samchain/econo-pairs-v1 huggingface dataset:
When they’re low, the world appears less risky, so less compensation appears to be needed for 12  risk. The trouble is that these are not measures of risk. They are a reflection of the risk appetite of those selling insurance. Taking on more risk because implied volatility is low is the equivalent of ignoring the road conditions and driving faster because your insurance got cheaper as a herd of new entrants flooded the car insurance market. When accidents start to increase, the whole thing can go into reverse. Those who had been selling insurance can incur losses. What might have looked like a profitable insurance business won’t do so any more. The terms on insurance can shift abruptly. The result: driving speeds slow down to a snail’s pace. In markets, this means price adjustments, whatever triggered them, might be followed by sharp withdrawal of cheap insurance… ….which removes the need for dealers to act as a stabilising influence… …Leading to greater market volatility…. …And sharp reduction in risk appetite. Market moves are amplified. These dynamics are difficult to size. They may or may not be of consequence. Exploration is needed about behaviour in some of the furthest corners of the system in order to take a firmer view on the form and extent of this fragility. As the Office of Financial Research in the United States noted, “Available data on investor portfolios are not sufficient to assess this…adequately”.

I’ll highlight two areas where markets have evolved in ways that raise questions about their resilience, even if all the intermediaries are safe. They might mean investors aren’t able to take the liquidity of markets for granted if they adjust. In both cases, there is no proven problem for markets or the economy. Inquiries are, as the police like to say, ongoing. Through our market intelligence gathering, I’m pleased to say that market participants are helping with those inquiries. And I look forward to the contributions of this Centre too. i) (Mis) use of volatility measures  Against a backdrop of relatively stable markets, some investors may have developed an appetite for betting that a range of markets, including bond markets, will remain stable. 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  That means selling options – effectively insurance against moves in market prices. A put option, for example, is insurance against falling prices. An investor who buys this insurance is guaranteed a sale price for the asset insured, regardless of what happens to the market. If prices are currently higher but then fall below the guaranteed price, an investor that wants to sell will incur some loss – think of this as the insurance excess – but the insurer will pay for the rest. If markets stay stable, as the insurer is betting they will, no payout is made and the insurance collects a premium. While markets are stable, it’s a nice little earner for the insurer.
A reduction in those capital market frictions would tend to lower the asset market spillover costs of the BFSP problem.   Finally, what guideposts should be provided by the international community in tackling the BFSP problem? The IMF recently began to explore such a framework (IMF (2011)). This raises a set of key questions about global financial governance. Are global financial network externalities sufficiently large to justify the international community imposing rules of the financial road? And how much driver discretion should instead be left to nation states which ultimately may bear the costs of the BFSP problem? These are big public policy questions. They are by no means new ones. If the quantitative experiments presented here are even roughly right, these questions may assume a new urgency in the period ahead. The BFSP problem is real. It may be rising. The result would be growing waves of global financial exuberance, punctuated by crashing capital busts. This roller-coaster has the potential to leave some nation states feeling queasy. They may even wish to get off. What is at stake may be more than just the future stability of the international financial system. References Barro, R J and Sala-i-Martin, X (1992), “Convergence”, Journal of Political Economy, Vol. 100 (2) pages 223–251. Dornbusch, R, Goldfajn, I and Valdés, R (1995), “Currency Crises and Collapses”, Brookings Papers on Economic Activity, Vol. 26(2), pages 219–294. French, K R and Poterba, J M (1991), “Investor Diversification and International Equity Markets”, American Economic Review, Vol. 81 (2), pages 222–226.

