effect that this may have on market prices themselves. as stressed in a recent paper by plantin, sabra and shin ( 2005 ) : 7 “ … marking to market tends to amplify the movements in asset prices relative to their fundamental values in bad states of the world …. under the historical cost regime, actions of the firms are strategic substitutes. sales by the other firms drive the market price down, which makes holding the asset booked at the acquisition cost greenspan, alan ( 1999 ) “ do efficient financial markets mitigate financial crises? ” before the 1999 financial markets conference of the federal reserve bank of atlanta, sea island, georgia october 19, 1999 jorge, jose peres ( 2005 ) financial system architecture : the role of systemic risk, added value and liquidity, cempre, faculdade de economia, universidade do porto knight, malcolm ( 2004 ) “ markets and institutions : managing the evolving financial risk ” bis guillaume plantin, haresh sapra and hyun song shin ( 2005 ) “ marking - to - market : panacea or pandora ’ s box? ” mimeo more desirable. conversely, in the mark - to - market regime, firm ’ s actions are strategic complements. the expectation of sales by the other firms makes holding the asset less desirable because of an expected low market value at the reporting date. strategic substitutability has a stabilizing effect, so that the market price is artificially smooth as compared to the true value of the asset under the historical cost measurement regime. strategic complementarity adds endogenous volatility, so that the market prices are artificially volatile as compared to the fundamental values in a marked - to - market economy ”. all the aspects i have been enumerating contribute, among other things, to increase volatility in asset prices and possible episodes of significant misalignment. this prospect is certainly a cause of uneasiness for monetary and financial authorities. from this standpoint it is interesting to examine two views that seek to identify general factors behind the tendency for asset price volatility. the first approach has been developed in the bis research, in particular by claudio borio and philip lowe ( 2002 ) 8. the main idea is that under present circumstances monetary stability is not enough by itself to ensure financial stability and may even contribute to unstable prices of financial assets. this contradiction would stem from the very success of monetary authorities in guaranteeing price stability in a credible way

targets, interest rate policy, in certain circumstances, should “ lean against the wind ” when it blows too strongly in asset markets. in any case, the elusive search for anchors that could help to achieve both monetary and financial stability will continue, and monetary policy cannot ignore the problem. ” ( constancio, 2002 ) 10 claudio borio and philip lowe ( 2002 ) “ asset prices, financial and monetary stability, exploring the nexus ” bis working paper no 114 about this debate see the contributions of andrew crockett, roger ferguson and otmar issing in “ monetary stability, financial stability and the business cycle : five views ” bis papers no 18, 2003 constancio, vitor ( 2002 ) “ policies and institutions for global financial stability ” in 8th international financial and economic forum, vienna november 2002 the second broad view trying to provide a general explanation for the recent instability of asset price has been put forward by raghuram rajan ( 2005 ), 11 the imf chief economist, in a recent noted paper. what came to be known as the “ rajan risk ” is linked with the structure of incentives of managers and institutions in the new financial environment. the gain of importance of market - based non - regulated institutions and the reduced weight of traditional banking, gives prominence to compensation schemes more linked to returns which induces managers to incur into riskier transactions. second, performances in these growing sector of “ investment institutions ” tends to be measured essentially against peers which fosters the herd behaviour already present in financial markets. both types of behaviour increase the probability of episodes of asset prices misalignments. the system tends to assume more risks, including the so - called tail risk where probabilities are low but losses can be high. who would have thought some years ago that pensions funds and insurance companies would become participants in the market for risk of default of other firms? on the other hand, hedge funds manage nowadays five times more assets than in 1998 and are involved in less liquid markets. also their returns have become more correlated across supposed different types of funds which seems to indicate that they could be subject to the same type of risks in a period of tighter credit and stressful equity markets. from all this the question that emerges is to determine if some new regulations are necessary or could be helpful at this stage. we should always be cautious about introducing new regulations and an evaluation of their costs must always be considered against their possible merits. also, a thorough dialogue with the sector has to be