without their own knowledge base simply followed the herd. in such a world, it is rational for any individual player to shift with the herd when new perceptions arrive. whatever the fundamentals, when the herd is running, you run with it. in its usual understated way, the bis observed that : “ highly correlated strategies across different players may have contributed to an aggravation of asset price movements ” ( bis ( june ) 1998, p. 95 ). the informational problems were compounded by the biased and ill - founded nature of much of the information and commentary. looking back on it, it might seem surprising that there were not more pundits, highlighting the excessive nature of the flows and the domestic policymaking deficiencies of the recipient countries. but who would these pundits be? among the policy officials in the recipient countries, the flows ( and the development of sophisticated financial sectors ) were a sign of progress and modernity : who would want to express doubts about that? in academic circles, the dominant paradigm was “ efficient markets ” – who would be bold enough to question the outcome of the market? any unexplained differential was passed off as a “ risk premium ” – the academic “ fifth ace ” that could square any circle and explain any regression result, no matter how different from the “ priors ”. in the financial markets themselves, who was going to bite the hand that fed them? 16 some of the subsequent commentary suggests naivety on the part of the investors ( they “ received repeated assurances that the financial sector was well supervised … and that there would be no changes in exchange rate policy ” ( imf 1998, p. 41 ) ). in hindsight, the degree of ignorance is so great as to border on the comic. business week ( 22 september 1998 ) reports a fund manager ’ s response to the russians ’ halting of trade in their domestic debt market in this way : “ nobody in the history of the world has ever done anything this foolish ”. some sense of history! at the same time, it should be noted that information that was available was not used. the bis banking data provided a comprehensive view on what turned out to be the most volatile element of the flows, but the existence of these data was either unknown or ignored. 17 as far as the outcome is concerned, however, unused information was as irrelevant as unavailable information. ( c ) the behaviour of risk premia the process of assessing and reassessing

of course, been other possible explanations for weak fixed - capital expenditure. these include competition from china, india and elsewhere ; the rise in oil and commodity prices ; and the uncertainty about how both will play out, and thus about prospective demand for uk output. all of this might have been thought to make the external environment unusually risky and so to warrant deferral of investment decisions. another possible explanation is, simply, that the level of investment has been under - recorded, and that the data will be revised up, as they have been frequently in the past ( chart 13 ). indeed, as the share of economic activity accounted for business and financial services increases, it is even possible that a growing part of business investment is simply unmeasured. when your teams spend time developing spreadsheets that will be used for 3 - 5 years, do you count that as investment? so it is difficult to know whether or not the management of risks associated with pension provision has had a bearing on the recent measured weakness in business investment. nobel prize winner, modigliani, f, and m. miller, 1958, ‘ the cost of capital, corporation finance and the theory of investment ’, american economic review 48, 261 - 297. financial market uncertainties it has, though, surely been an important factor in financial markets in recent years. the most obvious manifestations have been associated with their own jargon : liability - driven investment ( or ldi ), and so - called ‘ alpha - generating ’ active - management strategies. ldi involves matching a fund ’ s assets more closely with its quasi - fixed - income liabilities, via purchases of long - duration conventional bonds, inflation - indexed ( or real ) bonds, interest - rate swaps and inflation swaps. this may well have amplified the fall in very long - maturity real forward rates, which has been such a puzzle in recent years ( chart 14 ). greater asset - liability matching represents a reduction of risk, and so – at least at first blush – does not obviously square with a more aggressive approach to active management via increasingly popular ‘ alpha ’ strategies. but quite what such strategies entail may need a bit of unpacking. conventionally, in the framework of the capital asset pricing model, ‘ alpha ’ would refer to excess riskadjusted return ( a nice thing if you can get it! ). in practice, the term seems to be deployed rather loosely, being used variously to cover allocations to assets