Financial markets and financial information

There is a chicken and egg relation between financial markets and financial information: the markets need data to function well but the data is generated only when the markets become vibrant. This was my response to Peeyush Mishra who emailed me this week with a comparison of the richness of data that is available about the US housing market (OFHEO, Case-Shiller, NAR, NAHB and Commerce Department) with the paucity of such data for India. Peeyush asked me whether we should make a sustained push to collect and organize more of this data and put it in the national domain.

My argument was that we have already traveled down this top-down route with the National Statistical Commission that submitted its report in 2001 and the National Statistical Commission that was established in 2006 following the recommendations of that report.

The alternative (bottom-up) approach is to rely on the demand pull that emerges from well developed financial markets. These markets not only create demand for financial data, but this demand is backed by willingness to pay for the data – it is as the economists like to say “effective demand”. Both private sector and public sector providers respond to this demand. It may appear surprising but it is a fact that even Indian public sector providers respond to private sector demand for data particularly when this demand starts being met by private sector providers. Once they get into the game, public providers also sometimes try to shut out the private providers on vague grounds related to the integrity of the data. Viewed in this light, the main reason why the US has such rich data on housing is the huge mortgage and mortgage derivative market in that country.

It is also true that data providers (both private and public) are more reliable when the data they generate is used by financial markets than when it used primarily by academics. This is because while academics are content to run some outlier tests and get rid of the worst errors in the data, market participants have less tolerance for mistakes in the data. The private sector can also help in scrutinizing the validity of the methodology. For example, in 2003, Statistics South Africa was forced to correct flaws in the estimation of the housing rentals component of the consumer price index in response to complaints by analysts.

Posted at 3:55 pm IST on Fri, 7 Dec 2007         permanent link

Categories: derivatives, regulation, statistics

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