This was especially the case in the euro area but also in the United States, while stagnation continued in Japan. Certain emerging regions, such as Asia and Central and Eastern Europe, were more buoyant. But the economic results in Latin America were very poor. Inflation rates generally held at low levels and the trade imbalances between the main areas increased. Some of the uncertainty bearing on the world economy was associated with a complicated geopolitical situation. Unfortunately, it cannot be said that all the factors holding back an international recovery are behind us. The swift conclusion of the Iraq war has eliminated some of the main factors of uncertainty and this, along with cheaper oil and improved stock market prices, should contribute to entrenching a scenario that allows a more robust though still moderate pace of growth, even though doubts remain about the vigour of growth in a climate of lacklustre private investment. But the confidence crisis besetting the world economy was not only the result of the geopolitical situation. The disclosure of a series of irregularities in the financial statements of certain major companies, especially in the United States, fuelled a notable lack of confidence about the information provided to the markets and called into question not only companies’ reported earnings, but also the suitability of accounting regulations and the independence of auditors and investment banks.
A striking example of rational mimetic behaviour is the influence that hedge funds posess as “opinion leaders” and trend setters. By its nature, trend following amplifies the imbalance that may at some point affect a market, potentially leading to vicious circles of price adjustment and liquidation of positions. Moreover, increasing numbers of participants are able to access financial markets directly, while the expertise to deal with a wide range of technical information is not evenly distributed. This may also reinforce the role of “gurus”. Index management, as a fund management technique, has proven very popular on equity markets and may have contributed to exacerbating fluctuations in financial asset prices. Because their goal is to mimic the performance of indices, “passive managers” constantly strive to match the composition of their benchmark. They thus help to amplify market trends, buying more as the market rises and increasingly liquidating as the market drops. It can be argued that index funds distort the prices of the targeted indices and that, as a result, the indices end up creating rather than measuring performance. 13  Leading indicators of currency crisis in emerging countries – BURKART, COUDERT – Notes d’Etude et de Recherche – Banque de France – 2000. 6  BIS Review 71/2002  The impact of risk management techniques on market dynamics is particularly enlightening with regard to the question of asset price overshooting.