VOX  CEPR Policy Portal

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. 

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. 

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.

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.

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.

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.