A ‘bubble' in safe-haven asset values could turn out to be the next black swan event, caution Dirk G. Baur of University of Technology, Sydney, and Thomas K. J. McDermott of Trinity College, Dublin, in a research paper titled ‘Safe Haven Assets and Investor Behaviour Under Uncertainty' ( www.ssrn.com ). Looking at bonds and gold, which tend to act as safe-haven assets following stock-market crises, the authors find that these assets appear to differ in the timing of their responses to crisis events.

“Interestingly, for those events that most closely fit the description of ‘black swan' events — i.e. the 9/11 terrorist attacks and the recent global financial crisis — gold is the stronger and more immediate safe haven.”

“For the most extreme events — when uncertainty is most pronounced — investors turn to an asset that is quite literally ‘solid,' tangible and that has been used as a store of value for centuries — i.e. gold. In the aftermath of a market shock, psychological and emotional factors are clearly at play in the decisions of investors.”

Conceding that the availability of a safe-haven asset is beneficial for financial stability, the authors observe that investors' awareness of the existence of such an asset either makes them bear more risk or leads to an increased demand for safe-haven assets inflating the price and thus depriving the system from safe (haven) assets.

“In the global financial crisis, it was losses on what would have been considered relatively safe assets (CDOs, mortgage-backed securities etc.) that caused a dramatic loss of market confidence. This may be the next big risk that is unknown or not anticipated.”

To policymakers, the paper recommends that opportunities to intervene to short-circuit the potential for uncertainty to turn a shock into a crisis should be sought out. Instructive read, when ‘havens' hog the limelight as they now do.


Games investors play

To Michael Ehrmann and David-Jan Jansen, the 2010 FIFA World Cup in South Africa offered a natural experiment to analyse fluctuations in investor attention, because many soccer matches were played during stock-market trading hours. Using minute-by-minute trading data for 15 international stock exchanges, the authors present three key findings in a recent working paper from De Nederlandsche Bank titled ‘ The Pitch Rather Than the Pit: Investor Inattention During Fifa World Cup Matches' ( www.dnb.nl ).

Their foremost finding is that when the national team was playing, the number of trades dropped by 45 per cent, while volumes were 55 per cent lower. Second, market activity was influenced by match events, the paper reports. “For instance, a goal caused an additional drop in trading activity by 5 per cent. .”

However, the third finding is that the co-movement between national and global stock-market returns decreased by over 20 per cent during World Cup matches, whereas no comparable decoupling can be found during lunchtime, the authors distinguish. They conclude, therefore, that stock markets were following developments on the soccer pitch rather than in the trading pit, leading to a changed price-formation process.

Work that may enthuse one to study if our IPL matches have a similar effect on the bourses.