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World Wide Currency (VOX EU) Is it possible to introduce a globally recognised electronic currency in the future alongside the national currencies? Researchers test this idea with a two-country model and conclude that it’s theoretically doable. Although for monetary policymakers, there’s certainly so much more to do to get them prepared for this futuristic trend.
A Volatility Smile-Based Uncertainty Index (Central Bank of Brazil) Introduces a new index to measure uncertainty: the “Volatility Smile-Based Uncertainty” (VSU). It looks at the discrepancy of the implied volatility of exchange rate options, and after calculating this value for five major emerging economies, concludes that VSU is negatively associated with industrial production and has peaks close to turbulent periods.
Ten Applications of Financial Machine Learning (SSRN/Cornell University) Explores how the core of machine learning – studying past data to predict future outcomes – can be revolutionary for the financial services industry. However, it also warns that machine learning tools are vulnerable to input selection biases and that can lead to undesired consequences.
Perceiving Risk Wrong: What Happens When Markets Misprice Risk? (Bank Underground) Risk perceptions are extremely subjective and hard to quantify. This paper examines how overpricing and underpricing market risks can both eventually lead to an economic downturn in the manner of a chain reaction.
FinTech, BigTech, and the Future of Banks (NBER) Explores areas in which non-bank fintech firms can outplay their banking rivals. Being less regulated than banks gives fintech firms an important competitive advantage. Large tech firms are also challenging traditional banking businesses such as consumer finance and loans due to their capability to tap into large amounts of unique user data.