Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.

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