Quarterly Bulletin
Asset Prices Articles
| 2008 Q3 | Market expectations of future Bank Rate  (588k) (by Michael Joyce and Andrew Meldrum of the Bank's Monetary Instruments and Markets Division). This article discusses various financial instruments that can be used to infer the Bank Rate expectations of financial market participants and examines how well these measures have predicted Bank Rate in the past. It also examines the role of model-based and survey information in assessing financial market Bank Rate expectations. The article suggests that it is important to adjust market interest rates for credit, liquidity and term premia when inferring expectations. It finds that credit and liquidity premia can largely be accounted for, either through the choice of financial instrument or by making some simple adjustments. Although recent advances in term structure modelling provide some useful techniques for adjusting for term premia, there is considerable uncertainty about how robust they are. It remains prudent therefore not to rely on any one measure and instead to use a variety of methods and information for this purpose. |
| Spring 2006 | The information content of aggregate data on financial futures positions |
| Winter 2004 | Using
option prices to measure financial market views about balances
of risk to future asset prices
(190k) (by Damien Lynch and Nikolaos Panigirtzoglou of the Bank's Monetary Instruments and Markets Division and George Kapetanios of the Bank's Conjunctural Assessment and Projections Division). Probability density functions (pdfs), implied by prices of traded options, are often used by the Bank to examine financial market expectations about future levels of different asset prices. This article examines how information about one aspect of such expectations - views on balances of risk - for future asset prices may be inferred from the degree of asymmetry of an implied pdf. We first look at the general issue of choosing a statistic to summarise the degree of asymmetry of any pdf. The choice of units when measuring changes in the underlying asset price is then considered. Finally, we examine empirically the implications of using various asymmetry measures when relating the information from option-implied pdfs to market views about balances of risk to future asset prices. The foreign exchange and over-the-counter derivatives markets in the United Kingdom
(137k)(by Peter Williams of the Bank's Monetary and Financial Statistics Division). In April this year, the Bank of England conducted the three-yearly survey of turnover in the UK foreign exchange and over-the-counter (OTC) currency and interest rate derivatives markets, as part of the latest worldwide survey co-ordinated by the Bank for International Settlements (BIS). The results show that the volume of foreign exchange activity in the United Kingdom has increased by nearly 50% since April 2001. Turnover in OTC derivatives has more than doubled in the same period. This article presents the main results of the UK survey and highlights the effects of developments in foreign exchange and OTC derivatives markets on volumes of activity. It also provides detailed breakdowns of UK survey data and a comparison with global survey results. |
| Summer 2004 | Deriving
a market-based measure of interest rate expectations
(181k) (by Christopher Peacock of the Bank's Monetary Instruments and Markets Division). Forward rates are perhaps the most common measure of expected future interest rates. But the existence of a risk premium can drive a wedge between forward rates and what the market expects future rates to be. In this article we use survey data to derive an estimate of the risk premium. We find that the survey-based risk premium implies a significant and time-varying difference between forward rates and expected future interest rates. Consequently, this article sets out a simple model of the survey-based risk premium that can be used to generate a path for expected future interest rates on any particular day. Perfect partners or uncomfortable bedfellows? On the nature of the relationship between monetary policy and financial stability
(83k)(by Chay Fisher of the Bank's Financial Stability Assessment Division and Melanie Lund of the Bank's Centre for Central Banking Studies). The first annual Chief Economist Workshop, organised by the Bank of England's Centre for Central Banking Studies (CCBS), brought together economists from over 30 central banks. It marked a changing path for the CCBS as it increases its role in providing a forum where central bankers and academics can exchange views on central bank policies and share specialist technical knowledge. The topic for the inaugural meeting was the interplay between monetary policy and financial stability, an issue that has risen to prominence in international debate in recent years. |
| Spring 2004 | Asset
pricing and the housing market
(100k) (by Olaf Weeken of the Bank's Monetary Instruments and Markets Division). House prices have risen rapidly in recent years. While there is little doubt that the rates of increase observed are unsustainable, there is uncertainty as to the sustainability of the level of house prices. This article applies asset-pricing theory to the housing market to gain additional insights into some of the factors accounting for this rise in house prices. It presents estimates of the ratio of house prices to net rentals (a concept close to an equity market's price to earnings ratio). This ratio is currently well above its long-term average, a situation that in the past has often been followed by periods in which real house prices have fallen. However, a simple 'dividend' discount model of the housing market suggests that lower real interest rates can account for part of the increase in the ratio of house prices to net rentals since 1996. Nevertheless, to account fully for this increase, the housing risk premium would need to have fallen too. Comparing the implied housing risk premium now with that in the late 1980s may suggest that house prices are closer to sustainable levels now than was the case in the late 1980s. However, because of data and model limitations no firm conclusions can be drawn. |
| Winter 2003 | Understanding
and modelling swap spreads
(141k) (by Fabio Cortes of the Bank's Foreign Exchange Division). Interest rate swap agreements were developed for the transfer of interest rate risk. Volumes have grown rapidly in recent years and now the swap market not only fulfils this purpose, but is also used to extract information about market expectations and to provide benchmark rates against which to compare returns on fixed-income securities such as corporate and government bonds. This article explains what swaps are; what information might be extracted from them; and what appear to have been the main drivers of swap spreads in recent years. Some quantitative relationships are explored using ten-year swap spreads in the United States and the United Kingdom as examples. |
| Autumn 2003 | The information
content of regional house prices: can they be used to improve
national house price forecasts?
