The transmission of Federal Reserve tapering news to emerging financial markets
Joshua Aizenman, Mahir Binici, Michael M Hutchison04 April 2014
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
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.
Is the recent bank stress really driven by the sovereign debt crisis?
Guntram Wolff30 October 2011
Stress in the interbank market has increased dramatically since July 2011, and bank stock market valuations have fallen by 22% on average for 60 of the most important banks subject to stress tests. This column argues that bank stock valuation has been affected by the banks’ exposure to Greek debt and that Greek banks were particularly affected. Holdings of debt of the other four periphery countries does not, however, appear to be a strong determinant of stock price movements.
Stress in the interbank market has increased significantly since July (Figure 1). There is now a significant debate on why this is the case and what would be the best way to address it (Financial Times 2011).1 Many have argued that the sovereign debt crisis isthe most important driver of banking stress in the Eurozone. If that view is correct, then the right approach to solving Europe’s banking problem is to solve the sovereign debt crisis. Recapitalising banks instead would be far too costly, in particular if one wanted to cater for a haircut in Italy.
How the costs and benefits of regional trade agreements are distributed is a controversial question among economists. CEPR DP8566 analyses the stock market response to a country's signing of an RTA. The authors find that the biggest 'bounce' occurs in a country's stock market when it signs an RTA with an already-strong trading partner, or when the country is poor.
Stock market wealth effects in emerging market countries
Heiko Hesse16 October 2008
This column examines the impact of stock market valuation changes on consumption and investment in emerging markets. Though the effects are smaller than those in advanced economies, emerging market policymakers ought to pay attention to how equity price swings will transmit business cycles and impact aggregate demand.
There are a few channels through which asset price changes affect consumption. For instance, consumption depends on peoples’ expectations of wage income and equity price increases can signal higher income growth. Financial assets play a significant role in peoples’ permanent (life-cycle), income so changes in the stock market could have an effect on private consumption expenditure.
Has equity always earned a premium? Evidence from nineteenth-century Britain
John Turner , Graeme Acheson , Charles Hickson, Qing Ye10 May 2008
Past performance is no guarantee, but history tells us that the equity risk premium has been persistent. This column shows that British investors enjoyed relatively high returns in the nineteenth century, though today’s UK market differs greatly from its formative ancestor.
Financial economists have become increasingly interested in the historical returns of financial assets.1 This interest largely stems from a desire to calculate the expected equity risk premium. In particular, academics and practitioners are interested in discovering whether or not the high returns on stock markets over the past half-century are an aberration or are somehow intrinsic to equity as an asset.