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191 posts on "Financial Markets"

November 15, 2017

The Low Volatility Puzzle: Is This Time Different?



LSE_The Low Volatility Puzzle: Is This Time Different?

As stock market volatility hovers near all-time lows, some analysts are questioning whether investors are complacent, drawing an analogy to the lead-up to the financial crisis. But, is this time different? We follow up on our previous post by investigating the persistence of low volatility periods. Historically, realized stock market volatility is persistent and mean-reverting: low volatility today predicts slightly higher, but still low, volatility one month and one year from now. Moreover, as of mid-September, the market is pricing implied volatility of 19 percent in one to two years’ time. This level contrasts with the pre-crisis period when the term structure of implied volatility was relatively flat, which suggests this time may indeed be different, at least as measured by market participants’ pricing of risk.

Continue reading "The Low Volatility Puzzle: Is This Time Different?" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (0)

November 13, 2017

The Low Volatility Puzzle: Are Investors Complacent?



LSE_The Low Volatility Puzzle: Are Investors Complacent?

In recent months, some analysts and policymakers have raised concerns about the unusually low level of stock market volatility. For example, in the June Federal Open Market Committee (FOMC) minutes “a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.” In this post, we review this concern and find the evidence on investor complacency is mixed. On one hand, we present a view suggesting that historical volatility may have been abnormally high, rather than current volatility being abnormally low. On the other hand, we find that estimates of the volatility risk premium are somewhat low, which is consistent with the view that investor risk tolerance has increased. We extend this analysis in a related post publishing on Wednesday.

Continue reading "The Low Volatility Puzzle: Are Investors Complacent? " »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (2)

November 06, 2017

Mission Almost Impossible: Developing a Simple Measure of Pass-Through Efficiency



LSE_2017_Mission Almost Impossible: Developing a Simple Measure of Pass-Through Efficiency

Short-term credit markets have evolved significantly over the past ten years in response to unprecedentedly high levels of reserve balances, a host of regulatory changes, and the introduction of new monetary policy tools. Have these and other developments affected the way monetary policy shifts “pass through” to money markets and, ultimately, to households and firms? In this post, we discuss a new measure of pass‑through efficiency, proposed by economists Darrell Duffie and Arvind Krishnamurthy at the Federal Reserve’s 2016 Jackson Hole summit.

Continue reading "Mission Almost Impossible: Developing a Simple Measure of Pass-Through Efficiency" »

Posted by Blog Author at 7:00 AM in Financial Markets, Monetary Policy | Permalink | Comments (0)

October 12, 2017

Just Released: New York Fed Markets Data Dashboard



LSE_2017_http://libertystreeteconomics.newyorkfed.org/2017/10/just-released-new-york-fed-markets-data-dashboard.html

The Federal Reserve Bank of New York releases data on a number of market operations, reference rates, monetary policy expectations, and Federal Reserve securities portfolio holdings. These data are released at different times, for different types of securities or rates, and for different audiences. In an effort to bring this information together in a single, convenient location, the New York Fed developed the Markets Data Dashboard, which was launched today.

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Posted by Blog Author at 10:00 AM in Federal Reserve, Financial Markets, Monetary Policy, Repo | Permalink | Comments (0)

September 06, 2017

What Drives International Bank Credit?



LSE_2017_What Drives International Bank Credit?

A major question facing policymakers is how to deal with slumps in bank credit. The policy prescriptions are very different depending on whether the decline is a result of global forces, domestic demand, or supply problems in a particular banking system. We present findings from new research that exactly decompose the growth in banks’ aggregate foreign credit into these three factors. Using global banking data for the period 2000-16, we uncover some striking patterns in bilateral credit relationships between consolidated banking systems and borrowers in more than 200 countries. The most important we term the “Anna Karenina Principle” of global banking: all healthy credit relationships behave alike; each unhealthy credit relationship is unhealthy in its own way.

