Communiqué of the Euro-currency Standing Committee of the Group of Ten

The BIS is today publishing a volume of research papers entitled "The Measurement of Aggregate Market Risk". The volume was prepared by a group of central bank researchers for the Euro-currency Standing Committee of the Group of Ten central banks. The volume addresses measurement of market risk, market dynamics, market liquidity and the role that information plays in shaping market outcomes in unsettled circumstances. In publishing the volume, which represents the views only of the authors, the Committee hopes to stimulate further research on these topics by market participants and the academic community.

The behaviour of markets in the face of shocks has long been an area of fundamental interest to central banks. In recent years, the robustness of market liquidity has assumed greater importance as a growing number of market participants depend on traded financial markets for their investment and risk management needs. One set of participants who rely on market liquidity is intermediaries engaged in dynamic trading strategies, such as trading related to dynamic hedging or portfolio insurance. Previous research has highlighted the possibility that such strategies could, at times, have adverse repercussions for market functioning. This could happen when markets cannot distinguish dynamic-hedging-related trading from fundamentally based trading.

The research volume explores the question of whether data on exposures to large market movements under specific stress scenarios could be collected from market intermediaries, aggregated across whole markets, and then disseminated to market participants to alleviate such information problems. The research considers methodologies for designing stress tests which could be used in the collection and aggregation of data, as well as frameworks for incorporating feedback and liquidity effects into an aggregate risk measurement process. The benefits of such information would depend on its accuracy, timeliness and frequency, as well as upon whether mechanical feedback trading is large relative to other investors' repositioning during market breaks.

When the papers were discussed by the Committee, the Committee accepted the researchers' conclusion that this research did not establish an adequate technical basis nor adequate justification for collecting aggregate market risk data. However, the Committee decided to encourage continuing work on the aspects of market functioning and price dynamics under stress addressed in the volume. A research conference devoted to these subjects, organised jointly by the Bank of England, the Bank of Japan, the Federal Reserve Board and the BIS, will be held at the Bank of Japan in November 1998.

Note for editors. The Euro-currency Standing Committee is a sub-committee of the Governors of the central banks of the Group of Ten countries. It comprises senior central bank officials from Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Luxembourg, Sweden, Switzerland, the United Kingdom and the United States. Its current chairman is Toshihiko Fukui, Senior Deputy Governor of the Bank of Japan. The Committee is supported by a Secretariat located at the BIS.