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90 posts on "Financial Markets"

September 19, 2014

What Explains the June Spike in Treasury Settlement Fails?

In June of this year—as we noted in the preceding post—settlement fails in U.S. Treasury securities spiked to their highest level since the implementation of the fails charge in May 2009. Our first post reviewed what fails are, why they arise, and how they can be measured. In this post, we dig into the fails data to identify possible explanations for the high level of fails in June. We observe that sequential fails of several benchmark securities accounted for the lion’s share of fails in June, but that fails in seasoned securities—which have been trending upward for some time—were also elevated.

Continue reading "What Explains the June Spike in Treasury Settlement Fails?" »

Posted by Blog Author at 7:05 AM in Financial Institutions, Financial Markets | Permalink | Comments (1)

Measuring Settlement Fails

In June 2014, settlement fails of U.S. Treasury securities reached their highest level since the implementation of the Treasury fails charge in May 2009, attracting significant attention from market participants. In this post, we review what fails are, why they are of interest, and how they can be measured. In a companion post following this one, we evaluate the particular circumstances of the June 2014 fails.

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

September 18, 2014

At the N.Y. Fed: Workshop on the Risks of Wholesale Funding

Risk of Wholesale Funding Conference The Federal Reserve Banks of Boston and New York recently cosponsored a workshop on the risks of wholesale funding. Wholesale funding refers to firm financing via deposits and other liabilities from pension funds, money market mutual funds, and other financial intermediaries. Compared with stable retail funding, the supply of wholesale funding is volatile, especially during financial crises. For instance, when a firm relies on short-term wholesale funds to support long-term illiquid assets, it becomes vulnerable to runs by its wholesale creditors, as seen during the recent financial crisis. The workshop was organized to promote a better understanding of the risks posed by wholesale funding and to explore policy options for minimizing these risks.

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Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (1)

August 11, 2014

Inflation in the Great Recession and New Keynesian Models

Since the financial crisis of 2007-08 and the Great Recession, many commentators have been baffled by the “missing deflation” in the face of a large and persistent amount of slack in the economy. Some prominent academics have argued that existing models cannot properly account for the evolution of inflation during and following the crisis. For example, in his American Economic Association presidential address, Robert E. Hall called for a fundamental reconsideration of Phillips curve models and their modern incarnation—so-called dynamic stochastic general equilibrium (DSGE) models—in which inflation depends on a measure of slack in economic activity. The argument is that such theories should have predicted more and more disinflation as long as the unemployment rate remained above a natural rate of, say, 6 percent. Since inflation declined somewhat in 2009, and then remained positive, Hall concludes that such theories based on a concept of slack must be wrong.

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Posted by Blog Author at 7:00 AM in Financial Markets, Macroecon, Monetary Policy | Permalink | Comments (1)

August 04, 2014

Financial Stability Monitoring

In a recently released New York Fed staff report, we present a forward-looking monitoring program to identify and track time-varying sources of systemic risk. Our program distinguishes between shocks, which are difficult to prevent, and the vulnerabilities that amplify shocks, which can be addressed. Drawing on a substantial body of research, we identify leverage, maturity transformation, interconnectedness, complexity, and the pricing of risk as the primary vulnerabilities in the financial system. The monitoring program tracks these vulnerabilities in four sectors of the economy: asset markets, the banking sector, shadow banking, and the nonfinancial sector. The framework also highlights the policy trade-off between reducing systemic risk and raising the cost of financial intermediation by taking pre-emptive actions to reduce vulnerabilities.

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July 09, 2014

Lifting the Veil on the U.S. Bilateral Repo Market

Adam Copeland, Isaac Davis, Eric LeSueur, and Antoine Martin

The repurchase agreement (repo), a contract that closely resembles a collateralized loan, is widely used by financial institutions to lend to each other. The repo market is divided into trades that settle on the books of the two large clearing banks (that is, tri-party repo) and trades that do not (that is, bilateral repo). While there are public data about the tri-party repo segment, there is little to no information on the bilateral repo segment. In this post, we update a methodology we developed earlier to estimate the size and composition of collateral posted for bilateral repos, and find that U.S. Treasury securities are the dominant form of collateral for bilateral repos. This new finding implies that the collateral posted for bilateral repos is of higher quality than the collateral posted for tri-party repos.