But, unconstrained, such a simulation would imply a potentially unbounded relationship between market capitalisation and a country’s GDP. Because market capitalisation is the discounted value of future profit streams from companies, that seems implausible. Charts 10 plots equity financial depth for the US and UK since 1929 and 1965 respectively. Between 1929 and 1990, the financial depth ratio in the US was roughly flat, at around 50%. As the US liberalised this ratio shifted upwards, averaging around 100%; it has remained roughly at these levels since. The UK has followed a similar pattern. To reflect these findings, in the simulations an (arbitrary) cap of 100% is placed on countries’ market capitalisation to GDP ratio, once they have reached current levels of US GDP per capita. 6  BIS central bankers’ speeches  Using the relationship in Chart 9 and the GDP projections, equity financial depth in the G20 countries can be projected forward. Many of the advanced countries have only a short distance to travel to reach 100%, given their starting point. Among the emerging G20, the average financial depth ratio rises from around 50% in 2010 to around 100% by 2050 (Chart 11). In other words, the pace of financial deepening in the emerging G20 countries is rather gradual. If anything, this may understate the likely pace of change. Nonetheless, these trends imply a rather striking shift in the composition of the global market portfolio.
Understanding the joint behaviour of employment and wages remains one of the central issues in modern macro-economics. These dynamics have been complicated recently by changes in the world of work, with automation changing both the nature and structure of work. Recent Bank research has used granular data on advertised job vacancies to shed light on these 42  dynamics. The research analyses around 15 million job vacancies over a ten year period. Instead of  classifying jobs by sector, occupation or region, it uses machine learning techniques on the text describing jobs to classify and cluster vacancies. What results is a more “job description-based” classification scheme for labour demand. This approach provides a different way of classifying and describing how the world of work is evolving – for example, the types of skills required in the face of automation. The classification scheme has also been useful when identifying the relationship between labour demand and wages. Using the job description-based classification helps identify a clearer link between labour demand and offered and agreed wages. 40 41 42  Cielinska et al (2017). Other recent research papers using trade repository data include Abad et al (2016) and Bonollo et al (2016). See, for example, Duffie, Gârleanu and Pedersen (2005) and Lagos, Rocheteau and Weill (2011). Turrell et al (forthcoming). 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  Variety One of the potentially most productive avenues for Big Data research, in the macro and finance sphere, involves using not numbers but words as data.

If income spreads decline, this can also lead to lower global saving. When saving declines, this can put further upward pressure on global real interest rates, as the competition for savings can be expected to increase among those wanting to invest in new production technology. This can have significance for the development of the real interest rate. Finally, there is the question of monetary policy. Will it be conducted with an inflation target? And, if so, what level will the target have? Nominal interest rates will become higher in the future The demographical changes we can see ahead indicate that global saving will decline. This would imply higher global real interest rates. The future conditions for growth are more  6  BIS central bankers’ speeches  uncertain, but if labour productivity were to begin to increase faster than today, there would be further upward pressure on global real interest rates. Let us therefore say that future global real interest rates will be in the order of 1.5–2.5 per cent. If we add to this an inflation target and inflation expectations of 2 per cent in Sweden, we get nominal interest rates of 3.5–4.5 per cent. Even if we do not see a return to the nominal interest rate levels we previously regarded as normal, long-term nominal interest rates will be much higher than they are today. The important thing is that economic agents who now make decisions with long-term consequences bear this in mind.
First, we are introducing measures aimed at retaining talent and excellence, based on: (i) work-life balance policies, such as remote working and flexible hours; (ii) neutrality in job postings; (iii) mentoring programmes, in which we try to establish an equal number of men and women; and (iv) efforts to ensure parity on selection panels. Most of these policies are geared towards all employees, both men and women. This is essential, given that we believe a far-reaching cultural change must be achieved. And that is always more difficult if only some of us are engaged. Naturally, to drive such a shift in culture and attitudes, the commitment of senior management is key. This commitment was set out in our first Strategic Plan 2020-24, which was approved this year and includes a firm undertaking to consolidate, reinforce and build on the achievements made in this domain, and also to communicate and spread this message to the outside world. Accordingly, the Banco de España is involved in various cross-border initiatives, including most notably a forum we have jointly organised with Morocco’s central bank since April 2018 and which, this year, unfortunately had to be postponed because of the pandemic. Lastly, as part of our research function, this commitment is embodied in an undertaking to assess the implications of the gender gap at our institutions.

