Tobias Adrian, Michael J. Fleming, Or Shachar, 14 September 2017

The potential adverse effects of regulation on market liquidity in the post-crisis period continue to receive significant attention. This column shows that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, there is little evidence of a wide-spread deterioration in market liquidity. Liquidity remained resilient even during stress events like the 2013 ‘temper tantrum’.

George Dotsis, 10 September 2017

Option trading has grown phenomenally in the last 40 years, but option markets have existed since the early 17th century. This column reviews an option trading manual written by a London trader in 1906. It shows that traders in the 19th century developed sophisticated techniques for determining the prices of short-term calls and puts. They also priced at-the-money-forward straddles the same way they are priced today.

Konstantin Platonov, 25 August 2017

Unemployment rates rise during a financial crisis. In this video, Konstantin Platonov underlines the important link between pessismism about the financial market and the real economy. This video was recorded in July 2017 at a macroeconomics conference organised by the Bank of England.

Bruce Kasman, Joseph Lupton, 03 November 2016

Over the past two years, a significant disinflationary impulse has dampened nominal activity around the world. As this disinflationary impulse fades, however, both nominal and real growth should normalise. Indeed, as this column highlights, the latest signs show inflation and inflation expectations rising, profits stabilising, and capital expenditure inching up.

Alex Edmans, Clifford Holderness, 15 September 2016

The separation of ownership and control for public firms may lead to fully dispersed ownership where no shareholder has an incentive to engage in governance. This column argues that blockholders (owners of large stakes) play a critical role in long-term governance, partly through a credible threat to sell their stakes. This threat is undermined by well-intentioned policy moves to create holding-period incentives and requirements. If they succeed, these policies will make exit less likely and blockholders will lose a method to discipline managers.

Santosh Anagol, Vimal Balasubramaniam, Tarun Ramadorai, 17 July 2016

Evidence of the ‘endowment effect’ – ownership of an asset changing one’s valuation of it – runs counter to standard microeconomic theory. This column uses evidence from the Indian stock market’s random allocation of shares in IPOs to show that endowment effects do occur in even outside of controlled experiments, and correlate highly with measures of market experience. This evidence suggests that agents’ inertial behaviour explains endowment effects better than standard explanations.

Christopher Woolard, Kevin James, Joseph Stiglitz, Luigi Zingales, Matteo Aquilina , John Kay, Eric Budish, Thom Wetzer, 24 June 2016

Financial markets account for a large sector of the economy, and understanding their effectiveness is of critical importance. In this video, participants including Joseph Stiglitz, Financial Times columnist John Kay, and Luigi Zingales discuss new approaches to the issue. In order for financial markets to work for our society, broad consensus is needed. This video was recorded in February 2016 at the “Understanding Financial Markets Effectiveness: New Approaches” Conference jointly organized by the FCA and the Systemic Risk Centre at LSE.

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

Brexit creates new opportunities and new risks for the British and EU financial markets. Both could benefit, but a more likely outcome is a fall in the quality of financial regulations, more inefficiency, more protectionism, and more systemic risk.

Julia Tanndal, Daniel Waldenström, 13 April 2016

Financial deregulation in the US has been shown to be associated with rising income inequality over the past four decades. This column looks at the income effects of financial deregulation in the UK and Japan during the 1980s and 1990s. As in the US, deregulation substantially increased the shares of income going to the very top of the distribution. These findings highlight the importance of financial markets in the evolution of income inequality in society. 

John Armour, Colin Mayer, Andrea Polo, 24 March 2016

Following the Global Crisis, regulators around the world have shown a greater commitment to investigating and sanctioning corporate wrongdoers. This column argues that fines are only one (surprisingly small) component of the overall sanctions available to regulators. Reputational sanctions are, for some categories of misconduct, far more potent than direct penalties.

Roel Beetsma, Siert Vos, 23 February 2016

There is a broad consensus that banks and insurance companies may contribute to systemic risk in the financial system. For other financial market institutions, it is less clear-cut. This column examines the resilience of pension funds to severe shocks. While the evidence indicates that they are of low systematic importance, policy trends that apply to all financial players may undermine this. Specifically, risk-based solvency requirements carry the risk of homogenising the behaviour of all players, potentially amplifying shocks and destabilising markets.

Nils Herger, Steve McCorriston, 31 January 2016

A key feature of globalisation over the last three decades has been the wave-like growth of foreign direct investment. This column shows that conglomerate cross-border acquisitions, which are closely associated with mispricing in financial markets, play a significant role in explaining these developments.

Joshua Aizenman, 03 January 2016

The Global Crisis renewed debate on the benefits and limitations of coordinating international macro policies. This column highlights the rare conditions that lead to international cooperation, along with the potential benefits for the global economy. In normal times, deeper macro cooperation among countries is associated with welfare gains of a second-order magnitude, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilised financial markets, the perceived losses have a first-order magnitude. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation.

George Karolyi, David Ng, Eswar Prasad, 12 December 2015

Few economists understate the importance of emerging market economies in terms of world GDP and global growth prospects. This column asks where the future of emerging markets’ investments lie. Where investors have focused in the past and institutional path dependency are important determinants of emerging markets’ allocation of international investment portfolios. This has implications for the geographical distribution of emerging markets’ portfolio investments, a force to reckon with in international financial markets.

Jiangtao Fu, Daichi Shimamoto, Yasuyuki Todo, 01 December 2015

It has been widely argued that firms obtain loans with relaxed terms if they are politically connected. This column presents evidence from Indonesia that firms whose owners or directors have a personal relationship with a politician are more likely to have their loans approved by state-owned banks, and are more likely to receive the full amount applied for. However, the labour productivity of such firms is on average lower. This suggests that in some cases, politically connected lending may distort the efficiency of resource allocation and be detrimental to economic development.

Yves Zenou, 08 January 2015

Targeting key players in a network can have important effects due to multipliers arising from peer effects. This column argues that this is particularly true for crime –the success in reducing crime in Chicago was due to the targeting of 400 key players rather than spending resources on more general targets. Key-player policies in crime, education, R&D networks, financial networks, and diffusion of microfinance outperform other policies such as targeting the most active agents in a network.

Robert Townsend, Weerachart Kilenthong, 09 November 2014

In the aftermath of the Global Crisis, models with pecuniary externalities have gained popularity. This column presents a new framework that encompasses many of these externalities. The authors also show how to design financial contracts and markets in such a way that ex ante competition can achieve a constrained-efficient allocation.

Peter Koudijs, Joachim Voth, 12 April 2014

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 Kelly, Lubos Pastor, Pietro Veronesi, 31 March 2014

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, 20 October 2013

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.

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