Category Archives: Financial Markets

Climate change and finance: what role for central banks and financial regulators?

Emanuele Campiglio, Yannis Dafermos, Pierre Monnin, Josh Ryan Collins, Guido Schotten and Misa Tanaka

Climate change poses risks to the financial system. Yet our understanding of these risks is still limited. As we explain in a recent paper published in Nature Climate Change, central banks and financial regulators could contribute to the development of methodologies and modelling tools for assessing climate-related financial risks. If it becomes clear that these risks are substantial, central banks should consider taking them into account in their operations. Both central banks and financial regulators might also consider supporting a low-carbon transition in a more active way so as to contribute to the reduction of these risks.

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Filed under Financial Markets, Financial Stability

Fog in the Channel? How have equity markets reacted to Brexit news?

Srdan Tatomir, Iryna Kaminska, Marek Raczko and Gregory Thwaites

How have equity markets responded to news about Brexit? To answer this we split firms into those whose share prices are particularly sensitive to Brexit-related news, and those which are not.  The latter group provides a “control sample”, against which to assess the impact of individual pieces of news on the former. The ratio of the two groups’ prices gives a barometer of equity market sentiments around Brexit. So far, this measure points to downward pressure on valuation of companies more exposed to Brexit. The bulk of the fall occurred on the night of the referendum, with little movement afterwards, suggesting little additional “news” from subsequent developments beyond the immediate aftermath.

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When Harry Fired Sally: The Gender Punishment Gap

Mark Egan, Gregor Matvos and Amit Seru

Earlier this year the Bank hosted a joint conference with ECB and the Federal Reserve Board on Gender and Career Progression. In this guest post, Mark Egan, Gregor Matvos and Amit Seru summarise the paper they presented on the differential punishment of male and females in the US financial industry.

The gender pay gap – that women earn lower wages than men – is well known. Is that where the disparity in the workplace ends? No. In a new working paper, we document the existence of the “gender punishment gap”. We study the career trajectories of more than 1.2 million men and women working in the US financial advisory industry and examine how their careers evolve following misconduct. Women face more severe punishment at both the firm and industry level for similar missteps. Following an incidence of misconduct, women are 20% more likely to lose their jobs and 30% less likely to find new jobs relative to their male counterparts. The punishment gap is especially prominent in firms with few female managers.

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Filed under Financial Markets, Microprudential Regulation

What a difference a day makes

Matt Roberts-Sklar

What a difference a day makes BANNER

Often when analysing financial markets, we want to know the statistical distribution of some financial market prices, yields or returns. But the ‘true’ distribution is unknown and unknowable. So we estimate the distribution, based on what we’ve observed in the past. In financial markets, adding one data point can make a huge difference. Sharp moves in Italian bond yields in May 2018 are case in point – in this blog I show how a single day’s trading drastically alters the estimated distribution of returns. This is important to keep in mind when modelling financial market returns, e.g. for risk management purposes or financial stability monitoring.

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Filed under Financial Markets, Financial Stability

Algos all go?

Francis Breedon, Louisa Chen, Angelo Ranaldo and Nicholas Vause

Most academic studies find that algorithmic trading improves the quality of financial markets in normal times by boosting market liquidity (so larger trades can be executed more quickly at lower cost) and enhancing price efficiency (so market prices better reflect all value-relevant information). But what about in times of market stress? In a recent paper looking at the removal of the Swiss franc cap, we find that algorithmic trading provided less liquidity than usual, at worse prices, and that its contribution to efficient pricing dropped to near zero. Market quality benefits from a diversity of participants pursuing different trading strategies, but it seems this was undermined in this episode by commonalities in the way algorithms responded.

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Filed under Currency, Financial Markets, Financial Stability

Is the tail wagging the dog? The impact of VIX exchange traded products on equity volatility

Olga Maizels

Volatility returned to markets in early February, sparked by strong US wage growth data.  After  months of calm, the S&P 500 equity index fell by 4% on 5 February and the VIX – a measure of US equity volatility that is sometimes referred to as Wall Street’s “fear gauge” – experienced its largest one-day move in its 28-year history.  Interestingly, measures of volatility in other markets, including interest rates and currencies, moved by much less.  So what caused the outsized spike in the VIX?  Some of the rise was linked to rebalancing flows associated with VIX exchange-traded products (ETPs), which can amplify moves in the volatility market.  The events have also led to some questions whether developments in VIX ETPs can also affect the S&P 500 itself –whether the ‘tail’ can wag the ‘dog’.

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What did the CBPS do to corporate bond yields?

Calebe de Roure, Ben Morley and Lena Boneva

In August 2016 the MPC announced a package of easing measures, including the Corporate Bond Purchase Scheme (CBPS). In a recent staff working paper, we explore the announcement impact of the CBPS, using the so called “difference in differences” (or “DID”) approach. Overall – to deliver the punchline to eager readers – this analytical technique suggests that the announcement caused spreads on CBPS eligible bonds to tighten by 13bps, compared with comparable euro or dollar denominated bonds (Charts 1b, 2). Continue reading

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Filed under Financial Markets, Monetary Policy

Bitesize: UK real interest rates over the past three centuries

John Lewis

How low are UK real interest rates by historical standards? Using the Bank’s Millennium of Macroeconomic Data, I compute real bank rate, mortgage rates, and 10-year government bond yields over time.

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Filed under Bitesize, Economic History, Financial Markets, Macroeconomics

The 2016 Sterling Flash Episode

Joseph Noss, Liam Crowley-Reidy and Lucas Pedace

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Filed under Currency, Financial Markets, Financial Stability, New Methodologies

Peer to Peer – Scale and Scalability

Anna Orlovskaya and Conor Sewell

Peer to Peer (P2P) lending is a hot topic at Fintech events and has received a lot of attention from academia, journalists, various international bodies and regulators.  Following the Financial Crisis, P2P platforms saw an opportunity to fill a gap in the market by offering finance to customers and businesses struggling to get loans from banks.  Whilst some argue they will one day revolutionise the whole banking landscape, many platforms have not yet turned a profit.  So before asking if they are the future, we should first ask if they have a future at all. Problems such as a higher cost of funds, or limited ability to scale the business, may mean the only viable path is to become more like traditional banks.

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Filed under Banking, Financial Markets