.

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Topics:  Financial markets Frontiers of economic research

Tags:  futures, expectations, trading, risk premia, asset prices, oil, oil prices, forecasting

Monetary policy and long-term trends

Charles A.E. Goodhart, Philipp Erfurth 03 November 2014

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Introduction

There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage).

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Topics:  Financial markets Macroeconomic policy Monetary policy

Tags:  monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy

Persistent noise, investors’ expectations, and market meltdowns

Giovanni Cespa, Xavier Vives 22 April 2014

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The recent financial crisis has revived interest in the question of what triggers crashes and meltdowns in financial markets. An important reason for abrupt and large price dislocations is the lack or ‘slow motion’ of arbitrage capital (Duffie 2010) that weakens the risk-bearing capacity of liquidity providers.

We suggest that there is an alternative explanation based on expectations dynamics in the presence of persistent market noise.

In the market:

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Topics:  Financial markets

Tags:  liquidity, financial crises, asset prices, noise trading, informational efficiency

The transmission of Federal Reserve tapering news to emerging financial markets

Joshua Aizenman, Mahir Binici, Michael M Hutchison 04 April 2014

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The quantitative easing (QE) policies of the US Federal Reserve in the years following the crisis of 2008–2009 included monthly securities purchases of long-term Treasury bonds and mortgage-backed securities totalling $85 billion in 2013. The cumulative outcome of these policies has been an unprecedented increase of the monetary base, mitigating the deflationary pressure of the crisis.

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Topics:  Exchange rates International finance Monetary policy

Tags:  exchange rates, Federal Reserve, asset prices, emerging markets, stock markets, Credit Default Swaps, tapering

Capital inflows and booms in asset prices: Going beyond the current account

Eduardo Olaberría 07 December 2013

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For decades, policymakers’ perception has been that large capital inflows can fuel booms in asset prices. If this were true, bonanzas in capital inflows would imply an important risk to financial stability, since booms in asset prices are leading indicators of financial crises. However, as noted by Reinhart and Reinhart (2008: 50), despite being widespread among policymakers, until recently this perception was based mainly on anecdotal evidence.

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Topics:  Financial markets International finance

Tags:  capital flows, asset prices, current account, bubbles, Capital inflows, booms

Dark side of housing-price appreciation

Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay 25 November 2013

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Policymakers around the world often worry about decreases in real-estate prices and other asset prices, and take measures to prevent them. For example, in the aftermath of the financial crisis, the Federal Reserve has engaged in large-scale asset purchases – especially of mortgage-backed assets – to support the housing market and, in turn, the overall economy.

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Topics:  Financial markets Monetary policy

Tags:  housing, Federal Reserve, investment, asset prices, banks, lending, real estate

Speculative investors and transaction tax in the housing market

Yuming Fu, Wenlan Qian, Bernard Yeung 07 November 2013

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The Global Financial Crisis revived the idea of using transaction taxes to discourage short-term speculative trades. Such trading is often blamed for causing excess volatility in financial markets. Tobin (1978) proposed the tax more than 40 years ago, to “throw some sand in the wheels of speculation”, specifically for currency trading. The idea has been extended to all forms of financial transactions.

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Topics:  Financial markets

Tags:  housing, asset prices, financial transaction tax, stamp duty, Singapore

Fama, Hansen, and Shiller: An excellent choice of Nobel laureates

Tarun Ramadorai 24 October 2013

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The recent announcement of the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has delighted researchers working in empirical asset pricing. The combination of deep economic insight and clever methodological contributions that Eugene Fama, Lars Hansen, and Robert Shiller have brought to this field has revolutionised our understanding of the determinants of asset prices.

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Topics:  Financial markets

Tags:  Nobel Prize, asset prices, methodology

The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World

Roger E. A. Farmer , Carine Nourry, Alain Venditti,

Date Published

Sun, 01/13/2013

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Origins and macroeconomic implications of asset bubbles

Alberto Martin, Jaume Ventura 16 February 2011

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What is a bubble? Today’s economies often experience large movements in asset prices that have significant macroeconomic effects. Given that many of these movements in asset prices seem unrelated to economic conditions or fundamentals, they have come to be called bubbles, whether swelling or bursting. Typically, these bubbles are unpredictable and generate substantial macroeconomic effects. Consumption, the capital stock, and output all tend to surge when a bubble arises and then collapse or stagnate when the bubble bursts.

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Topics:  Frontiers of economic research Macroeconomic policy

Tags:  asset bubbles, asset prices, rational agents

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