A Change of Focus: Stock Market Classification in the UK

This paper examines the impact of a change of focus by a firm, as signified by stock market reclassification. It distinguishes between sector reclassifications that are motivated by information specific to a particular firm, and those that result from sector redefinitions and reorganisations. The direction of the price effects following reclassification depends significantly upon this distinction. Moreover, for firm-specific reclassifications, the negative price effect is greater where the firm has been underperforming its sector, suggesting that investors may be sceptical about the motives underlying a change of focus. Furthermore, a stock’s return comovement with the FTSE All-Share Index may be affected by it being reclassified into a new sector. This change in return comovement is consistent with the allocation of stocks into categories, as discussed by Barberis and Shleifer (2003). Reclassification can induce common factors in the returns to stocks in an index without there being any change in these stocks’ fundamental cash flows

Investing in the Presence of Massive Flows

Approximately $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to guide this decision. Reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but revert within a year. We identify alpha-maximizing responses to reclassifications for both tightly benchmarked and more flexible investors

Fair Value Reclassifications of Financial Assets during the Financial Crisis

At the peak of the financial crisis in October 2008, the IASB amended IAS 39 to grant companies the option of abandoning fair value recognition for selected financial assets. Using a comprehensive global sample of publicly listed IFRS banks, we find that banks use the reclassification option to forgo the recognition of fair value losses and ultimately the regulatory costs of supervisory intervention. Analyses of stock market reactions suggest that a small subset of the most troubled banks benefit from such reclassifications. However, analyses of related footnote disclosures reveal that two-thirds of reclassifying banks do not fully comply with the accompanying IFRS 7 requirements. These banks experience a significant increase in bid-ask spreads in the long run.Bank Regulation, Fair Value Accounting, Financial Crisis, IAS 39, IFRS 7

Residential Mortgages - Borrowing for Investment

Irish household debt has risen sharply in recent years, driven by strong demand for residential mortgages.

Excess money growth and inflation dynamics

The paper analyses the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialised economies. We find that, over a 3-year horizon, the positive link between monetary aggregates and prices holds in approximately fifty percent of the cases. An econometric investigation suggests that a contemporaneous increase in the gap measures of the real stock price and real housing price and strong dynamics of loans to the private sector significantly increase the probability of turning an episode of excessive money growth into an inflationary outburst. JEL Classification:inflation, money growth, quantity theory of money

Excess money growth and inflation dynamics

The paper analyzes the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialized economies. We find that when robust money growth is accompanied by large increases in stock and house prices and loose credit conditions, the probability of recording an inflationary outburst over a three-year horizon is significantly increased. In contrast, significant money stock expansions which are not associated with sustained credit increases and strong dynamics in other asset prices seem to be less likely to have inflationary consequences and thus, less worrying from a policy perspective.Inflation, money growth, quantity theory of money

Diversification, innovation, and imitation inside the Global Technological Frontier

Recent research highlights the relationship between economic development and productive diversification, which may be hindered by market failures. After identifying stages of diversification in disaggregated export data, the authors develop a metric for the flows of export"discoveries,"or inside-the-frontier innovations in developing countries. They then explore the empirical relationship between economic development and (1) inside-the-frontier-innovation as reflected by the introduction of new export products, (2) export diversification measured by an index of export-revenue concentration, and (3) on-the-frontier innovation as reflected in patents. The data suggest, unsurprisingly, that inside-the-frontier innovation is more common among poor countries than among industrial economies. Overall export diversification increases at low levels of development but declines with development after a high-income point, whereas patenting activity rises exponentially with development. The data also suggest that the relationship between the frequency of export discoveries and economic development is not due to changes in the industrial composition of exports. The authors use a simple model of innovation and imitation to test the hypothesis that the threat of imitation inhibits the discovery of new exports. Econometric evidence suggests that the frequency of export discoveries across countries rises with the returns of export activities (proxied by exogenous export growth during the sample period), but the magnitude of this effect increases with barriers to entry. The count-data estimations deal with unobserved international heterogeneity, and the results are robust to various changes in the specification of the empirical model. This finding supports the hypothesisthat market failures inhibit inside-the-frontier innovation.Economic Theory&Research,Markets and Market Access,Water Resources Assessment,Achieving Shared Growth,Airports and Air Services