Monitoring hedge funds: a fi nancial stability perspective.

Investor inflows into hedge funds have been significant in recent years and they have continued unabated. As a result, the presence and role of these investment funds in global capital markets have become increasingly important, and to a much greater extent than the amount of capital they manage would suggest. This is because hedge funds can, and often do, leverage their investment positions. Indeed, their leveraged assets are sometimes comparable with the assets of large banks. The growing and active participation of hedge funds in a large number of financial markets implies that the functioning of these markets could be seriously affected if the hedge fund sector came under stress. The positive contribution of hedge funds to the efficiency and liquidity of global financial markets is widely recognised, but there are also concerns that in times of stress their activities may create risks to financial stability. The lack of transparency and limited publicly available information about their balance sheets and activities poses significant challenges for financial stability analysis. While it is possible to base such an analysis on a multitude of information sources on hedge fund activities – including dedicated financial media, commercial hedge fund databases, quarterly industry reports, hedge fund return indices, academic studies, some supervisory data and market surveillance – these sources are not sufficient for an adequate monitoring and robust evaluation of hedge fund activities from a financial stability perspective. Three groups of indicators could be important for financial stability analysis, namely those which shed light on banks’ exposures to hedge funds, provide yardsticks of the crowding of hedge fund trades, and facilitate the gauging of endogenous hedge fund vulnerabilities. The latter group would include the measures of funding liquidity risk, leverage and exposures to market risk factors. The construction of all these indicators would be greatly facilitated if basic information on hedge fund balance sheets were available. Since this is not the case, various indirect estimation methods have to be relied upon. A “desirable vs. available” analysis reveals the most important information gaps, but it does not aim at providing recommendations on how to enhance hedge fund transparency in practice. Instead, it proposes three elements which a transparency framework would ideally include: fi rst, more aggregate information to all market participants; second, a highly standardised reporting template that would make disclosures more effective; fi nally, adequate information for a joint analysis of the aggregate activities of banks, hedge funds and other highly leveraged institutions in order to have a comprehensive picture of risks to the smooth functioning of financial markets.

Liquidity and the Dynamic Pattern of Asset Price Adjustment: A Global View

Global liquidity expansion has been very dynamic since 2001. Contrary to conventional wisdom, high money growth rates have not coincided with a concurrent rise in goods prices. At the same time, however, asset prices have increased sharply, significantly outpacing the subdued development in consumer prices. We investigate the interactions between money and goods and asset prices at the global level. Using aggregated data for major OECD countries, our VAR results support the view that different price elasticities on asset and goods markets explain the observed relative price change between asset classes and consumer goods

Monetary Policy, Global Liquidity and Commodity Price Dynamics

This paper examines the interactions between money, interest rates, goods and commodity prices at a global level. For this purpose, we aggregate data for major OECD countries and follow the Johansen/Juselius cointegrated VAR approach. Our empirical model supports the view that, when controlling for interest rate changes and thus different monetary policy stances, money (defined as a global liquidity aggregate) is still a key factor to determine the long-run homogeneity of commodity prices and goods prices movements. The cointegrated VAR model fits with the data for the analysed period from the 1970s until 2008 very well. Our empirical results appear to be overall robust since they pass inter alia a series of recursive tests and are stable for varying compositions of the commodity indices. The empirical evidence is in line with theoretical considerations. The inclusion of commodity prices helps to identify a significant monetary transmission process from global liquidity to other macro variables such as goods prices. We find further support of the conjecture that monetary aggregates convey useful information about variables such as commodity prices which matter for aggregate demand and thus inflation. Given this clear empirical pattern it appears justified to argue that global liquidity merits attention in the same way as the worldwide level of interest rates received in the recent debate about the world savings and liquidity glut as one of the main drivers of the current financial crisis, if not possibly more

Household debt and financial assets: evidence from Germany, Great Britain and the USA

We explore the determinants of debt, financial assets and net worth at the household level by using survey data for Germany, Great Britain and the USA. To identify which households are potentially vulnerable to adverse changes in the economic environment, we also explore the determinants of a range of measures of financial pressure: the probability that a household has negative net worth; the debt-to-income ratio; mortgage income gearing; the saving-to-income ratio. Our empirical findings suggest that the poorest and the youngest households are the most vulnerable to adverse changes in their financial circumstances. Copyright (c) 2008 Royal Statistical Society.

Integration of Chinese and Russian Stock Markets with World Markets: National and Sectoral Perspectives

Interest in examining the financial linkages of economies has increased in the wake of the 2008/2009 global financial crisis. Applying the concepts of beta- and sigma-convergence of stock market returns, we assess changes over time in the degree of stock market integration between Russia and China as well as between them and the United States, the euro area and Japan. Our analysis is based on national and sectoral data spanning the period September 1995 to October 2010. Overall, we find evidence for gradually increasing stock market integration after the 1997 Asian financial crisis and the 1998 Russian financial cri-sis. Following a major disruption caused by the 2008/2009 global financial crisis, the process of stock market integration resumes between Russia and China, and with world markets. Notably, the episode of sigma-divergence from the 2008/2009 crisis is stronger for China than Russia. We also find that the process of stock market integration and the impact of the recent crisis have not been uniform at the sectoral level, suggesting potential for d-versification of risk across sectors