Quarterly Bulletin
Equity Markets Articles
| 2008 Q1 | Recent developments in portfolio insurance  (2.2mb) By Darren Pain of the Bank's Foreign Exchange Division and Jonathan Rand of the Bank's Sterling Markets Division. The aim of this article is to describe how portfolio insurance works, the main strategies employed and how these have evolved over recent years, and the possible links between their use and financial market stability. The key benefit of portfolio insurance is that it enables financial risk to be distributed among those agents most willing to absorb it. The downside is that it can possibly create conditions for greater fragility in financial markets and leaves issuers of portfolio insurance exposed to potential unexpectedly high losses. It seems unlikely that portfolio insurance-related investments contributed significantly to the financial market volatility that began in Summer 2007. Nonetheless, it is important to keep alert to situations when portfolio insurance could potentially work to amplify financial market instability. |
| 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. |
| Autumn 2002 | The
balance-sheet information content of UK company profit warnings
(67k) (by Allan Kearns and John Whitley of the Bank's Domestic Finance Division). This article looks at the information content of profit warnings issued by UK private non-financial companies over the period 1997-2001 in relation to measures of their profitability and balance-sheet strength. It finds that profit warnings are associated with a persistent fall in profit margins and that this decline in margins is larger than for companies who do not issue warnings. The article also finds that profit warnings contain incremental information for other balance-sheet variables: those firms who issue warnings are also more likely to see their gearing levels rise, and investment and dividends fall, than other firms whose profit margins also fall but who do not issue a warning. |
| 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. |
| Spring 2002 | Analysts'
earnings forecasts and equity valuations
(116k) (by Nikolaos Panigirtzoglou and Robert Scammell of the Bank's Monetary Instruments and Markets Division). Equity valuations are important for monetary policy makers as the factors that drive equity valuations may contain information about the future course of the economy. Moreover, a possible correction in equity prices may be a source of shocks to which monetary policy may have to react. Such an equity market correction may also have negative implications for financial stability. We use a three-stage dividend discount model to see whether analysts' forecasts can explain the level of equity prices over the past ten years. This model is also used to decompose equity returns into changes to earnings, the yield curve and equity risk premia. Equity wealth and consumption-the experience of Germany, France and Italy in an international context
(108k)(by Ben Norman, Maria Sebastia-Barriel and Olaf Weeken of the Bank's International Economic Analysis Division). Consumption in Germany, France and Italy (the EU3) has generally been thought to be less responsive to wealth effects than in the United Kingdom or the United States. The aim of this article is to assess the evidence for changes in the responsiveness of EU3 consumption to changes in equity prices, given the rapid increase in share prices in recent years and the rising share of financial assets held in equities during the 1990s. |
