Although financial globalisation has brought about improved macro-economic efficiency, via a more efficient allocation of resources and capital, liberalised capital flows, increased competition on financial markets, increased transparency (apart from the recent ENRON episode! ), changes in asset prices have also become more pronounced and have experienced clear misalignments or deviations from their “equilibrium” levels. Moreover, credit seems to have played a greater role in asset prices fluctuations. Initially observed during the “speculative bubbles” of the 1980s and early 1990s, this trend has persisted, if not amplified. Several factors may explain these recent and abnormal patterns in asset prices. I shall give a few examples. ·  First, "short-termism": some market participants may have become more inclined to be mostly preoccupied with their short-term results. This trend might result, in particular, from growing pressure to yield good results immediately. However, these results are not necessarily sustainable. Marking-to-market financial products may also have contributed to this widespread focus on immediate financial performances. This emphasis on short-term performance may result in increased volatility in the price formation process: the shorter the investment horizon of markets participants, the bigger the impact of any new information on prices. ·  Second, herding or mimetic behaviour: mimetic behaviour is of course by no means a new phenomenon on financial markets. Technological developments on markets may however 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 operators (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 running the risk of being right alone. A striking example of rational mimetic behaviour is the influence that hedge funds enjoyed as "opinion leaders" and trend makers. By its nature, trend-following amplifies the imbalance that may at some point affect a market, potentially leading to vicious circles of price adjustments and liquidation of positions. Moreover, more and more participants are able to access directly to financial markets, while the expertise to deal with a larger set of technical information is not evenly distributed. This may also reinforce the role of “gurus”. ·  Third, index management: as a fund management technique, it has proven very popular on equity markets and may have contributed to exacerbating movements in financial asset prices. Because their goal is to mimic the performance of indices, “passive managers” try constantly to match the composition of their benchmark. They thus help to amplify market trends, buying more as the market rises and liquidating more as the market drops.