Thursday, August 21, 2014

21/8/2014: G20: Does it matter?

To many analysts and observers, in recent years, G20 has emerged as a broader and more inclusive alternative to the restricted club of advanced super-economies of G7 or G8 (see my earlier note on G8 here:

A new ECB paper by  Lo Duca, Marco and Stracca, Livio, titled "The Effect of G20 Summits on Global Financial Markets" (February 18, 2014, ECB Working Paper No. 1668: acknowledges that "In the wake of the global financial crisis, the G20 has become the most important forum of global governance and cooperation, largely replacing the once powerful G7."

All good so far but the question is: does G20 matter to the financial markets? Do summits and new announcements coming from G20 move the markets? "In this paper we run an event study to test whether G20 meetings at ministerial and Leaders level have had an impact on global financial markets. We focus on the period from 2007 to 2013, looking at equity returns, bond yields and measures of market risk such as implied volatility, skewness and kurtosis. Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants."

Of course, the sample covers primarily the period of the Global Financial Crisis and the Great Recession, so one might think that G20 announcements might be swamped by other, more market-linked news. The problem with this is that during the crises, information - any information - acquires more significant value: (see box-out). So, no, the sample period is not at fault... 

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