ECB and Bank of England Workshop «Asset pricing models in the aftermath of the financial crisis». Date: 2411.2011. Site: Frankfurt am Main, Germany. Deadline: 15.09.2011
The main objective of the workshop is to provide a forum for researchers in the field of economics to discuss new developments in asset pricing. During the recent financial crisis, movements in asset prices which brought turmoil to financial markets were surprising for most market participants and central bankers. The tensions here spread to the real economy, resulting in the largest economic recession in developed economies since the Second World War.
The recent crisis has revealed a strong need to gain a better understanding of how assets are priced when different market frictions and behavioural phenomena are present. Asset prices reflect the magnitude of the underlying risk for an investment as well as the price of this risk, namely the price charged by market participants to hold that risk. Retrospectively, it would appear that certain risks, most prominently systemic risk (i.e. the risk that a shock in one segment of the financial markets spreads to other segments), were either largely ignored or considered too low. Furthermore, over-optimistic expectations may have pushed the price of risk to unreasonably low levels. As tensions in financial markets intensified, liquidity in some market segments became very scarce and collateral requirements for financial transactions were raised, thereby raising questions as to how well liquidity and counterparty risk had been priced and whether risk management practices had been adequate.
The workshop aims to discuss recent academic literature on the issues mentioned, looking in particular at the monetary policy implications.
- Liquidity risk and supply and demand effects
The impact of liquidity conditions in financial markets on asset pricing became highly relevant during the financial crisis. For example, for many asset classes, the question emerged of how to price financial instruments in an illiquid trading environment. Thus, measuring liquidity risk and including it in asset pricing models became of crucial importance. The crisis also showed that supply and demand conditions in financial markets are highly pertinent for better explaining price movements and may be significantly influenced by fiscal and monetary policies. For example, in sovereign bond markets, increased issuance activity was sometimes not matched by a rise in investor demand.
- OTC markets and counterparty risk
In many financial markets, the majority of trades are conducted over-the-counter (OTC). This means that prices do not result from an automatic matching of submitted orders, but are determined by the quotes proposed by dealers. Moreover, the presence of a dealer may involve an additional increase in the magnitude and/or cost of counterparty risk, especially in derivatives markets. It is very important that the impact of such a market structure on financial asset prices, not least in an environment of low liquidity and high uncertainty, is taken into account in asset pricing models.
- Detecting price misalignments in real time
From a policy perspective, it is important to disentangle movements in asset prices associated with higher levels of risk from those which reflect changes in the attitude of investors towards risk. Therefore, a better understanding of the formation of misalignments and bubbles in asset prices is important for the assessment of price signals. In this context, potential drivers of risk aversion and the role of heterogeneous agents and heterogeneous beliefs in asset pricing could be interesting.
- Interlinkages among various financial markets
A major challenge for market participants and policy-makers is a situation whereby various markets suddenly appear to show an unusually strong interconnection. Financial markets which prior to the crisis looked segmented now moved “in tune”, as the risks originating in one market quickly spread to others. In addition, investor portfolios turned out to be less well-diversified than previously thought because of this contagion. The changing nature of the relationships among assets is a big challenge for asset pricing and, thus, the objective here is to better understand the interlinkages across market segments and the role of institutional channels in explaining asset prices.
Papers should be sent by e-mail as PDF files to AssetPricing2011@ecb.europa.eu. Each submission should include an abstract and the e-mail address of the corresponding author. Authors of submitted papers will receive notification by the end of September 2011.
The travel expenses of presenting authors will be reimbursed. Participants from central banks and other official institutions are generally expected to cover their own expenses.
The workshop is planned to be organised as a one-day event from 9 a.m. until 6 p.m. on 24 November 2011. A dinner is planned for the evening of 23 November.
The organising committee of the workshop includes Gonzalo Camba-Méndez, Stefano Corradin, Magdalena Grothe, Manfred Kremer, Diego Rodríguez Palenzuela, Martin Scheicher, Thomas Werner (all ECB) and Chris Yeates (Bank of England).
The workshop will be conducted in cooperation with the Bank of England.
Thomas Werner, Deputy Head of Division
Capital Markets/Financial Structure Division, Directorate General Economics, ECB
E-mail: Thomas.Werner@ecb.europa.eu Tel: +49 69 1344 8707