(104k) (by Rob Wood of the Bank's Structural Economic Analysis Division). It is often suggested that house price movements in the South East lead, or even cause, movements in the rest of the United Kingdom. If this were the case then house price inflation in the South East would be useful when forecasting national house price inflation. There are plausible channels through which such a 'ripple effect' could operate. But tests for patterns of regional price changes consistent with the effect give mixed results. There is evidence that regional price changes were consistent with the South East playing a leading role in the late 1980s/early 1990s, but not during other periods. So it is important to understand the nature of the shock to the housing market before concluding that a given house price change in London and the South East has implications for house prices in other regions. |
| Spring 2003 | Market-based
estimates of expected future UK output growth
(77k) (by Ben Martin and Michael Sawicki of the Bank's Monetary Instruments and Markets Division). This article derives some simple market-based projections of future output growth from a Taylor monetary policy rule, yield curves and inflation surveys. The results can be used as a timely cross-check on output growth expectations from other sources. We find that over the recent past the projections have been plausible in magnitude against both recorded outturns and survey expectations. Monetary policy and the zero bound to nominal interest rates
(93k)(by Tony Yates of the Bank's Monetary Assessment and Strategy Division). Some commentators have recently discussed the possibility that certain countries may experience a period of general price deflation. In such a situation, nominal interest rates may reach their lower bound of zero. This article concludes that the evidence available suggests that such a situation is highly unlikely to occur in the United Kingdom. It reviews what the academic literature has to say about the scope for alternatives to cutting interest rates in the improbable event that nominal interest rates do reach zero. The measurement of house prices
(81k)(by Gregory Thwaites and Rob Wood of the Bank's Structural Economic Analysis Division). House prices are an important consideration in assessing macroeconomic developments in the United Kingdom. But the special characteristics of housing-heterogeneity, infrequent sale and negotiated prices-give rise to important issues that complicate their measurement. There are several valid concepts of house prices-such as the average transaction price, the price of a typical house and the housing stock deflator-each of which is useful for a different purpose. Users must therefore be careful to match the measure they use with the concept of house prices they are interested in. Furthermore, all the available measures are volatile, so high-frequency changes in house price inflation should not be expected to persist. |
| Winter 2002 | Equity
valuation measures: what can they tell us?
(226k) (by Anne Vila Wetherilt and Olaf Weeken of the Bank's Monetary Instruments and Markets Division). This article examines the usefulness of summary statistics, such as the price-earnings ratio and the dividend yield, that are commonly used in valuing equity markets. But these measures are very sensitive to assumptions made about the (unobservable) equity risk premium, as well as to the precise definitions of earnings or dividends used in the calculations. This limits their usefulness as summary statistics of equity valuations. Profit expectations and investment
(64k)(by Seamus Mac Gorain of the Bank's Monetary Instruments and Markets Division and Jamie Thompson of the Bank's Structural Economic Analysis Division). This article examines the relationship between expectations of future profits and companies' physical investment. Theory suggests that increased profit expectations should raise share prices as well as investment. But this correlation between investment and share prices may be rather weak if investors' opinions of companies' prospects differ from those of the companies' managers. Using a simple aggregate investment equation, the article illustrates that measures of profit expectations based on current profits and analysts' earnings forecasts appear to be more informative for investment than stock prices themselves. This result is consistent with recent research at the Bank using company data. Money market operations and volatility in UK money market rates
(160k)(by Anne Vila Wetherilt of the Bank's Monetary Instruments and Markets Division). The Bank of England implements UK monetary policy by influencing short-term interest rates in its money market operations. The way in which the Bank operates in the market has changed significantly over time, but the aim throughout has been to ensure that the behaviour of short-term interest rates is consistent with monetary policy decisions, whether made by the Chancellor of the Exchequer or, since 1997, by the Bank's own Monetary Policy Committee. Operational choices by the central bank, together with developments in the markets themselves, are likely to have affected the volatility of short-term interest rates. This article outlines various measures of volatility in sterling money markets. |
| Autumn 2002 | Ageing
and the UK economy
(66k) (by Garry Young of the Bank's Domestic Finance Division). This article argues that overall living standards in the United Kingdom are set to double over the next 50 years alongside a sharp increase in the proportion of people over retirement age. While there are clear risks to this outlook, these would be present even without demographic change. Nevertheless an ageing population does appear to increase the risks to the financial welfare of individuals, especially in their old age. If people living longer do not save more when they are working, then either they have to consume less in their old age or work for longer than would have been the case had greater provision been made for retirement. This risk is heightened by general uncertainty about asset returns which becomes more important as the number of people reliant on private pensions increases. |
| Summer 2002 | Asset
prices and inflation
(108k) (by Roger Clews of the Bank's Monetary Instruments and Markets Division). This article is one in a series on the UK monetary policy process. It discusses some of the interconnections between inflation, monetary policy and asset prices. The Monetary Policy Committee is extensively briefed on asset market developments, along with other developments in the economy, before it makes its policy decisions. |