Continue reading "What Drives International Bank Credit?" »

August 09, 2017

Investor Diversity and Liquidity in the Secondary Loan Market



LSE_Investor Diversity and Liquidity in the Secondary Loan Market

Over the last two decades, the U.S. secondary loan market has evolved from a relatively sleepy market dominated by banks and insurance companies that trade only occasionally to a more active market comprising a diversified set of institutional investors, including collateralized loan obligations (CLOs), loan mutual funds, hedge funds, pension funds, brokers, and private equity firms. This shift resulted from the growing presence of these investors in the syndicates of corporate loans, as shown in the chart below. In 1991 the average term loan had just two different types of investors; by 2013 that number had grown to five.

Continue reading "Investor Diversity and Liquidity in the Secondary Loan Market" »

Posted by Blog Author at 7:00 AM in Banks, Financial Markets | Permalink | Comments (0)

August 07, 2017

Regulatory Incentives and Quarter-End Dynamics in the Repo Market



LSE_Regulatory Incentives and Quarter-End Dynamics in the Repo Market

Since the global financial crisis, central bankers and other prudential authorities have been working to design and implement new banking regulations, known as Basel III, to reduce risk in the financial sector. Although most features of the Basel III regime are implemented consistently across jurisdictions, some important details vary. In particular, banks headquartered in the euro area, Switzerland, and Japan report their leverage ratios—essentially, capital divided by total consolidated assets—as a snapshot of their value on the last day of the quarter. In contrast, institutions headquartered in the United States and the United Kingdom report most leverage ratio components as averages of their daily values over the quarter. In this post, we study the impact of this difference in regulatory implementation on rates and quantities borrowed in the U.S. repo market.

Continue reading "Regulatory Incentives and Quarter-End Dynamics in the Repo Market" »

Posted by Blog Author at 7:00 AM in Banks, Financial Markets, Repo | Permalink | Comments (2)

June 28, 2017

Market Liquidity after the Financial Crisis



LSE_Market Liquidity after the Financial Crisis

The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity.

Continue reading "Market Liquidity after the Financial Crisis" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (3)

June 19, 2017

Introducing the Revised Broad Treasuries Financing Rate



LSE_Introducing the Revised Broad Treasuries Financing Rate

The Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, is proposing to publish three new overnight Treasury repurchase (repo) benchmark rates. Recently, the Federal Reserve decided to modify the construction of the broadest proposed benchmark rate (the other two proposed rates are expected to remain unchanged; see the Bank’s announcement on May 24). In this post, we describe the changes to this rate in further detail. We compare this revised rate to the originally proposed benchmark rate and show that, in the post-liftoff period, it trades higher, on average.

Continue reading "Introducing the Revised Broad Treasuries Financing Rate" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (2)

May 24, 2017

Dealer Balance Sheets and Corporate Bond Liquidity Provision



Dealer Balance Sheets and Corporate Bond Liquidity Provision

Regulatory reforms since the financial crisis have sought to make the financial system safer and severe financial crises less likely. But by limiting the ability of regulated institutions to increase their balance sheet size, reforms—such as the Dodd-Frank Act in the United States and the Basel Committee's Basel III bank regulations internationally—might reduce the total intermediation capacity of the financial system during normal times. Decreases in intermediation capacity may then lead to decreased liquidity in markets in which the regulated institutions intermediate significant trading activity. While recent commentary by market participants claims that this is indeed the case—Wall Street Journal article [subscription required] notes that “three-quarters of institutional bond investors say that liquidity provided by bond dealers has declined in the past year...”—empirical studies have struggled to find evidence supporting this narrative. In this post, we summarize the findings of our recent article in the Journal of Monetary Economics that addresses the apparent disconnect between the market-participant commentary and the empirical evidence by focusing on the relationship between bond-level liquidity and financial institutions’ balance sheet constraints.

Continue reading "Dealer Balance Sheets and Corporate Bond Liquidity Provision" »

Posted by Blog Author at 7:00 AM in Dealers, Financial Institutions, Financial Markets | Permalink | Comments (0)
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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

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