Financial markets

Jon Danielsson, Robert Macrae, Jean-Pierre Zigrand, 24 June 2016

Brexit creates new opportunities and new risks for the British and EU financial markets.  If policymakers react optimally, both could benefit. However, a more likely outcome is a fall in the quality of financial regulations, more inefficiency, more protectionism, and less protection.  Systemic risk could increase, with a systemic vicious feedback loop a possibility.

Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 20 June 2016

This week’s UK referendum on EU membership is likely to have both short- and long-term effects on the country’s financial sector. This column, which reports the views of panel members in the monthly Centre for Macroeconomics survey, finds that almost all think that a vote for Brexit would lead to a significant disruption to financial markets and asset prices for several months, putting the Bank of England on high alert. On top of the risk of a financial crisis in the near future, an unusually strong majority agrees that there would be substantial negative long-term consequences. No panel member expects the overall consequences of a Brexit outcome to be beneficial for the UK economy – the first time since this survey began that one side of the argument is supported by none of the respondents.

Robin L Lumsdaine, 11 June 2016

As happens eight times a year, next week financial markets will again turn their attention to what, if any, change the Federal Reserve will make to its policy rate. This column discusses research on the anticipation of such decisions via the Fed funds futures markets, which indicates that markets ‘set up’ much farther in advance than has been previously documented. This finding emphasises the importance of clarity in central bank communications.

Jon Danielsson, Morgane Fouché, Robert Macrae, 10 June 2016

The threat to the financial system posed by cyber risk is often claimed to be systemic. This column argues against this, pointing out that almost all cyber risk is microprudential. For a cyber attack to lead to a systemic crisis, it would need to be timed impeccably to coincide with other non-cyber events that undermine confidence in the financial system and the authorities. The only actors with enough resources to affect such an event are large sovereign states, and they could likely create the required uncertainty through simpler, financial means. 

Mariassunta Giannetti , Bige Kahraman, 09 June 2016

Theoretical corrections of price deviations in trade are not reflected in empirical evidence. This is surprising because institutional investors should be able be able to identify mispricing. This column explores how the organisation of the asset management industry may hamper trading against mispricing. Asset managers that are less subject to redemption risk exhibit a higher propensity to trade against mispricing. Organisational structures lowering the sensitivity of investor flows to performance strengthen asset managers’ incentives to trade against mispricing.

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