Benjamin H. Cohen

Positive Feedback Trading Under Stress: Evidence from the US Treasury Securities Market

A vector autoregression (VAR) is estimated on tick-by-tick data for quote-changes and signed trades of 2-year, 5-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.

Derivatives, Volatility and Price Discovery

It is sometimes suggested that trading in derivatives leads to excessive volatility in underlying asset prices relative to what would be called for by fundamental values. These effects are tested by comparing the variances of price changes over different time horizons before and after the start of organized derivatives trading. It is found that ratios of the variances of multi-day and daily price movements decline for bond prices in the United States and Germany and for stock indices in the US, Japan and the UK, though no such effect is found for Japanese bonds. Other indicators confirm that serial correlation has tended to decline since the introduction of derivatives. While these results offer strong grounds for rejecting predictions of the destabilizing effects of derivatives, an alternative view, that derivatives accelerate the price-discovery functions of cash markets, cannot be definitively confirmed, given ambiguous breakpoint results and the many other contemporaneous developments in financial technology. Copyright 1999 by Blackwell Publishers Ltd.

Financial Markets and Systemic Risk in an Era of Innovation

This essay reviews some of the more significant ongoing changes in the global financial system over the past decade and identifies implications these changes have had for systemic stability and for the role of public authorities. Trends such as disintermediation and financial sector consolidation have modified the ways in which systemic shocks are propagated and distributed among market participants. This has complicated the role of banks, which continue to stand at the centre of the financial system in many countries. While the overall results will no doubt continue to be positive for households and businesses, this complexity increases the potential for uncertainty, particularly during the period when new markets and institutions are developing. These developments have also complicated the roles of financial regulators, including central banks. The response has been a move towards a greater reliance on transparency and market discipline as ways to improve the spread of information and thus prevent systemic disruption. There has been an increased recognition of the systemic significance of a diverse range of markets and channels of intermediation to the health of the financial system. Copyright 2001 by Blackwell Publishers Ltd.

Finanzmärkte und Systemrisiko in Europa

Die Struktur des Finanzdienstleistungssektors befindet sich sowohl in Europa als auch weltweit in einem tiefgreifenden Wandel. Je nach Land ist dieser Wandel unterschiedlich stark ausgepragt und nimmt verschiedene Formen an, doch die allgemeinen Trends sind bereits seit einiger Zeit offensichtlich. Auf diese Weise hat die Effizienz des Finanzsystems enorm zugenommen, und diese Entwicklung wird sich zweifellos fortsetzen. Den privaten Haushalten und Unternehmen steht eine breitere Palette von Dienstleistungen zu durchschnittlich niedrigeren Preisen zur Verfugung als je zuvor. Die Moglichkeit, bestimmte Arten von Risiken zu isolieren und sich gezielt dagegen abzusichern, hat die Gelegenheiten fur Sparer erweitert und wirtschaftlich wertvolle Investitionsprojekte begunstigt.