Featured Idea

Giant funds and market mispricing

The short-termism of corporate managers has been a recurring concern of policymakers for decades due to the close tie with mispricing in capital markets. This article shows that a root cause of mispricing is the tight tracking of asset managers to market cap benchmarks. This seemingly prudent practice is commonly adopted by giant pensions, sovereign-wealth funds and endowment funds. However, it gives rise to momentum trading, excessive focus on short-term price movements, high volatility for overvalued assets, and overvaluation for the aggregate market.

Tell Me More

Our Latest Ideas

Fiduciary duty in dysfunctional markets

Financial markets play a central role in the capitalist economy, allocating new savings to productive investment, acting as a signalling device to corporate management, and providing liquidity to investors. The efficient markets paradigm claims that competition among investors keeps asset prices close to fair value. A new interpretation contends that stock markets have morphed into a contest between two sets of investors: those seeking short-term gain matched against those targeting long-term value. This unending battle corrupts prices, creates macroeconomic instability and costs vast sums in asset management fees.

Tell Me More

Innovation and shirking in financial markets

Innovation is usually viewed by economists as a productivity-enhancing force, powering economic growth in modern capitalist societies. This is just as true in the investment industry, where new products are assumed to help consumers meet their individual financial needs. This optimistic view ignores the damage that can be done by innovations, especially in the financial sector, where agency issues create the potential for negligence and rent extraction.

Tell Me More

Paul Woolley Centre for the Study of Capital Market Dysfunctionality

The PW Centre produces and disseminates high-quality research focused on the workings of capital markets and the social efficiency of allocations achieved in these markets.

Visit The Website

Our Blog

View All

of our latest blogs

Giant funds must curb short-termism

Many of the problems of present-day finance have their origins in the horizons set along the investment chain. The key players in this chain are the giant pension, sovereign wealth and endowment funds who appoint external asset managers, who in turn invest in companies. If these funds invest with their eyes set partially or largely on the short term, it sends a clear message down the line and embeds similar standards throughout the capitalist system.

Tell Me More

Markets as amplifiers of crises

The finance sector is widely recognised as an originator of periodic crises. What is less widely discussed is the unhelpful role that the finance sector can play in amplifying crises that emerge from entirely non-financial origins.

Tell Me More