Therefore listed companies will have an incentive to adjust their risk profile and avoid more hazardous - which may also be more innovative - investment projects. Therefore, “entrepeneurship” may be curbed and the growth potential may be influenced adversely. Another impact of volatility on financial management is related to recourse to hedging, namely derivative products. As I mentioned earlier, derivatives are a driving force behind mature financial markets, and their strong development in the last two decades is merely consequence of the benefits they have generated. More precisely, derivatives and related financial innovations have enabled companies to transfer the impact of interest rate and currency fluctuations to financial institutions or investors that were ready to manage it, whereby facilitating international trade or project financing. Meanwhile, the pricing of derivatives is closely linked to volatility. As volatility is indeed difficult to predict, market practitioners have developed models, which are constantly being refined. Over time, market participants, - especially banks, - have become more competent in managing risk, while being left that residual risks which are more complex and harder to control. These consequences would not be a major concern, if the episodes of excessive volatility were only accidental. Peaks of volatility clearly reflect macroeconomic imbalances, as soon as market participants take into account the relevant information. This has been evidenced in studies reviewing factors behind currency crises in emerging countries. Macro data - such as balance of payment or 13 fiscal policy indicators - prove to be discriminant-leading indicators from this point of view.

However, I cannot affirm that the resolution of market imbalances would result in a reduction of volatility to levels that prevailed before these imbalances were taken into account by market participants. In my view one should not underestimate the part played by technical factors in the persistence of volatility peaks. This persistence in volatility is fuelled by technical features that facilitate the build up of mimetic behaviours (amplifying effects), or that reinforce the links between the various market segments (diffusion effects). Mimetic behaviour is of course by no means a new phenomenon on financial markets. However benchmarking, index management, and risk management techniques may have gradually reinforced this type of behaviour, as participants are under increasing pressure to follow their peers through matching the performance of a benchmark. There is no doubt that the spread of benchmarking allows fund managers and clients to better assess their performance against that of other funds. But, in a context of growing competition within the sector, it may well have increased mimetic behaviour. Some market participants (whose own compensation is closely linked to the relative, rather than absolute, profit and losses they generate) may indeed have come to the conclusion that it would be better to be wrong along with everybody else, rather than to run the risk of being right alone. A striking example of rational mimetic behaviour is the influence that hedge funds posess as “opinion leaders” and trend setters.