Systemically Significant Prices
Robert C. Hockett,
Saule T. Omarova and
No yp8an, LawArXiv from Center for Open Science
2 Journal of Financial Regulation 1-20 (2016) Some prices and indices in national or transnational markets take on particular market-wide importance, either because (a) they are associated with ubiquitous inputs to production, (b) they are associated with highly popular asset classes, (c) they tend by convention to be used as benchmarks in determining other prices, or (d) 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 toward certain statistical mean values that reflect determinants that can plausibly be characterized 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' behavior), or even deliberately manipulative behavior 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, 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 and indices when these are systemically important. Key to the effort is recognizing that what we propose is in some cases what regulators view themselves as 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.
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