Department of Finance

Introducing the Brexit readiness score

If you believe Prime Minister Theresa May the United Kingdom will be ready to exit the European Union in April 2019. If you believe UK businesses Britain is falling behind in its preparations. The next round of Brexit negotiations, and the first since the summer recess, was delayed by a week to September 25, 2017, suggesting that businesses may […]

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    The insurance market and the failure to tell high from low risk

The insurance market and the failure to tell high from low risk

Is it really possible to tell if insurance markets are functioning effectively without too many high- or low-risk buyers of policies?

That is the challenge we address in our new research paper. The study suggests that standard tests for the twin phenomena of adverse and advantageous selection – too many or too few buyers who are likely to make a claim […]

Why do bankers earn so much more than other professionals?

Are bankers overpaid? Do they have special qualities that make them deserve to earn more than other professionals? In this video interview, LSE professor Ulf Axelson explores why pay is so high on Wall Street relative to normal jobs.

Here is part of his answer: “(It’s) due to a combination of two characteristics of many of the types of jobs you have […]

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    Brexit will probably cause disruption in markets, but systemic risk is unlikely

Brexit will probably cause disruption in markets, but systemic risk is unlikely

With less than two years until Britain leaves the EU, the implications of Brexit for financial stability are of some concern. Two key central bankers have reached opposites conclusions, with Mark Carney worried and Mario Draghi more sanguine. Broadly in line with Draghi, we think Brexit should mostly decrease systemic risk, albeit with a potential for an increase.

Brexit will […]

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    Data on electricity demand shows a slowdown in manufacturing post-Brexit

Data on electricity demand shows a slowdown in manufacturing post-Brexit

Like many others we were frustrated about the absence of both reliable and (almost) real-time economic indicators about the true state of the economy post-Brexit. Survey data was plentifully available, but often contradicted itself, and appeared to be heavily biased towards the political leaning of the sponsor. Hence, we decided to look for a truly independent and reliable indicator, […]

Macroprudential policies can backfire

The purpose of macroprudential policies, or ‘macropru’, is to prevent excessive risk accumulating in the financial system, to contain financial crises when they happen, and to ensure the financial system contributes to economic growth.

There are many directions the authorities can take when implementing macropru (e.g. Cerutti et al. 2016). Most are passive, focusing on crisis resolution and fixed rules […]

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    What Donald Trump could do to ‘make America great again’ without destroying free trade

What Donald Trump could do to ‘make America great again’ without destroying free trade

US flag, by unsplash.com, under a CC0 licence
For nearly two years, unsettling comments by US presidential candidates rattled international investors. The prospect of US trade wars with China and Mexico hit global markets, already weakened by the surprising result of the Brexit referendum. The elections ended, but the financial community still cannot breathe a sigh of relief.

In order to calm […]

Low volatility makes a financial crisis more likely

Received wisdom maintains that financial market volatility has a direct impact on the likelihood of a financial crisis. Perhaps the best expression of this is Hyman Minsky’s (1992) hypothesis that economic agents observing low financial risk are induced to increase risk-taking, which in turn may lead to a crisis. This is the foundation of his famous statement that ‘stability […]

Is Europe spending too much?

The eurozone crisis, the rise of nationalist parties across Europe and the Brexit vote have all pointed to significant vulnerabilities in the European social model. Europe is home to only 8 per cent of the world’s population, yet it produces 50 per cent of global social payments (public pensions, healthcare benefits, maternity leave and associated benefits, public education and […]

How demography influences monetary policy

There are three main longer term factors that determine how our economy performs. These are:

Population trends (demography);
Technical know-how (innovations);
How we manage ourselves (governance and education).

There is debate whether innovation is currently slowing or accelerating, and governance questions are always with us. But this blog is primarily about demography, and its influence on monetary policy, largely taken from a joint paper  […]

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    Shareholders’ votes on CEO pay focus mostly on top-line figures

Shareholders’ votes on CEO pay focus mostly on top-line figures

We examine the impact of enhanced executive remuneration disclosure rules on the voting pattern of shareholders under UK regulations. The key findings are that shareholders guide their vote by top line salary only, and appear to disregard the remaining – substantial – body of information provided to them.

Our paper can be seen against a backdrop of numerous policy initiatives […]

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    Some mutual funds do business with firms whose shares they own

Some mutual funds do business with firms whose shares they own

Major decisions in public corporations are subject to a democratic process: Proposals for change are presented at annual general meetings (AGMs), company managers indicate their preferred outcome, and shareholders then vote. Mutual funds have significant voting power by virtue of their extensive shareholdings. They also often have business ties with firms held in their portfolios because they manage company […]

CEOs strategically time news releases for their own benefit

More and more firms seek to set long-term incentives for their managers. One way to do so is to restrict executives from selling stock and options for a certain period, typically three years. When such stock and options finally become available (“vesting”), many executives are eager to sell.

One easy way to boost short-term stock prices is to release news. Even […]

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    Company news affects the way in which a stock’s returns co-move with those of other firms

Company news affects the way in which a stock’s returns co-move with those of other firms

It is well known that the release of new information about a firm affects its stock price, as investors update their expectations about the firm’s fundamentals and future profitability. For example, unexpectedly good earnings news cause price increases, while negative surprises cause drops in prices. However, little is known about the impact of news on the co-variance structure of […]

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    Some currency trading positions yield increased returns around Fed announcements

Some currency trading positions yield increased returns around Fed announcements

Announcements by the Federal Open Market Committee (FOMC), which occur regularly at pre-specified dates, are one of the most highly anticipated events by investors around the world. Through these announcements, the Federal Reserve communicates monetary policy in the form of setting the target federal funds rate which is the interest rate at which financial institutions lend to each other […]

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    When firms increase advertising spending, their stock prices climb in tandem

When firms increase advertising spending, their stock prices climb in tandem

Recent research has found that advertising has an important impact on the liquidity and breadth of ownership of stocks. This is intriguing as advertising is intended to increase the awareness of a firm’s products rather than its securities. Nevertheless, there appears to be a spillover effect. In a recent paper, I start by providing evidence of the spillover effect […]

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    Intra-industry competition informs stock markets investment decisions

Intra-industry competition informs stock markets investment decisions

There is a large and growing body of research on peer effects in social sciences.  For instance, the economics literature on education has dealt extensively with peer effects in the classroom.  One of the hypotheses in this literature is that students who are exposed to unusually low achieving cohorts tend to score lower themselves.  While it is hard for […]