Animal spirits and environmental, social and governance asset prices: does market sentiment drive stock returns?

Gerardo Martinez

In 1936, John Maynard Keynes coined the famous term ‘Animal Spirits’ to illustrate how people take decisions based on urges, overlooking the benefits and drawbacks of their actions. To what extent are prices of Environmental, Social and Governance (ESG) assets driven by the sentiment of market participants, as opposed to economic fundamentals? To answer this question, I make use of Natural Language Processing (NLP) tools and an original corpus of tweets to capture market sentiment around climate change. Estimating a factor model, I find that sentiment is associated with immediate returns of climate change related stock indices. These results are stronger for days with the most extreme returns. Market sentiment might be particularly useful in explaining large movements in ESG asset prices.

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What does the rise in the inflation mean for financial stability?

Kristina Bluwstein, Sudipto Karmakar and David Aikman

Introduction

Inflation reached almost 9% in July 2022, its highest reading since the early 1990s. A large proportion of the working age population will never have experienced such price increases, or the prospect of higher interest rates to bring inflation back under control. In recent years, many commentators have been concerned about risks to financial stability from the prolonged period of low rates, including the possibility of financial institutions searching for yield by taking on riskier debt structures. But what about the opposite case? What financial stability risks do high inflation and increasing interest rates pose?

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Precautionary facilities: stitches for a fragmented financial safety net

Daniel Christen and Nicola Shadbolt

Geoeconomic fragmentation is one of the greatest risks to the international monetary and financial system at present, particularly since Russia’s war of aggression against Ukraine. Fragmentation is likely to have wide-ranging implications for the global economy, including increasing the volatility of capital flows and exposing gaps in the global financial safety net (GFSN). In this post, we argue that increased take up of the IMF’s ‘precautionary facilities’ would reinforce the GFSN and help prepare it for these challenges. The IMF’s upcoming review of precautionary facilities is an opportune moment to find ways to reduce stigma and increase uptake.

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UK productivity puzzle – a production network perspective

Marko Melolinna

Input/output networks are important in propagating shocks in an economy. For understanding the aggregate effects of shocks, it is useful to know which sectors are central (ie, providing a lot of inputs to a lot of other sectors) and how the central sectors are affected by and propagate the shocks to other sectors. In a new Staff Working Paper, my co-author and I build a structural model incorporating key features of the sectoral production input/output network in the UK, and then use the model to help us understand UK productivity dynamics since the global financial crisis (GFC). We find that the slower productivity growth rates since the GFC are mainly due to negative shocks originating from the manufacturing sector.

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What is the information content of oil futures curves?

Julian Reynolds

Moves in oil prices have significant implications for the global economic outlook, affecting consumer prices, firm costs and country export revenues. But oil futures contracts tend to give an imperfect steer for the future path of oil prices because, at any given time, futures contracts may be affected by a wide range of fundamental drivers, besides the expected path of future spot prices. This post presents an empirical methodology to determine the so-called ‘information content’ of oil futures curves. I decompose the oil future-to-spot price ratio into structural shocks, which reflect different fundamental drivers of futures prices, in order to identify the extent to which futures prices reflect market information about the outlook for spot prices.

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When the lights go out: why does operational risk matter for financial stability?

Rachel Adeney and Amy Fraser

Operational risk is rapidly becoming one of the most important threats to the financial system but is also one of the least well understood. Cyber attacks are regularly cited as one of the top risks faced by firms in the financial sector and one of the most challenging to manage. But they are only one part of operational risk, which includes losses from any kind of business disruption or human error, including power outages or natural disasters. In this post we discuss why operational risk matters for financial stability, how policymakers have responded to increasing risks from operational disruptions and the future challenges that may arise in this space.

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How broad-based is the increase in UK inflation?

Galina Potjagailo, Boromeus Wanengkirtyo and Jenny Lam

CPI inflation in the UK has markedly increased over the last year, reaching 10.1% in September. The aggregate increase reflects potentially different dynamics across disaggregated prices, from which CPI inflation is constructed. How much of the increase has been broad-based across a wide range of prices? We assess this through a measure of ‘underlying inflation’ that captures comovement across many disaggregated prices – energy, food and other (‘core’) price items. We observe a substantial rise in underlying inflation, hence many prices have increased jointly. Broad-based energy price increases have been the main driver of underlying inflation. Furthermore, about a quarter is due to core price items which reflect more persistent inflation.

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Old problems with new assets: some of crypto’s challenges look strangely familiar

John Lewis

Cryptoassets and the crypto ecosystem as a whole has to face many of the same challenges as conventional assets and the regular financial system do. The same classic problems which are staple of economics textbooks (and history books), such as maturity mismatch, liquidity shortages, credibility, and collateral feedback loops. But whereas the conventional system has learned from the past and evolved to deal with them, much of the crypto ecosystem seems to have overlooked them. In this post I draw out the parallels between previous issues in the traditional financial system and recent crypto turbulence. I argue that when crypto goes wrong, it often goes wrong in strikingly conventional, even old-fashioned ways.

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Bitesize: Riding the waves: the breadth of global monetary policy changes

Shaheen Bhikhu and Thomas Viegas

Central banks respond to inflation by setting interest rates in order to achieve domestic price stability. Occasionally, economic shocks are global in nature and so monetary policy can move in tandem across the world. But how common have directional changes in monetary policy been across the world over recent decades?

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Bonus episode: understanding pay and labour market tightness

Josh Martin

Everyone likes a bonus – be it a bonus in pay, or a bonus episode for your favourite TV show. Everyone, that is, except statisticians. Bonuses are hard to define and measure and are often excluded from data on pay. But bonuses could be really important to understand labour market tightness – a topic of much interest at the moment. This blog takes a quick walk through some pay measures, highlighting the role of bonuses, and exploring what has happened to bonuses before, during and since the pandemic.

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