Systemically Significant Prices

Robert C. Hockett and Saule T. Omarova

Journal of Financial Regulation, 2016, vol. 2, issue 1, 1-20

Abstract: Some prices and indices in domestic or global markets take on particular market-wide importance. This can occur either because (i) they are associated with ubiquitous inputs to production, (ii) they are associated with highly popular asset classes, (iii) by convention they tend to be used as benchmarks in determining other prices, or (iv) some combination of the above. Examples include prevailing wage and salary rates, certain energy and commodity prices, and such indices and borrowing rates as the Standard & Poor’s 500, the Federal Funds Rate, and the Libor and Euribor interbank lending rate benchmarks.We call such prices and indices ‘systemically important’ prices and indices, or ‘SIPIs’. Over the long term, these prices and indices tend towards certain statistical mean values that reflect determinants that can plausibly be treated as ‘fundamentals’, be these demographic, technological, or global-quantity-rooted in character. At times, however, SIPIs can move out of alignment with mean values and associated fundamentals owing to distortions stemming from missing information, recursive collective action problems (including ‘noise’ trading and ‘herd’ behaviour), or even deliberately manipulative behaviour on the part of influential or colluding market actors. We develop a general account of systemically important prices and indices as well as of the market vulnerabilities to which they can give rise. We then develop a menu of regulatory strategies for addressing these vulnerabilities in manners that protect markets’ capacities to translate fundamental values into (more) accurate prices or indices when such prices or indices are systemically important. Key to the effort is recognizing that what we propose is in some cases what regulators are committed to doing already in maintaining market integrity, and in other cases is what central banks do already in determining appropriate money rental (‘interest‘) rates and securing them through open market operations.

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1093/jfr/fjw007 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:refreg:v:2:y:2016:i:1:p:1-20.

Access Statistics for this article

Journal of Financial Regulation is currently edited by Dan Awrey, Geneviève Helleringer and Wolf-Georg Ringe

More articles in Journal of Financial Regulation from Oxford University Press
Bibliographic data for series maintained by Oxford University Press ().