ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Chart C Trading volumes for governmentbond futuresChart D Trading volumes in equity markets(millions of contracts; three-month moving averages of dailydata)(index: July 2007 = 100; three-month moving averages ofmonthly data)German ten-year Euro-Bund futuresGerman five-year Euro-Bobl futuresUS ten-year Treasury note futuresUS five-year Treasury note futuresDow Jones EURO STOXX indexStandard & Poor’s 500 index1.81.81601601.61.61401401.41.41201201.21.00.80.60.41.21.00.80.60.41008060401008060400.20.220200.02000 2001 2002 2003 2004 2005 2006 2007 2008Sources: Chicago Mercantile Exchange/Chicago Board of Tradeand Eurex Deutschland.Note: The notional size of each contract is €100,000 for theEuro-Bobl and Euro-Bund futures and USD 100,000 for thefive-year and ten-year Treasury note futures.0.002000 2001 2002 2003 2004 2005 2006 2007 2008Sources: Bloomberg and ECB calculations.Note: Volumes are measured as the total number of traded sharesfor the indices’ constituent firms.0Anecdotal evidence suggests that bond dealers have significantly reduced the size of their balancesheets in response to the increased volatility in yields and the higher funding costs. Since futurescontracts are very often used for the hedging of interest rate risk on dealers’ bond portfolios, thenumber of futures traded for this purpose may have declined. Chart C shows that the tradingvolume for futures contracts has indeed declined since the onset of the financial turmoil inmid-2007. In particular, the number of contracts traded for the most frequently used instrument,the ten-year government bond future, has declined by more than two-thirds in the United Statesand by more than half in Germany since mid-2007. Slightly smaller declines have been observedin the trading volumes for five-year government bond futures.Chart D shows that for stock markets, volumes – measured as the average number of stockstraded per month – have remained relatively resilient in both the euro area and the United States,despite declining somewhat at the beginning of 2009, particularly in the euro area. As notedabove, the relatively robust trading volumes observed on stock markets may reflect the manyinformation shocks affecting markets. All other things being equal, market prices should adjustwhen new information becomes available. Thus, when information shocks hit markets with agreater frequency than normal, the frequency of trading will also increase. For stock markets,these information shocks can reflect both revised expectations of future dividends and changesin the discount factor. By contrast, cash flows from standard government bonds are fixed innominal terms, and so valuations respond only to changes in the discount factor.The considerable increase in macroeconomic uncertainty in the course of 2008, combined withmarket participants’ downsizing of balance sheets, has generated spikes in volatility and a severedeterioration in market liquidity in many financial market segments. This has even affectedECBAnnual Report200845