Financial markets

James Choi, Adriana Z. Robertson, 20 October 2018

Economists typically try to infer investors’ motives and beliefs by observing prices, quantities, and choices, but the lack of randomised experiments makes drawing convincing conclusions difficult. This column presents the findings from a different approach – directly asking investors about their motives and beliefs. Rather than a small number of dominant factors, it finds substantial support for many of the leading theories of what drives portfolio equity shares.

Harjoat Singh Bhamra, Raman Uppal, 17 October 2018

Most households do not diversify but instead invest in only a handful of stocks, typically ones with which they are familiar. Using a new framework for evaluating the welfare losses from this underdiversification, this column argues that when the effect of familiarity biases on a household’s decision to allocate wealth between risky and safe assets and on its consumption-savings decisions are taken into account, the welfare loss is amplified by a factor of four. The impact on household and social welfare of financial policies through innovation, education, and regulation could thus be substantial.

Linda Schilling, Harald Uhlig, 11 October 2018

The Bank for International Settlements has attributed the volatility of the price of Bitcoin and other cryptocurrencies to the lack of a crypto central bank. This column examines the implications of this and the increasing, but bounded, supply of Bitcoin for the cryptocurrency’s price. It also discusses how the price of Bitcoin interacts with monetary policy for traditional currencies.

Raphael Auer, Stijn Claessens, 09 October 2018

Cryptocurrencies are often thought to operate out of the reach of national regulation. This column argues that in fact their valuations, transaction volumes, and user bases react substantially to news about regulatory actions. Because they rely on regulated financial institutions to operate and markets are (still) segmented across jurisdictions, cryptocurrencies are within the reach of national regulation.

Lin William Cong, Ye Li, Neng Wang, 05 October 2018

Cryptocurrencies, tokens, and the blockchain technology upon which these platforms are built hold considerable potential for financial architectures. This column presents a dynamic asset valuation model of cryptocurrencies and tokens on blockchain-based platforms. Price dynamics in the model feature explosive growth of the user base after an initial period of dormant adoption, accompanied by a run-up of token price volatility, in line with existing evidence. The findings highlight how the value of the tokens depends on user base, the quality of the blockchain platform, and users’ expectations of future token price dynamics. 

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