Research-based policy analysis and commentary from leading economists
Viral Acharya, 26 January 2021
Viral Acharya talks to Tim Phillips about estimating the value of a COVID-19 cure using the behaviour of stock prices and a novel vaccine progress indicator. The value of a cure is worth between 5% and 15% of wealth and rises substantially with uncertainty surrounding the frequency and duration of the pandemic.
You can read the Covid economics Paper discussed, here: Covid Economics 61: 1–72.
Viral Acharya, Timothy Johnson, Suresh Sundaresan, Steven Zheng, 19 January 2021
Quantifying the economic damage caused by the COVID-19 pandemic and the worth of a cure can assist cost-benefit analyses of potential public-sector investment to alleviate the impact of the current pandemic. By reflecting forward-looking expectations, stock prices should indicate the economic value of progress being made towards vaccine development. This column estimates the value of a COVID-19 cure using the behaviour of stock prices and a novel vaccine progress indicator. The value of a cure is worth between 5% and 15% of wealth and rises substantially with uncertainty surrounding the frequency and duration of the pandemic. Understanding the fundamental biological and social determinants of future pandemics may be as important as resolving the immediate crisis.
Steven Davis, Stephen Hansen, Cristhian Seminario-Amez, 27 October 2020
COVID-19 will likely restructure economic activity in a variety of ways, and lead to the growth of some firms and the decline of others. This column uses stock markets to examine these effects as share prices are tied to expectations about future earnings growth. On days with large pandemic-related market moves, there is enormous dispersion in firm-level returns. Using firms’ pre-pandemic regulatory filings, which describe sources of future earnings risk, it uncovers dozens of relevant risks associated with lower or higher returns, including direct exposure to social distancing and indirect effects arising from substitution effects and supply-chain linkages.
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.
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.
Niels Joachim Gormsen, Ralph Koijen, 23 March 2020
The economic effects of the coronavirus outbreak, and the preventive measures adopted around the world, are still largely unknown. In addition, standard macroeconomic models based on fundamentals may be slow to adapt in this fast-changing environment. This column uses high-frequency data on dividend futures to evaluate the impact on growth expectations. Dividend growth and GDP growth expectations in the US and EU begin to deteriorate after the lockdown in Italy, and these effects are exacerbated by the travel restrictions imposed thereafter. The lower bound on dividend growth is as severe as during the Global Crisis, at least in the short run.
Stefano Ramelli, Alexander Wagner, 12 March 2020
The novel coronavirus represents a fearsome risk which is stirring feverish behaviour by investors worldwide. This column shows that initially, economic expectations about international trade underlay movements in the stock prices of individual firms; later, concerns about corporate debt began to play a role.
Giancarlo Corsetti, Romain Lafarguette, Arnaud Mehl, 13 August 2019
Many policymakers are concerned that fast trading has adverse effects on markets, although the existing evidence is ambiguous. This column argues that high-frequency trading can increase market efficiency and the quality of trade. By creating noise, fast trades may prevent traders with a herd mentality from pushing prices in one direction.
Rawley Heimer, Alp Simsek, 03 August 2019
Policymakers for long have attempted to curb financial speculation while preserving markets for useful trading. This column analyses the impact of a recent US policy which restricts leverage in the foreign exchange market. It finds that the policy reduced speculative trading without impeding markets, and thus provides important lessons to address excessive growth in financial markets.
Tito Cordella, Anderson Ospino, 14 August 2017
While some studies suggest that financial globalisation increases volatility and leads to economic instability, others appear to show that it leads to more efficient stock markets, with higher returns but no increase in volatility. Using a new measure of financial globalisation, this column argues that, on average, it has no significant effect on stock market volatility in developed markets, but it decreases volatility in emerging and frontier markets, where domestic shocks are likely to play a relatively greater role.
Yi Huang, Jianjun Miao, Pengfei Wang, 08 November 2016
The Chinese Shanghai Stock Exchange Composite Index dropped by a third in mid-2015, wiping out billions in share value. One of the responses of the Chinese government was to directly participate in the stock market. This column assesses the costs and benefits of this intervention, finding that the resulting gains amounted to about 5% of Chinese GDP. The value was created not just from increased equity and investor confidence, but also from increased liquidity and reduced probability of default for listed firms.
Holger Breinlich, 10 March 2016
Given the increasing number of regional trade agreements, economists have been estimating their effects on a wide range of outcomes. This column looks at stock market reactions to the implementation of the Canada-US free trade agreement to evaluate its effects on firms’ profits. Firm profits seem to be hurt by lower tariffs, but increase with cheaper access to intermediates and – for large firms – better access to the US market. The author estimates that CUSFTA increased the yearly profits of Canadian manufacturing by 1.2%.
Thierry Foucault, Laurent Frésard, 05 March 2016
Economists continue to debate whether stock markets influence the real economy. This column takes a look at initial public offerings (IPOs) and finds that firms can increase the precision of the signals they get from the stock market by imitating each other. This effect has important implications for the structure of industries, innovation strategies, the diversity of product offerings for consumers, and the scope for diversification for investors.
Joshua Aizenman, Mahir Binici, Michael Hutchison, 04 April 2014
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
Guntram Wolff, 30 October 2011
Stress in the interbank market has increased dramatically since July 2011, and bank stock market valuations have fallen by 22% on average for 60 of the most important banks subject to stress tests. This column argues that bank stock valuation has been affected by the banks’ exposure to Greek debt and that Greek banks were particularly affected. Holdings of debt of the other four periphery countries does not, however, appear to be a strong determinant of stock price movements.
Christoph Moser, Andrew Rose, 12 September 2011
How the costs and benefits of regional trade agreements are distributed is a controversial question among economists. CEPR DP8566 analyses the stock market response to a country's signing of an RTA. The authors find that the biggest 'bounce' occurs in a country's stock market when it signs an RTA with an already-strong trading partner, or when the country is poor.
Heiko Hesse, 16 October 2008
This column examines the impact of stock market valuation changes on consumption and investment in emerging markets. Though the effects are smaller than those in advanced economies, emerging market policymakers ought to pay attention to how equity price swings will transmit business cycles and impact aggregate demand.
John Turner , Graeme Acheson , Charles Hickson, Qing Ye, 10 May 2008
Past performance is no guarantee, but history tells us that the equity risk premium has been persistent. This column shows that British investors enjoyed relatively high returns in the nineteenth century, though today’s UK market differs greatly from its formative ancestor.
