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. 

Mitsuhiro Osada, Kazuki Otaka, Satoko Kojima, Ryuichiro Hirano, Genichiro Suzuki, Nao Sudo, 26 January 2021

COVID-19 has brought about severe adverse effects on the economy around the globe, and Japan is no exception. This column introduces a model that maps cash shortages to firm's default probability, employing the balance sheet data of about 730,000 SMEs. It uses the model to assesses how a decline in sales due to Covid-19 increases the default probability of firms and how much the government's financial support mitigates a rise in that probability.

Puriya Abbassi, Falk Bräuning, 31 October 2020

The recent and persistent failure of covered interest parity is inconsistent with the standard view of international finance textbooks. Current thinking relates this violation mostly to supply-side effects. This column argues that demand effects associated with banks’ management of foreign exchange exposure are also an important but are often overlooked driver. This result has implications for the current policy debate concerning global funding and foreign exchange markets, as well as the important role of the US dollar in international finance and banking.

Gordon Liao, Tony Zhang, 01 October 2020

Institutional investors and borrowers often hedge a sizeable portion of their currency mismatches. This column examines the role that this currency hedging of foreign assets and liabilities plays in determining exchange rates. It shows that countries’ hedging demands from their external imbalances can explain forward and spot exchange rate dynamics during the COVID-induced financial turmoil in March 2020, as well as their usage of the Federal Reserve central bank liquidity swap lines.

Johannes Fleck, Adrian Monninger, 02 October 2020

Household portfolios in the euro area differ systematically between countries. As a result, ECB policies have asymmetric effects and views on a potential EU financial transaction tax are divergent. This column argues that cross-country variation in portfolio structures is due to variation in country-specific beliefs on social and communal insurance. These beliefs lead to differences in subjective expectations regarding the availability of external support during financial distress. This means that they regulate the extent to which households use their portfolios for self-insurance, as well as their readiness to participate in debt markets.

Robert McCauley, 26 August 2020

On 23 March 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and on 9 April set the amount at up to $250 billion and extended the purchase to junk bonds. This column shows that these interventions succeeded in stabilising credit markets: prices lifted and dealing spreads narrowed. However, emergency lending powers provide an inadequate basis for Federal Reserve operations in corporate bonds. In light of these findings, congressional authority to buy and to sell corporate bonds alongside US Treasuries would help to align Federal Reserve operations with what has become a capital-market centred financial system

Davide Delle Monache, Ivan Petrella, Fabrizio Venditti, 24 August 2020

The fast rebound of US stock prices following the Covid-19 shock has reignited discussions over ‘frothiness’ in stock markets. This column examines how asset prices are affected by drastic shocks to the real economy, and what factors drive this relationship. Evidence from the investigation suggests that, from a longer-term perspective, high asset valuations may reflect more than just investor optimism. The greater expected income, in comparison to government bonds, could be the key as to why investors are continuing to trust in the stock market, irrespective of the turbulent wider economic climate.

Robin Döttling, Sehoon Kim, 19 August 2020

Socially responsible investing has been at the centre of recent regulatory scrutiny and academic debate. This column explores how retail investors’ preferences for socially responsible investments respond to market distress, as revealed within mutual fund flows during the COVID-19 pandemic. The results suggest that funds with the highest sustainability ratings experience sharper declines in flows. This suggests that there tends to be a shift away from sustainability among retail investors’ preferences in the face of an economic shock, highlighting a source of fragility in the increasingly popular socially responsible investment  market. 

Gunther Capelle-Blancard, Adrien Desroziers, 19 June 2020

During the COVID-19 pandemic and the related economic fallout, the response of the stock markets has raised concerns as well as questions. This column explores the surprising trends. There is some evidence that shareholders have favoured the less vulnerable firms, and that credit facilities and government guarantees, lower policy interest rates, and lockdown measures mitigated the decline in stock prices. However, fundamentals only explain a small part of the stock market variations at the country level. Overall, it is hard to deny that the links between stock prices and fundamentals have been loose at best.

