The euro zone crisis and the "global" financial crisis of 2007‐2009 have sparked interest in improving our understanding of financial market interrelationships. Due to the rise of financial globalization over the past two decades, regulators worry that contagion and herding phenomena are more common. Hence, events that produce large movements or greater asset price volatility in one location may be transmitted to other locations around the globe, even if there are no fundamental economic reasons to expect such an outcome. For example, fears of a global meltdown in equity markets led to the imposition of short-selling bans on equities in 2008. While most of these bans have since been withdrawn, several countries in the euro zone re‐introduced them in 2011 because of their sovereign debt crises. Concerns over the interconnectedness of financial markets were also heightened by the realization that equity prices are greatly influenced by institutional investors, including hedge funds.
These recent events highlight the inadvisability of separating micro- from macroprudential concerns. Microprudential side policies regulate the behaviour of individual institutions while macroprudential concerns ensure good monetary policy is paralleled with financial system stability. In this project, researchers investigate empirically policy makers’ reactions to an unfolding financial crisis and the negative externalities that emerge in the form of poorly functioning financial markets. At the macro level, the project investigates whether the bond and equity markets in the throes of a financial crisis can be linked to overall economic performance. Ultimately, the aim is to propose policy responses leading to improved financial governance.
Publications from this project, initiated in 2012, will begin to appear in 2013.