Financial markets

Valentin Jouvanceau, Ieva Mikaliunaite, 25 February 2021

The Euro Area Monetary Policy Event-Study Database makes available intraday asset price changes around ECB policy announcements for a wide range of assets, but conceals unrecognised effects of the ECB’s actions and communications. This column presents three new types of monetary surprises: ‘duration’, ‘sovereign spread’, and ‘save the euro’. These reflect the frequent and significant reactions of long-term sovereign bond yields to ECB monetary policies.

Stefano Corradin, Marie Hoerova, Glenn Schepens, 12 February 2021

Euro area money markets have gone through substantial changes and turbulent periods over the past 15 years. These have included the global and euro area sovereign debt crises, new liquidity and leverage requirements, and the expansion of the Eurosystem balance sheet through asset purchase programmes. This column discusses the interaction between money markets, new Basel III regulations, and central bank policies. The analysis shows that money market conditions worsen when financial stress increases, or if central bank asset purchases induce scarcity effects. It outlines implications of changing money market conditions for monetary policy implementation and transmission.

Alex Edmans, 11 February 2021

Policymakers, investors, and stakeholders are demanding that companies report sustainability metrics so that they can be held accountable for delivering social performance. Doing so increases the total amount of information in the market and reduces the cost of capital. However, real decisions depend on not the total amount of information, but the balance between ‘hard’ (quantitative) and ‘soft’ (qualitative) information. Since sustainability metrics only contain the former, they distort this balance – skewing managers’ sustainability investments to ones with short-term payoffs.

Yotam Margalit, Moses Shayo, 31 January 2021

The impact of markets on participants' values and political preferences has long been a contested issue.  This column uses a large field experiment to evaluate the effects of engagement in financial markets. Participants from a national sample in England were randomly assigned substantial sums they could invest in stocks or non-financial assets over a six-week period. Results show that investment in stocks led to a more right-leaning outlook on society and economics, including issues like personal responsibility, merit, and the role of luck in economic success. It also increased support for market-friendly policies and less regulation. 

Mattia Bevilacqua, Lukas Brandl-Cheng, Jon Danielsson, Jean-Pierre Zigrand, 28 January 2021

While the direct economic consequences of Covid-19 have been significant, the impact on the financial markets has been more nuanced. This column uses a unique data set on the financial markets’ fears and perceptions of long-run financial risk to identify how Covid-19, and particularly Fed policy responses to Covid-19, affected global market fears. While some Fed interventions had little or no impact on market fear, the most powerful were the US dollar swap lines, which strongly reduced the perceived likelihood of global market losses decades into the future. The results suggest that the Fed's relative global role has been strengthened, possibly at the cost of increased moral hazard.

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