Olivier Darmouni, Oliver Giesecke, Alexander Rodnyansky, 20 May 2020

The share of firms’ borrowing from bond markets has been rising globally. This column argues that euro area companies with more bond debt are disproportionately affected by surprise monetary shocks, compared to firms with mostly bank debt. This finding stands in contrast to the predictions of a standard bank lending channel and points toward frictions in bond financing. This provides lessons for the conduct of monetary policy in times of hardship such as COVID-19, when the corporate sector suffers from liquidity shortages.

Gbenga Ibikunle, Khaladdin Rzayev, 09 May 2020

Dark pools, which are trading venues that do not offer pre-trade transparency, are often suspected of causing difficulties with price discovery, and of adversely affecting market quality. This column studies the effects of COVID-19-induced volatility on trading in dark pools. Increased volatility is found to be linked with an economically significant shift of market share from dark pools to lit exchanges.

Jordan Schoenfeld, 05 May 2020

Are pandemics systemically important to modern-day financial markets? It is not obvious how a financial market’s myriad interconnected parts would react to a pandemic-induced supply and demand shock. This column shows that the COVID-19 pandemic triggered unprecedented changes in employment levels and the values of stocks, bonds, commodities, and currencies. Corporate managers also systematically underestimated their business-model exposure to pandemics in their annual report risk factors.

Ricardo Caballero, Alp Simsek, 30 April 2020

The Covid-19 shock has caused large turmoil on financial markets. This column argues that non-financial supply shocks such as the current one can endogenously lead to financial shocks and severe contractions in asset valuations and aggregate demand, which substantially amplify a recession. Conventional monetary policy can mitigate the downward pressure as long as the interest rate is unconstrained. If it is, large-scale asset purchases by government facilities are needed to prevent a downward spiral.

Laura Kodres, 28 April 2020

Amid the uncertainty of the COVID-19 pandemic, the movements in equity markets’ around the world have mirrored the spread of the virus and its virulence. Attempts to limit market crashes, volatility, and financial contagion have taken a number of different forms. This column explores the two main policy responses available to financial market regulators – bans on short sales versus circuit breakers – and reviews them in the context of some ‘best practices’ for market regulation.

Olivier Accominotti, Marie Briere, Aurore Burietz, Kim Oosterlinck, Ariane Szafarz, 10 April 2020

For many years, globalisation was on the march, bringing with it the increased risk of financial contagion effects. The Global Crisis reversed this expansion and highlighted the vulnerabilities intrinsic to the globalised international economy. This column takes a historical approach to the debate, analysing how patterns of globalisation and contagion have changed over time. The patterns also suggest that the ongoing Covid-19 pandemic is likely to cause another enormous ‘stress test’ for globalisation, forcing firms and nations to limit traveling and trade, perhaps leading to a reevaluation of the international system.

Ralph De Haas, 22 November 2019

We think about climate policies as moderating or interceding in markets. 
But a new paper implies that when stock markets play a bigger part in the economy, polluting industries become cleaner. Tim Phillips asks Ralph De Haas of the European Bank for Reconstruction and Development whether we already have a green finance initiative under our noses.

Markus Baldauf, Joshua Mollner, 31 October 2019

Financial markets process orders faster than ever before. Although faster speeds are associated with smaller spreads, they may also lead to less informative prices. This column captures this trade-off within a theoretical model of high-frequency trading in modern financial markets. It then uses the model to evaluate some potential market design responses to high-frequency trading that are currently in debate. In particular, it shows that asymmetric speed bumps improve markets by eliminating an inefficient form of high-frequency trading.

Marzio Bassanin, Ester Faia, Valeria Patella, 30 August 2019

Macroeconomic models with credit frictions do a good job of explaining debt falls during financial crises, but fail to account for pre-crisis debt increases and level pro-cyclicality. This column introduces a model in which investors’ beliefs about future collateral values are non-linear. Greater ambiguity optimism during booms and greater aversion during recessions closely model the empirical shifts seen before and during financial crises, highlighting the joint role of financial frictions and beliefs distortions for market developments.

Henri Servaes, 30 May 2019

Performance fee-based contracts, which aim to align the interests of the fund manager with that of the investor, have been controversial in mutual funds markets, and are once again under review in Europe. This column presents empirical evidence showing that performance fee contracts do not improve fund performance, particularly in instances where contracts fail to specify a benchmark for results.


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