19 | December | 2007 | Mostly Economics

Archive for December 19th, 2007

Activity in forex and derivatives markets

December 19, 2007

BIS has released the final reportof its triennial (once in three years) survey on forex and derivatives market activity in 2007. The statistics of the survey findings are here. The press release presents a summary of the findings:

First, average daily turnover has grown by an unprecedented 71% since April 2004, to $3.2 trillion. This increase was much stronger than the one observed between 2001 and 2004.
Second, growth in turnover was broad-based across instruments. More than half of the increase in turnover can be accounted for by the growth in foreign exchange swaps, which rose 82% compared with 44% over the previous three-year period. Changes in hedging activity may have been one factor underlying the increasing importance of foreign exchange swap instruments.
Third, the composition of turnover by counterparty changed substantially. Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover.
Fourth, the currency composition of turnover has become more diversified over the past three years. The share of the four largest currencies fell, although the US dollar/euro continued to be the most traded currency pair. The most notable increases in share were for the Australian and New Zealand dollars, which have attracted attention from investors as high-yielding currencies, and the Hong Kong dollar, which has benefited from being associated with the economic expansion of China. More broadly, the share of emerging market currencies in total turnover has increased, to almost 20% in April 2007 from less than 15% in April 2004.
Finally, the geographical distribution of foreign exchange trading did not change significantly. Among countries with major financial centres, Singapore, Switzerland and the United Kingdom gained market share, while the shares of Japan and the United States dropped. In some cases, changing shares reflected the relocation of desks.

Posted in Academic research & research papers, Economics - macro, micro etc, Financial Markets/ Finance, reports | 1 Comment »

Fed handling of subprime crisis

December 19, 2007

This article in New York Times is an eye-opener to the way Fed handled the sub-prime crisis. There were concerns early on but Fed continued to ignore the risks.

Late Ned Gramlich and others had pointed to the risky mortgage business (He even wrote a book on the same) but “Mr. Greenspan argued that the Fed was ill-suited to investigate deceptive lending practices”. Greenspan’s view was Fed can’t check on fraudulent practices.

Fed also ignored the risks from the rising housing prices. Moreover, a New York Fed study said there was no bubble and the costs of the housing bubble bust was pretty small.

Accordingly, they conclude that market fundamentals are strong enough to explain the recent path of home prices and that no bubble exists. Nevertheless, weakening fundamentals could have an impact on home values on the east and west coasts, where the new housing supply appears to be relatively inelastic. However, prices in these regions have typically been volatile, and previous declines have not had a sizable negative effect on the overall economy.

I am sure the authors would need to revisit and update their research work.