BIS central bankers’ speeches  Chart 9:  Chart 10:  Volatility and correlation of S&P 500  Excess volatility Per cent 20  S&P 500 1Y Correlation 70% 1990 - 2004  Per cent 60  1yr Correltaion (LHS) 15  60%  2005 - 2010  Excess correlation (LHS)  1yr Volatility (RHS)  50% 40%  +  30%  -  40  5 0  30  5  20%  20% 30% 40% S&P 500 1Y volatility  10  15  0% 10%  20  10  10%  0%  50  10  20  50%  0 90 92 94 96 98 00 02 04 06 08  Source: JP Morgan and Bank calculations. Source: JP Morgan and Bank calculations. Chart 11:  Chart 12:  Simulated price series under different Hurst coefficients  Distribution of simulated returns at different time horizons with H=0.9(a)  H=0.5 H=0.7 H=0.9  40  T=1  20 + 0  T=20 T=50  20 40 60 80 100 Time Source: Bank of England. -  +  Source: Bank of England (a) Returns at different time horizons have been scaled by the inverse of the square root of time, 1/sqrt(T).
And thus, Willem Buiter and Erik Nielsen in their recent paper (2007): “Mundell on His Head: Asymmetric shocks are good for you, thanks to Economic and Monetary Union in Europe”, argue that home bias has been receding in the Eurozone, so an increasing number of households and companies now hold a Euro-wide portfolio. In finance it is good when returns on particular assets are negatively correlated, because it helps you to diversify risk and achieve the better risk-return tradeoff. Therefore, if asymmetric shocks hit monetary union, it will result in negatively correlated returns on euro-zone assets portfolio, so such portfolio holders will be better off in comparison with a scenario of a symmetric negative shock. Of course this train of thought may seem too narrow, since it boils down merely to the capital income analysis and loses sight of other effects of asymmetric shocks, such as those on the labor market situation. Nevertheless, this example provides a clear evidence that our cost and benefit analysis may change every so often in tandem with new ideas that smart people come up with. However, before I proceed, I would like to make two important points. First, I would like to note that views presented here are my own and they do not represent the official position of the National Bank of Poland. Second, my economic background allows me to speak in terms of standard economic variables: output, consumption, prices etc. On the other hand, I do not feel competent to speak about highly immeasurable values like national pride.