In other words, are women being promoted because of their gender or because they are the best candidate irrespective of their gender? After being promoted, women’s wage progression is, on average, faster than men’s. This suggests that the women selected for promotion perform better.6  Allow me to focus on my organisation now. As I said earlier, the Banco de España currently has a gender-equal workforce, with the share of women having gradually risen from 30% at the end of the 1980s. Significant momentum was gained in the mid-2000s, coinciding with greater awareness about the advantages of gender diversity. However, at that point no specific policy geared towards increasing women’s presence was implemented. Instead it came about ‘naturally’. Despite the workforce parity achieved, there are still sizeable differences across professional groups: in 2019, women accounted for 40% of managerial staff, 46% of senior experts, 52% of experts and specialists, 66% of administrative staff and 11% of other support services staff. 6  The criticism that this could be to compensate for prior wage gaps after the diversity policy was ushered in also appears to be baseless since women’s relatively quicker salary increases after promotion were faster still pre-2011. 6  This recent momentum was above all due to women making up a relatively larger share of new entrants joining the Bank (see centre panel). Logically, among the most experienced staff, the relative share of women has increased at a much slower pace (see right-hand panel).
One exception was the Bank of England’s Corporate Bond Secondary Market Scheme, introduced in 2009, and from 2010 offering daily two-way prices on a wide range of high-quality sterling corporate bonds issued by non-financial companies, to aid secondary market liquidity. These prices were determined as a spread around the market price (so moved up and down with the market), and set at levels that incentivised market participants to sell to the Bank when market functioning was poor, and buy when market functioning returned to normal. The implications for the public sector balance sheet were modest: even at its peak, the scheme only owned about 1% of eligible bonds. But the existence of live two-way backstop prices helped liquidity to return to the market – and delivered a natural unwind in the facility, with bonds being sold back to market participants as functioning normalized (Chart 3). 11  See for instance https://voxeu.org/article/subprime-crisis-what-central-bankers-should-do-and-why and https://maverecon.blogspot.com/2007/08/central-banks-in-time-of-crisis.html. 12 In practice, effecting full risk transfer through central bank repo requires it to be done on a ‘non-recourse’ basis (ie relying solely on the collateral provided for risk mitigation in the event of default). The principles of such operations are discussed in https://www.imf.org/en/Publications/WP/Issues/2017/07/10/Central-Bank-Emergency-Support-to-Securities-Markets-45012, and were put into practice by the Federal Reserve in its Money Market Fund facilities provided during the GFC and the Covid crisis.

Yves Mersch: Making Europe’s financial market infrastructure a bulwark of financial stability Speaking points by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, for the Bank of France/Sciences Po research seminar “Financial stability in a digital world”, Paris, 7 June 2016. *  *  *  Introduction •  Europe’s financial market infrastructure has proved to be resilient through bouts of financial market volatility;  •  it has supported the liquidity and stability of financial markets in times of stress;  •  the European Central Bank and the Eurosystem, in conjunction with European legislators and market participants, have made Europe’s financial market infrastructure into the bulwark of financial stability it is today;  •  in the first part of my presentation, I will investigate the potential impact of the digitalisation of financial services on Europe’s market infrastructure;  •  in the second part, I will outline how the Eurosystem plans to deal with the technological and strategic challenges which affect our market infrastructure.
This may help us understand how we ended up here. It is not easy to give a short and comprehensive definition for economic governance. For the sake of our discussions, let me define it simply as the nature and practice of economic management, regulation and development. Economic governance is in fact part of a larger picture that combines political governance, corporate governance and legal governance, which continuously interact with each other. The term “economic governance” is explained as “the study of arrangements, and organizations that arise and evolve to govern economic activity.” These institutions underpin economic transactions by protecting property rights, enforcing contracts, and organizing the physical and regulatory infrastructure to facilitate economic activity. Good governance provides a very important set of pillars, which are critical in the design of an economy. The most widely cited ones are transparency, accountability, rule of law and participation. Let me go over these four principles rather quickly. Transparency ensures that the necessary information is freely available and directly accessible to those who will be affected by decisions and their enforcement. Accountability is a mirror image of the authority. It is critical for decision makers to be responsible for the consequences of their decisions and actions to those who will be affected. In democracies, every independent institution or organization is accountable to the public and to its institutional stakeholders. Participation is the cornerstone of democracies, where every person in the system, in one way or the other, has a voice in the decision-making process.

