It can be argued that index funds distort the price of the targeted indices and that, as a result, the indices end up creating rather than measuring performance. ·  Last but not least, the impact of risk management techniques on market dynamics is particularly enlightening with regard to the question of asset price overshooting. Value-at-risk calculations have become a crucial element of the standard approach used by market participants to evaluate the risk inherent in their market activities and to set up exposure limits. Of course, central banks and financial institutions should continue to encourage the use of these instruments. But, in times of financial turmoil, the growing use of sophisticated risk management techniques by financial intermediaries might have had the paradoxical effect of amplifying the initial shock, exhausting liquidity and contributing to contagion  3  M. BORDO, B. EICHENGREEN, D. KLINGEBIEL and M. S. MARTINEZ-PERIA: “Is the Crisis Problem Growing More Severe?”, CEPR, September 2000. 4  BIS Review 28/2001  phenomena. Regardless of the intrinsic qualities of these risk management tools, we see that their growing use in the same fashion by all market participants may have produced pernicious effects. When market players rely on converging risk evaluations, they tend to take the same decisions at the same time, thus amplifying the initial shock to prices and trading volumes. All those factors have one consequence in common: they encourage homogenous behaviour and reactions to the detriment of the diversity that is indispensable to the smooth functioning of financial markets.

So, what are the possible policy implications of these recent patterns or trends on financial markets? My opinion is that financial authorities might reflect on some ways to foster behavioral diversity in financial markets. As we have just seen before, some specific factors, such as short-termism, mimetic behaviour etc… have tended to make “contrarians” less pro-active on financial markets. As a consequence, in order to safeguard the smooth functioning of the markets, the diversity of participants’ behaviours must be protected or even reinforced. This necessary diversity should logically reflect natural differences in time horizons, strategies and reaction functions of market players. On this point, I would like to explore amongst many others three possible avenues for future action for both monetary or financial authorities and the financial industry. First avenue: Strengthening the continuing efforts aiming at market transparency Experience shows that uncertainty and incomplete information are determining factors in mimetic behaviour. These shortfalls in market transparency make mimetic behaviour seem rational to agents, who prefer to follow bigger participants, who are thought to be better informed, rather than develop their own analysis. Therefore, strengthening transparency continues to be the priority. In the same vein, attention should be paid to expand the skills and competencies required by the analysis of a more detailed and complex information. Transparency is useless if only a limited number of experts are able to deal with it. One of the objectives of transparency is to enable better differentiation of borrower creditworthiness.