297 posts on "Financial Markets"
February 1, 2021
The Law of One Price in Equity Volatility Markets
Can option traders take a square root? Surprisingly, maybe not. This post shows that VIX futures prices exhibit significant deviations from their option-implied upper bounds—the square root of variance swap forward rates—thus violating the law of one price, a fundamental concept in economics and finance. The deviations widen during periods of market stress and predict the returns of VIX futures. Just as the stock market struggles with multiplication, the equity volatility market appears unable to take a square root at times.
Posted at 7:00 am in Financial Markets | Permalink
January 6, 2021
The International Spillover of U.S. Monetary Policy via Global Production Linkages
Julian di Giovanni describes work with Galina Hale that employs an empirical framework to quantify the role of the global production network in transmitting U.S. monetary policy across international stock markets.
Posted at 7:00 am in Bank Capital, Banks, Exports, Financial Markets, International Economics, Monetary Policy, Stocks, Tariffs | Permalink
December 21, 2020
What’s Up with Stocks?
“U.S. stocks are racing toward a second consecutive quarter of dramatic gains, continuing a historic stock-market recovery that few predicted in the depths of the March downturn,” said a September Wall Street Journal article. “The stock market is detached from economic reality. A reckoning is coming,” said the Washington Post. What is going on? In this post, I look not at what stocks have actually done or will do, but at what investors expected should have happened, and what they expect will happen going forward. It turns out that, at least by the particular measure of expectations I consider, investors expected stock returns to be high all along and continue to expect the same in the future.
November 30, 2020
Treasury Market When‑Issued Trading Activity
Despite the importance of when-issued trading of Treasury securities, and the advent of FINRA’s TRACE database of trading statistics, little is known publicly about the level of WI activity. In this post, the authors address this gap by analyzing WI transactions recorded in TRACE.
November 24, 2020
How Bank Reserves Are Distributed Matters. How You Measure Their Distribution Matters Too.
Changes in the distribution of banks’ reserve balances are important since they may impact conditions in the federal funds market and alter trading dynamics in money markets more generally. In this post, we propose using the Lorenz curve and Gini coefficient as a new approach to measuring reserve concentration. Since 2013, concentration, as captured by the Lorenz curve and the Gini coefficient, has co-moved with aggregate reserves, decreasing as aggregate reserves declined (such as in 2015-18) and increasing as aggregate reserves increased (such as at the onset of the COVID-19 pandemic).
Posted at 7:00 am in Bank Capital, Banks, Fed Funds, Federal Reserve, Financial Markets, Inequality, Panic | Permalink
October 23, 2020
At the New York Fed: Sixth Annual Conference on the U.S. Treasury Market
On September 29, 2020, the New York Fed hosted the sixth annual Conference on the U.S. Treasury Market. The one-day event, held virtually this year, was co-sponsored by the U.S. Department of the Treasury, the Federal Reserve Board, the U.S. Securities and Exchange Commission (SEC), and the U.S. Commodity Futures Trading Commission (CFTC). The agenda featured a number of panels and speeches on the effects of the COVID-19 pandemic on the Treasury market in March 2020, the ensuing policy response, and ways that market resiliency could be improved in light of the vulnerabilities revealed. Two speeches also touched on the ongoing transition from LIBOR to alternative reference rates.
October 19, 2020
How Has Post‑Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?
“Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.
Posted at 7:00 am in Bank Capital, Banks, Central Bank, Corporate Finance, Financial Institutions, Financial Markets, Regulation | Permalink
October 1, 2020
The Impact of the Corporate Credit Facilities
American companies have raised almost $1 trillion in the U.S. corporate bond market since March. Based on Compustat data, these companies employ more than 16 million people, and have spent more than $280 billion on capital expenditures in the first half of 2020, thereby supporting future economic activity. In this post, we document the contribution of the Primary Market and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) to bond market functioning, summarizing a detailed evaluation described in a new working paper. Improvements documented in an earlier blog post on the corporate facilities continued after the initial announcement as purchases began, and can be attributed both to the positive effects of Federal Reserve interventions generally as well as the facilities’ direct impact on eligible issuers in particular.
August 26, 2020
How Does the Liquidity of New Treasury Securities Evolve?
In a recent Liberty Street Economics post, we showed that the newly reintroduced 20-year bond trades less than other on-the-run Treasury securities and has similar liquidity to that of the more interest‑rate‑sensitive 30-year bond. Is it common for newly introduced securities to trade less and with higher transaction costs, and how does security trading behavior change over time? In this post, we look back at how liquidity evolved for earlier reintroductions of Treasury securities so as to gain insight into how liquidity might evolve for the new 20-year bond.
August 20, 2020
Market Function Purchases by the Federal Reserve
This post describes efforts taken by the Federal Reserve to support and sustain the Treasury and MBS markets following the COVID-19 outbreak as well as prior “market functioning” interventions in 1939, 1958, and 1970.
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