However, we should not forget that the real economy and the financial economy are largely two sides of the same coin. Without one, the other would not exist. Financing is a key element for economic activity, and channelling such financing is precisely where we need the banking sector. We have once again been able to witness this owing to COVID-19. As you will recall, the financial sector was declared an essential service during the lockdown. And, for example, without banks’ active participation, it would not have been possible to successfully structure the ICO guarantees programme. Naturally, mobilising the resources needed for this transformation, which the law estimates at around € billion, will necessarily involve public-private investment formulas in which banks will no doubt play a key role. As you can imagine, financing these public-private investment needs is reason enough for the banking system to become involved. But initiatives such as the climate agreement signed on the occasion of the COP25 and the launch of FinResp (Centre for Responsible and Sustainable Finances) show that the sector is clearly committed. How can the financial economy contribute to switching the real economy towards full decarbonisation? The response is straightforward: through correct risk measurement. When banks manage their risks properly, they are promoting the effective allocation of available economic resources, by distinguishing between those projects more likely to succeed and those not viable in the medium term.
Instead, it should aim to promote and support the adaptation of the productive system and workers to the new realities and the efficient reassignment of resources among industries and firms. In short, the design of economic policy measures should be adapted to the changing circumstances of the crisis itself. The ability, over the coming quarters, to recalibrate the support measures to ensure that at all times they match the needs arising from the course of the pandemic will determine our opinion in a few years’ time of the success of the economic policies of today in addressing this crisis. It is this spirit of needing to adapt to continuously changing circumstances that has inspired the recent agreement between the Government and the social agents to renew furlough arrangements (ERTEs) until 31 January 2021: the agreement has introduced new forms of temporary suspension of employment relationships, in response to activity restrictions that may arise entirely or partly as a consequence of the introduction of fresh pandemic containment measures. One particular dimension of the necessary redesign of these mechanisms is a more selective focus. The protection measures should be directed at those industries and firms most directly affected by the activity restrictions resulting from the course of the pandemic, this being an aspect of the latest ERTE extension. The rationale for this heightened focus is twofold. First, public funds are limited and already subject to considerable pressure, so they need to be channelled towards those uses that yield the highest returns.

Instead, the goal of the CCAR was to help ensure that large bank holding companies have strong, firmwide risk measurement and management processes to support their internal assessments of capital adequacy and that their capital resources are sufficient given their business activities and the resulting risk exposures. 4  BIS central bankers’ speeches  The second important strand of reform is to ensure that regulatory oversight is sufficiently broad to include the activities of the so-called shadow banking system. This aspect of reform and oversight is still in its early days. But work is underway. For example, the Financial Stability Board is undertaking work to identify potential sources of vulnerability caused by the activities in the shadow banking system and how such vulnerabilities could be addressed. Also, in the United States, the Financial Stability Oversight Council (FSOC) views its mandate broadly with respect to identifying systemic risks and proposing remedies. For example, on an ongoing basis, the FSOC will monitor and assess which non-bank financial intermediaries in the United States are systemically important and, thus, require greater regulatory oversight. But the focus will not just be on large financial firms. Activities and practices that occur outside of the core institutions are also important. For example, the activities of money market mutual funds is one area receiving close scrutiny. As you know, a run on the money market funds developed in the fall of 2008 when the Reserve Fund broke the buck when Lehman Brothers failed.
An operating environment based on prudent risk management rather than aggressive risk taking, gives us regulators comfort that profits are conservatively stated. This is the essence of prudence which underpins safe and sound banking. BIS Review 70/2004  1  In an increasing trend to harmonise prudential frameworks across the globe, in recognition of the fact that banks, wherever they may be domiciled, are exposed to the same risks, it is becoming increasingly difficult to pursue country-specific solutions. We recognize that we too have to be internationally compatible in adopting common standards for regulation and supervision which are spearheaded by the Basel Committee. Global financial reporting practices are not far away and there are efforts underway to establish a common set of internationally accepted financial reporting standards. Differences of opinion between standard setters and regulators need to be reconciled IAS 39 is one such which is being hotly debated. The efforts taken by CRISIL India, together with the SLBA, in this regard are commendable and I would like to see this initiative gather momentum to provide the platform for the improvement of risk management techniques by the banks in Sri Lanka which would, in turn, make them ready, if not in 2007, even later, to meet the challenges of Basel II. The transition to Basel II calls for a fundamental shift from the basic rudiments of risk management to sophisticated risk management techniques. The period of transition and the cost of transition has to be closely examined by the banking industry.

Considerable investment in information technology will have to be made to complete this transition. The strong platform of good risk management, therefore has first to be in place. Therefore, the incentive that I can see from Basel II now is to commence the process to improve risk management especially operational risk by banks in Sri Lanka. As you may know Basle II requires specific capital to be allocated to operational risk, which is one of the main differences between Basle I and Basle II. Some internationally reputed banks have already allocated about 20% of capital for operational risk. To effectively mitigate risks, banks need to have risk managers or risk management specialists. If you don’t have such specialists, you need to look for them or enhance the capacity of the existing staff to meet this need. Sound risk management practices lead to cushions that are built in good times so as to be run down , up to a point, in bad times. Provisions for loan losses dictated by prudence when profits are good, can always be written back when profits are low. It is that degree of caution in the exercise of judgements, in making estimates when there is an element of uncertainity, that makes prudence the most critical factor in risk management in banks. This is my message to you today and I wish this Seminar every success. 2  BIS Review 70/2004