New issue of the journal Sveriges Riksbank Economic Review
Date
21/03/2013
In this edition of the Riksbank's journal there are three articles dealing with different aspects of developments on the financial markets in recent years:
Deputy Governor Karolina Ekholm describes how the international integration of the financial markets around the world has developed since the global financial crisis. The process of internationalisation that began in the early 1980s appears to have come to a halt after 2008. This is reflected, for instance, in the fact that European banks have reduced their lending on foreign markets and that activity on the interbank market has declined. The author discusses what advantages and risks can be found in financial integration, as well as how they may be affected by the international regulations emerging in the wake of the crisis. In particular, she focuses on developments at EU level, where the endeavour to maintain financial stability on an integrated market appears to require a higher degree of joint supervision and regulation. Her conclusion is that a reinforced European banking sector, with a smoothly-functioning bank union, could have beneficial effects on the Swedish economy, regardless of whether or not Sweden takes part in the bank union.
Maria Bergsten and Johannes Forss Sandahl survey algorithmic trading on the foreign exchange market and discuss its advantages and disadvantages. Using interviews with a number of participants in the foreign exchange market as a base, the authors assess that this type of automated trading, where orders are given and executed by computers, is used for trading currency pairs that include the Swedish krona, and to an even larger extent for trading other currency pairs. The purposes of algorithmic trading are to execute orders, set prices, manage risks and make use of opportunities for arbitrage. Some of these functions are fulfilled by the algorithms referred to as high frequency trading. The authors also note that the practice that has developed on the foreign exchange market largely functions well as self-regulation for managing risk that algorithmic trading can give rise to.
Tor Johansson and Fredrik Bonthron present the Riksbank's new index for financial stress in Sweden. Unlike the previous index, which the Riksbank has used since 2011, the new index contains several indications for each sub-market. The degree of stress on the stock market, bond market, money market and foreign exchange market is now measured by means of three indicators for each respective market. Each indicator receives a value by being given an order of rank in relation to all of the previous observations since 1995. The index is then calculated as a squared mean value of the indicators, adjusted for correlations between them. This adjustment is made to emphasize periods when there is stress on several sub-markets at the same time. The authors consider that the new index provides a better measure of financial stress than the previous one, as it takes more information into account, is less sensitive to individual sub-markets and more clearly emphasizes period of widespread stress.
