Nils Friewald, Florian Nagler, 30 January 2019

Previous studies show that conventional factors, such as firm-specific and macroeconomic variables, do a poor job of explaining yield spread changes. Using data from the US corporate bond market, this column shows that over-the-counter frictions explain around 23% in the variation of the common component and one third of the total variation in yield spread changes. The combination of search and bargaining frictions is slightly more important for the dynamics of yield spread changes than inventory frictions. The findings are broadly consistent with leading theories of intermediation frictions in over-the-counter markets.

Jon Danielsson, 02 January 2019

Laura Veldkamp, Maryam Farboodi, 02 January 2019

Technological change is making it possible to process more and more information. This column looks at the implications of this for trading strategies. It finds that growth in the amount of data investors can process is a logical and predictable cause of a shift from fundamentals-based to order flow-based strategies. 

Meghana Ayyagari, Thorsten Beck, Maria Soledad Martinez Peria, 11 December 2018

Macroprudential tools have been implemented widely following the Global Crisis. Using data from 900,000 firms in 49 countries, this column finds that such policies are associated with lower credit growth during the period 2003-2011. The effects are especially significant for micro, small and medium-sized enterprises and young firms that are more financially constrained and bank dependent. The results imply a trade-off between financial stability and inclusion.

Guillaume Vuillemey, 17 November 2018

A key function of financial markets is to share risks, and thus to mitigate the transmission of shocks to the real economy. This column analyses one historical setup in which risk-sharing possibilities in financial markets suddenly increased – the creation of the first central clearing counterparty in 1882 in France in the market for coffee futures. The ability to better hedge coffee prices had real effects and increased trade flows Europe-wide. 

Andrew Ellul, 05 July 2018

Systemic risk has been a cause for growing concern since the onset of the Global Crisis. Andrew Ellul explains his research on the lending side of systemic risk creation, which address the types of investments financial institutions make. These investments have shifted towards equity markets, which are riskier and less liquid, and more interconnected - all of which amplifies risk in crisis.

Ralph De Haas, 15 June 2018

In the 2015 Paris Agreement, participating countries committed to trying to limit the increase in the global temperature to no more than 2 degrees, requiring a major transition in the way we produce products and services. Ralph de Haas explains his research on how this Green Transition can be financed, and whether certain types of finance - in particular stock vs. credit markets - are better suited to achieving 'greener growth'. This video was recorded at CEPR's Third Annual Spring Symposium.

Ashoka Mody, 01 April 2018

Gonçalo Faria, Fabio Verona, 09 May 2018

The slope of the yield curve is of interest to policymakers and market participants alike. But despite being a good in-sample predictor of the equity risk premium, it performs rather poorly out-of-sample. This column finds that the low-frequency component of the term spread is a strong and robust out-of-sample equity risk premium predictor for several forecasting horizons. This finding adds to recent empirical evidence that the level and price of aggregate risk in equity markets are strongly linked to low-frequency economic fluctuations.

Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci, 24 April 2018

During 2016-17, market analysts and policymakers grappled with the puzzling coexistence of subdued market volatility and heightened policy uncertainty and geopolitical risk. The rise in world growth expectations can explain some but by no means all of the decline in market volatility during this period. This column argues that excess optimism about future growth prospects might have fuelled the decline in volatility. This would imply that gradual unwinding of such expectations could bring more bursts of market volatility, as we have begun to witness since the start of 2018.

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.

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