LQG Seminars

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The calming of short-term market fears and its long-term consequences: The central banks’dilemma

Seminar by J-P Zigrand

12th April 2022 – On-Line

Fear, uncertainty, and risk stalk financial markets. Malignant uncertainty recently metastasised delivering tragedy and magnified fear, uncertainty and risk. In early 2022 geopolitical landscape has changed radically. The LQG is very lucky to have Jean-Pierre “JP” Zigrand of the LSE / SRC to discuss the implications.

JP will discuss an innovative method developed at the LSE / SRC used to extract daily market “fear” term structures from option markets covering event horizons from two weeks up to 10 years ahead! Based on this he will shed light on the challenges for markets and the possible long run consequences of Central Bank responses.

JP will discuss the short-term effects and long-term consequences of Fed crisis interventions on market fears — the risk perception of large asset price drops. We extract daily market fear term structures from option markets covering event horizons from two weeks up to 10 years ahead. We identify the discretionary component of crisis interventions, grouped into five policy categories, using announcement surprises during market turmoil including 2020. The Fed’s liquidity provision for financial intermediation, especially via its FX swap lines, had a strong impact on fear, while interest rate changes and credit support to the wider economy support were less effective. The strong effects on long-run risk perceptions point to the risk of moral hazard of discretionary crisis interventions.

The slides presented at this seminar are available here.

 

Jean-Pierre “JP” Zigrand

Co-director of the Systemic Risk Centre
Co-director of the Financial Markets Group and Associate Professor of Finance
London School of Economics

Biography

Jean-Pierre Zigrand is Co-director of the Systemic Risk Centre, Co-director of the Financial Markets Group and Associate Professor of Finance at the London School of Economics. His research interests are in the areas of systemic risk and asset pricing in which he has an extensive publication record. His teaching is principally in quantitative finance at MSc, PhD and executive levels. Dr Zigrand is the director of the LSE MSc Finance executive programme. He is a member of the Bank of England Bank’s Macroprudential Panel – Market Subgroup and has acted as a consultant to private sector financial institutions, to the Luxembourgish Central Bank as well as to regulatory bodies. He has been a Lead Expert to the UK Foresight Team on the Future of Computer Trading. Dr Zigrand has a BA and MA in Economics from the Catholic University of Louvain and a PhD in Economics from the University of Chicago.