Financial Stability Review
International Finance Articles
2004
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Risk
Appetite: Concept and Measurement
(154k)
(Issue 17, December 2004)
This article critically reviews the analytical underpinning and measurement of investor 'risk appetite'. We reconcile a number of different approaches with asset pricing theory, and articulate a new measure based on the variation in the ratio of risk-neutral to subjective probabilities used by investors in evaluating the expected payoff of an asset. The measure distinguishes risk appetite from risk aversion, and is reported in levels rather than changes. A preliminary application of the approach is assessed alongside other indicators of market sentiment and appears to yield generally plausible results.
Collective
Action Clauses (CACS): an Analysis of Provisions Included in
Recent Sovereign Bond Issues - Summary
(41k)
(Issue 17, December 2004)
A recent Financial Stability paper published by the Bank assesses the extent to which recent contractual innovations in foreign currency sovereign bonds issued under New York law may contribute to the creation of a more orderly framework for restructuring sovereign bonds. Contractual clauses can be designed to facilitate collective agreement between all creditors to achieve a comprehensive restructuring; improve information exchange between a sovereign and its creditors; and discourage disruptive individual litigation.
Structured
Note Markets: Products, Participants and Links to Wholesale
Derivatives Markets
(188k)
(Issue 16, June 2004)
Hedging and taking risk are the essence of financial markets. A relatively little known mechanism through which this occurs is the market in structured notes, which have embedded derivatives, some of them very complex. Understanding these instruments can be integral to understanding the underlying derivative markets. In some cases, dealers have used structured notes to bring greater balance to their market risk exposures, by transferring risk elsewhere, including to households, where the risk may be well diversified. But the positions arising from structured notes can sometimes leave dealers 'the same way around', potentially giving rise to 'crowded trades'. In the past that has sometimes been associated with episodes of market stress if the markets proved less liquid than normal when faced with lots of traders exiting at the same time.
Understanding
Capital Flows to Emerging Market Economies
(196k)
(Issue 16, June 2004)
A number of recent empirical studies have aimed to identify the determinants of capital flows to emerging market economies (EMEs), usually grouping these into two broad categories: factors that are specific to creditor countries ('push' factors), and those that are specific to debtor countries ('pull' factors). This article summarises two related pieces of work carried out at the Bank of England. The first is a model on the determinants of bank lending flows to EMEs, and the second a model on the determinants of spreads on EME sovereign bonds. The main finding is that push factors are important in explaining banking flows and bond spreads. In the case of the latter, the model suggests that two thirds of the compression in EME bond spreads in the period between October 2002 and earlier this year was explained by push factors alone, and in particular the fall in US short-term rates in 2001. This implies a need for caution by EMEs in borrowing too heavily during times of a benign external financing environment, as a reversal in credit conditions is more often than not beyond the control of the borrower.
Key Resources
|
Memorandum of Understanding between HM Treasury,
the Bank of England and the Financial Services Authority
Download PDF (50k) |
