In parallel, new techniques for unbundling and distributing risk, and possibly also asset managers working under fewer constraints than in the past, may have made financial markets more efficient. For any given level of expected volatility in the economy, that may have enabled investors to hold more diversified portfolios, reducing the excess returns (or risk premia) required for bearing the residual undiversified risk. Taken together, other things being equal, these factors would tend to work in the direction of reducing inflation risk premia and term premia in government bond yields, credit spreads, equity risk premia, and implied volatilities derived from options. But there are important qualifications to this story, especially regarding what it implies looking forward. First, various cyclical developments, such as corporate sector balance sheet repair, have probably reduced risk. And, of course, growth is currently robust pretty uniformly across the world economy. Those features of the environment may have reduced risk premia, cyclically. There is no way to separate out with any precision the cyclical and structural, potentially more persistent, influences on  BIS Review 47/2006  5  the price of risk. Second, the importance of some of those structural factors may be exaggerated by market participants. Closest to home for me, I would not want anyone to think that central banks are capable of delivering uninterrupted growth indefinitely.

Source: IMF  BIS Review 47/2006  9  Chart 7: Contributions to growth in UK non-financial company sterling deposits Other Legal, Accountancy & Other Business Activities T ransp ort, Storage & Communication Wholesale & Retail T rade Real Estate Construction M anufacturing Utilities & Primary Industries T otal  Percentage p oint contributions to change on a y ear ago 12 10 8 6 4 2 0 -2 -4  1998 Source: BoE  1999  2000  2001  2002  2003  2004  2005  Chart 8: Employer pensions contributions Per cent of gross corporate savings 50 40 30 20 10 0 1990  1992  1994  1996  1998  2000  2002  2004  Source: ONS  Chart 9: Employer pensions contributions £ billion, 2005 prices 60 50 40 30 20 10 0 1992  1994  1996  1998  2000  2002  2004  Source: ONS; dat a shown are expressed in 2005 prices using RP I inflat ion  10  BIS Review 47/2006  Chart 10: One-off and regular employer pension contributions  £ billion 35  Regular contributions Special/one-off contributions  30  Total employer contributions  25 20 15 10 5 0  1992  1994  1996  1998  2000  2002  2004  2005  Not e: Covers self-administ ered occupat ional schemes only Source: ONS  Chart 11: UK business investment Per cent of GDP, constant prices  14 12 10 8 6 4 1990  1993  1996  1999  2002  2005  Source: ONS and BoE calculations  BIS Review 47/2006  11  Chart 12: UK business investment recoveries  percentage difference from trough in I/Y ratio 30 25 20  Average of past recoveries  15 10 5  Current  0 -8  -6  -4  -2  0  2  quarters relative to trough  4  6  8  Source: ONS and BoE calculations  Chart 13: Revisions to UK business investment Percentage change on a quarter earlier  Initial Estimates  12  Suse que nt Estimate s  9 6 3 0 -3 -6 -9  Late st Data  -12 1993  1995  1997  1999  2001  2003  2005  Source: ONS  Chart 14: Long-maturity real sterling forward rates Per cent 6 5 4 3 2 1 0 1986  1991  1996  2001  2006  Source: Bloomberg and BoE calculat ions  12  BIS Review 47/2006  Diagram A: Stylised effect on equity returns of a fall in risk premia  One-period ex-post equity returns Time T  Time T+x  Premium falls by Y% each period Preshock steady state returns  Post shock steady state returns  time  BIS Review 47/2006  13