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11 posts on "Financial Markets"
September 8, 2022

How Can Safe Asset Markets Be Fragile?

Photo: carton on eggs with one egg cracked

The market for U.S. Treasury securities experienced extreme stress in March 2020, when prices dropped precipitously (yields spiked) over a period of about two weeks. This was highly unusual, as Treasury prices typically increase during times of stress. Using a theoretical model, we show that markets for safe assets can be fragile due to strategic interactions among investors who hold Treasury securities for their liquidity characteristics. Worried about having to sell at potentially worse prices in the future, such investors may sell preemptively, leading to self-fulfilling “market runs” that are similar to traditional bank runs in some respects.

February 16, 2022

The Making of Fallen Angels—and What QE and Credit Rating Agencies Have to Do with It

Riskier firms typically borrow at higher rates than safer firms because investors require compensation for taking on more risk. However, since 2009 this relationship has been turned on its head in the massive BBB corporate bond market, with risky BBB-rated firms borrowing at lower rates than their safer BBB-rated peers. The resulting risk materialized in an unprecedented wave of “fallen angels” (or firms downgraded below the BBB investment-grade threshold) at the onset of the COVID-19 pandemic. In this post, based on a related Staff Report, we claim that this anomaly has been driven by a combination of factors: a boost in investor demand for investment-grade bonds associated with the Federal Reserve’s quantitative easing (QE) and sluggish adjustment of credit ratings for risky BBB issuers.

February 5, 2021

Up on Main Street

The Main Street Lending Program was the last of the facilities launched by the Fed and Treasury to support the flow of credit during the COVID-19 pandemic of 2020-21. The others primarily targeted Wall Street borrowers; Main Street was for smaller firms that rely more on banks for credit. It was a complicated program that worked by purchasing loans and sharing risk with lenders. Despite its delayed launch, Main Street purchased more debt than any other facility and was accelerating when it closed in January 2021. This post first locates Main Street in the constellation of COVID-19 credit programs, then looks in detail at its design and usage with an eye toward any future programs.

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.

May 8, 2020

The Money Market Mutual Fund Liquidity Facility

To prevent outflows from prime and muni funds from turning into an industry-wide run after the COVID-19 outbreak, the Federal Reserve established Money Market Mutual Fund Liquidity Facility. This post looks at the Fed’s intervention, its goals, and the direct and indirect market effects.

November 26, 2018

The Pre-FOMC Announcement Drift: More Recent Evidence

We had previously documented large excess returns on equities ahead of scheduled announcements of the Federal Open Market Committee (FOMC)—the Federal Reserve’s monetary policy-making body—between 1994 and 2011. This post updates our original analysis with more recent data. We find evidence of continued large excess returns during FOMC meetings, but only for those featuring a press conference by the Chair of the FOMC

Posted at 7:00 am in Financial Markets, FOMC | Permalink
July 1, 2015

What Do Bond Markets Think about “Too-Big-to-Fail” Since Dodd-Frank?

As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain “too big to fail.”

April 8, 2015

From the Vault: Separating News and Noise … and Jokes

Tesla Motors’ shares saw a brief bounce from a far-out and fictional product (a smart watch) announced as part of an April fool’s prank. While markets evidently made quick sense of the joke, that’s not always the case.

Posted at 12:40 pm in Financial Markets | Permalink
March 9, 2015

Herd Behavior in Financial Markets

Over the last twenty-five years, there has been a lot of interest in herd behavior in financial markets—that is, a trader’s decision to disregard his or her private information to follow the behavior of the crowd.

Posted at 7:00 am in Financial Markets | Permalink | Comments (1)
April 9, 2014

Lunch Anyone? Volatility on the Tokyo Stock Exchange around the Lunch Break on May 23, 2013, and Stock Market Circuit Breakers

Stock market circuit breakers halt trading activity on a single stock or an entire exchange if a sudden large price move occurs.

Posted at 7:00 am in Financial Markets, Liquidity, Stocks | Permalink
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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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