Expert insights into forces shaping policy decisions
- In politics and economics, unsuspected forces can have a profound impact on anything from the administration of justice to the movement of financial markets.
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The event, which took place in Central on April 23, was another opportunity for leading academics from HKUST Business School to share recent findings with a wider audience and invite questions and feedback. As they did so, it also became clear that greater public awareness and alternative sources of data may well lead to further change.
Focusing on the US, Professor Deniz Okat, Assistant Professor in the Department of Finance, explained how the government has a great deal of control over the juridical system in the way candidates are nominated and confirmed for positions as federal judges.
Older judges are easier to agree on, largely because they will have fewer opportunities to make an impact. My theoretical model predicts weaker nominees are more likely to be appointed.
Older judges are easier to agree on, largely because they will have fewer opportunities to make an impact. My theoretical model predicts weaker nominees are more likely to be appointed.
However, the US constitution also includes many checks and balances. In many cases, these make it necessary for the ruling party to compromise with the opposition, the idea being that this leads to the best overall outcome.
In studying nominations to the judiciary, Okat found that confirmation in the Senate is more likely - and faster - when the president compromises on the candidate. Typically, that would be by supporting an older nominee who, people assume, will serve a shorter time on the bench.
But doing so disregards the general evidence that younger appointees, once they have mastered the role, tend to be more effective for longer. Therefore, the “power struggle” surrounding appointments and the system of checks and balances comes with a price.
“Many people think compromise, meeting in the middle, is good because different opinions are reflected in the outcome,” Okat said. “But there is a dark side. For example, with federal judges the probability that agreement will be reached decreases with the strength of the nominee. And the delays and polarisation between the parties increase.”
He added that, to many observers, age might correlate with competence. But, where possible, it is important to subject this theory to an empirical test, and Okat has developed a model to support his views.
“My argument is that we should appoint younger judges - between 1989 and 2014 the average age of nominees was around 50. Examples show that they learn by doing and their decisions improve over the years. But older judges are easier to agree on, largely because they will have fewer opportunities to make an impact. My theoretical model predicts weaker nominees are more likely to be appointed.”
Following on, Professor Abhiroop Mukherjee, Associate Professor in the Department of Finance of HKUST Business School, spoke about the unique power governments currently have in collecting macroeconomic data. They aggregate this to produce everything from GDP and employment statistics to numbers for inflation, wage growth, and the amount of oil being stored.
Around the world, the release of aggregated information by governments affects financial markets to different degrees. But that interaction may change if alternative data sourced, say, from commercial satellites allows markets to know what is happening in the economy before governments release their figures
In recent times, many traders have started using alternative sources of data to build trading strategies that [anticipate] new government information before it is announced.
In recent times, many traders have started using alternative sources of data to build trading strategies that [anticipate] new government information before it is announced.
“Governments are often the only source of macroeconomic information,” Mukherjee said. “That makes them a monopoly power, and their announcements can move financial markets. But in recent times, many traders have started using alternative sources of data to build trading strategies that [anticipate] new government information before it is announced.”
One such tactic is to tap into social media to get an early sense of what is happening in the economy as a whole.
Another is to use satellite imagery to monitor specific locations crucial to certain industries and, thereby, get a feel for the ongoing level of activity.
By keeping an eye on key points in the supply chain – for example, deliveries to or truck departures from a microchip factory – or on storage facilities or agricultural centres, some market players can now get a good estimate of whatever macroeconomic numbers are on the way.
“The main idea here is to focus on measuring activity at supply chain bottlenecks,” Mukherjee said. “For example, we could look at the market for WTI crude oil and find where it is possible to erode the government monopoly on information.”
One way, using satellite images, would be to check the level of inventory in the largest storage facilities as a fairly reliable indicator of the direction in which prices will be heading.
“Crude oil needs to be stored in tanks covered with floating lids,” Mukherjee said. “We can monitor five towns in the US with these tanks and, in sunny weeks, satellite images help to measure the shadows indicating the depth in each one. We can then compare our predictions with the real numbers announced by the government.”
Over time, he noted, investors can expect more access to this kind of alternative data, meaning government-supplied information will gradually have less power to move prices.
The next presentation in the series will take place on May 8.