Financial markets

Markus Eberhardt, Andrea Presbitero, 26 April 2021

Commodity prices are one of the most important drivers of output fluctuations in developing countries. This column shows that a major channel through which commodity price movements can affect the real economy is their effect on financial stability. Commodity price volatility is likely to trigger financial instability and banking crises through a reduction in government revenues and a shortening of sovereign debt maturity, which in turn are likely to weaken banks’ balance sheets.

Eric Jondeau, Benoit Mojon, Cyril Monnet, 16 April 2021

The momentum towards greening the economy implies transition risks that represent new threats to financial stability. The risk of a run on brown assets, similar to that seen during the subprime crisis, can have widespread destabilising effects. This column proposes a liquidity backstop with an access fee proportional to carbon emissions, and a borrowing rate independent of emissions. It argues that such a facility will help green the economy, re-establish production efficiency, and avoid highly inefficient runs. An orderly reallocation of capital to a greener economy can lift long-term growth and facilitate the post-Covid recovery.

Patrycja Klusak, Matthew Agarwala, Matt Burke, Moritz Kraemer, Kamiar Mohaddes, 25 March 2021

Enthusiasm for ‘greening the financial system’ is welcome, but does the explosion of ‘green’ finance indicators reflect the science? This column reports research that uses artificial intelligence to construct the world’s first ‘climate smart’ sovereign credit rating. The results warn of climate-driven downgrades as early as 2030.

Patrick Bolton, Marcin Kacperczyk, 24 March 2021

A company’s carbon-transition risk – associated with curbing carbon emissions within a relatively short period of time – is proportional to the size and growth rate of the company’s carbon emissions. This column asks whether companies with different carbon emissions have different stock returns. The total level of a company’s CO2 emissions and the year-by-year growth in emissions significantly affect its stock returns in most geographic areas of the world. The increasing cost of equity for companies with higher emissions can be a form of carbon pricing by investors seeking compensation for carbon-transition risk.

Andrea Eisfeldt, Edward Kim, Dimitris Papanikolaou, 24 March 2021

Intangible assets are absent from traditional measures of value, despite their large and growing importance in firms’ capital stocks. As a result, the fundamental anchor for value that uses book assets is mismeasured. This column presents a new intangibles-adjusted value factor based on an improvement to the traditional Fama and French approach. The new measure prices assets as well as or better than the traditional value factor but yields substantially higher returns. Both asset pricing researchers and practitioners can benefit from incorporating intangibles in their fields of work. 

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