World-Watching: Germany Bundesbank: What Moves Markets?

[Deutsche Bundesbank discussion paper 16/2022 by Mark Kerssenfischer & Maik Schmeling]

Non-technical summary

Research question

A key question in the macro-finance literature concerns the drivers of asset prices. Are asset prices mainly driven by news, or by changes in sentiment and other factors unrelated to economic fundamentals? In most asset pricing models, news play a dominant role. But in empirical investigations, the explanatory power of news is often quite low.

Contribution

We study the explanatory power of news by building a large, time-stamped event database covering a wealth of news related to the macroeconomy, including macroeconomic data releases, central bank announcements, bond auctions, election results, sovereign rating downgrades, and natural catastrophes. We combine this event database with high-frequency stock price and bond yield changes, both for the U.S. and the euro area, going back to 2002.

Results

We find that roughly half of all stock and bond price movements in the U.S. and euro area occur in tight windows around clearly identifiable news and in this sense can be explained by those news. On the positive side, this share is much higher than most previous studies found. However, our results still ascribe a large role to return variation that cannot be linked to news about economic fundamentals.

Read the paper [archived PDF].

Germany-Watching: Economics (U.S. Money Market Fund Reform)

from Deutsche Bundesbank Eurosystem’s Bundesbank Research Centre:

You Can’t Always Get What You Want (Where You Want It): Cross-Border Effects of the U.S. Money Market Fund Reform [PDF]

Authors: Daniel Fricke, Stefan Greppmair, Karol Paludkiewicz

Non-technical summary
Research Question

Money market funds (MMFs) are an important part of the growing segment of non-bank financial intermediaries. This paper contributes to this literature by analyzing the cross-border effects of the 2014 U.S. MMF reform, which was implemented several years prior to the EU Regulation. We study whether euro area MMFs received inflows as a consequence of the reform and investigate the (unintended) economic effects on the basis of the non-synchronized implementation dates of the regulatory changes in the U.S. and the EU.

Contribution

To the best of our knowledge, we are the first to examine the cross-border effects of the 2014 U.S. MMF reform. Prior work has shown that the reform led to a substantial decline of the institutional prime segment in the U.S. (MMFs that invest primarily in non-sovereign debt instruments). Moreover, these funds increased their risk-taking due to the increased competition and newly imposed liquidity restrictions left these funds more prone to large outflows (run risks).

Results

We document both positive and negative effects of the U.S. reform on institutional MMFs in the euro area. These funds, particularly those from the prime segment, experienced substantial inflows from foreign investors around the implementation of the U.S. reform and we show that these cross-border flows were largely motivated by the search for money-like instruments. While euro area MMFs reduced their risk-taking, the industry as a whole has become more concentrated and possibly more exposed to run risks. This risk materialized in the COVID-19 induced stress period during which these funds faced large outflows by foreign investors.

Read the full discussion paper [archived PDF].

Essay 91: Germany Watching

from Deutsche Bank Research, the new edition of Focus Germany:

Economic Weakness, Political Turbulence [PDF]

German exports and global trade have been moving in lockstep recently and more or less ground to a halt in YoY terms. We found that the Bundesbank’s leading indicator for global industrial production leads German exports by 4 to 5 months. Recent declines in this indicator do speak against a recovery in German exports before the end of Q1 2020, despite recent signs of stabilization in German foreign order intake. (Also included in this issue: house prices in Germany, labor market, automotive industry and German politics.)

If you have any further questions, please do not hesitate to contact Deutsche Bank Research.