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

June 25, 2014

Do Currency Forwards Say Anything about the Future Value of the U.S. Dollar?

J. Benson Durham

Currency forwards do include useful information about the future value of the U.S. dollar, but any messages are hard to decipher without tools. Just as the yield curve reflects expected short rates as well as term premiums, foreign exchange forwards embed not only anticipated depreciation but also premiums for currency risk. This complicates life for both central bankers, who routinely tease information from asset prices, and portfolio managers, who need to estimate expected returns and beat benchmarks. Most analyses of market quotes suggest that forwards as well as interest rate differentials largely comprise noise rather than information about anticipated currency returns. However, drawing on my recent staff report, a new method, analogous to common arbitrage-free term structure models and based solely on observable prices, suggests that forwards provide lucid clues about the expected path of the U.S. dollar.

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

June 09, 2014

What’s Your WAM? Taking Stock of Dealers’ Funding Durability

Adam Copeland, Isaac Davis, and Ira Selig

One of the lessons from the recent financial crisis is the need for securities dealers to have durable sources of funding. As evidenced by the demise of Bear Stearns and Lehman Brothers, during times of stress, cash lenders may pull away from firms or funding markets more broadly. Lengthening the tenor of secured funding is one way for a dealer to mitigate the risk of losing funding when market conditions are strained. In this post, we use clearing bank tri-party repo data to examine the degree to which dealers are lengthening the maturities of their sources of funding. (Aggregate statistics using these data are available here.) We focus on less liquid securities because it is for these assets that the durability of funding matters the most. We find substantial progress overall, with the weighted-average maturity (WAM) of funding of the less liquid securities more than doubling from January 2011 to May 2014. Nevertheless, there is currently a wide dispersion in dealer-level WAM, raising questions as to whether all dealers have enough durability in their funding of risk assets.

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Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets | Permalink | Comments (4)

June 02, 2014

Do Expected, in addition to Spot, U.S. Treasury Term Premiums Matter?

J. Benson Durham

The spot term premium is the extra compensation investors require, today, to own long-term as opposed to short-term risk-free debt. The expected term premium is what they anticipate demanding later. Notably, the two don’t necessarily move in the same direction. Just as near-term expected short rates could decline with surprisingly easy monetary policy, while simultaneously more distant-horizon expected rates could increase if that action boosts expected longer-run inflation or growth, so too could investors require less duration compensation immediately, perhaps as the central bank announces plans to buy assets, yet build in greater risk premiums for later amid allowances for a bumpy withdrawal of the punchbowl. Why is this distinction relevant? Nearly everyone agrees that historically low term premiums coincided with unconventional measures, but we know less about how long investors expected low premiums to prevail. Drawing on my staff report, formal models suggest that expected term premiums did drop along with spot measures, but a survey-based estimate notably increased since 2007. This hardly means the Federal Open Market Committee (FOMC) didn’t provide extraordinary support beyond the standard short rate channel, but perhaps investors weren’t insouciant and instead fathomed a possibly tricky exit from prolonged policy accommodation.

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

May 14, 2014

When Are Equity Investors Paid to Take Risk?

J. Benson Durham

Most gauges of “the” equity risk premium have declined since the financial crisis but remain elevated, even as broad market indexes near record highs. The implication for investors seems simple; they can expect to be rewarded handsomely for bearing equity risk, relative to holding Treasuries. Lessons for central bankers may also appear straightforward. Sizable premiums could imply that aggressive unconventional monetary policy hasn’t necessarily eased financial market conditions satisfactorily. However, my recent New York Fed staff report suggests that such a cursory reading ignores the term structure of equity premiums, which conveys a subtler story about more precisely when over the investment horizon investors get paid to take risk and how monetary policy accommodation may have affected stock prices.

Continue reading "When Are Equity Investors Paid to Take Risk?" »

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