Perceiving risk wrong: what happens when markets misprice risk?

Kristina Bluwstein and Julieta Yung

Financial markets provide insightful information about the level of risk in the economy. However, sometimes market participants might be driven more by their perception rather than any fundamental changes in risk. In a recent Staff Working Paper we study the effect of changes in risk perceptions that can lead to a mispricing of risk. We find that when agents over-price risk, banks adjust their bank lending policies, which can lead to depressed investment and output. On the other hand, when agents under-price risk, excessive lending creates a ‘bad’ credit boom that can lead to a severe recession once sentiment is reversed.

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The special relationship: UK and US bond yields

Matt Roberts-Sklar.

Take a look at UK and US 10-year government bond yields over the past few decades and you’d struggle to say which was which. In the words of the FT last year, “The benchmark 10-year Gilt might as well be draped in the stars and stripes”. And even relatively short maturity UK and US bond yields are highly correlated. But what is behind this co-movement and does it matter?

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Estimating and interpreting term premia in UK government bond yields: global influences on a small open economy

Iryna Kaminska, Andrew Meldrum and Chris Young

Since March 2009, UK long term rates have moved around a lot – as shown in Figure 1 – despite Bank Rate being held fixed. To understand these movements you need to understand term premia.  In this blog, we suggest that much of the movement in term premia reflects global factors.

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