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Anxiety in the face of risk
Eisenbach, Thomas M.; Schmalz, Martin C. (2013)
We model an ?anxious? agent as one who is more risk averse with respect to imminent risks than with respect to distant risks. Based on a utility function that captures individual subjects? behavior in experiments, we provide a tractable theory relaxing the restriction of constant risk aversion across horizons and show that it generates rich implications. We first apply the model to insurance markets and explain the high premia for short-horizon insurance. Then, we show that costly delegated portfolio management, investment advice, and withdrawal fees emerge as endogenous features and ...
Staff Reports , Paper 610

Discussion Paper
How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?
Boyarchenko, Nina; Eisenbach, Thomas M.; Gupta, Pooja; Shachar, Or; Van Tassel, Peter (2020-10-19)
“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 ...
Liberty Street Economics , Paper 20201019

Discussion Paper
Banking System Vulnerability: 2022 Update
Crosignani, Matteo; Eisenbach, Thomas M.; Fringuellotti, Fulvia (2022-11-14)
To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.
Liberty Street Economics , Paper 20221114

Working Paper
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Macchiavelli, Marco; Eisenbach, Thomas M.; Anadu, Kenechukwu E.; Cipriani, Marco; La Spada, Gabriele; Wang, J. Christina; Huang, Catherine; Malfroy-Camine, Antoine; Azar, Pablo D.; Landoni, Mattia (2023-08-24)
Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similar to money market fund investors, stablecoin investors engage in flight-to-safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds run risk has ...
Supervisory Research and Analysis Working Papers , Paper SRA 23-02

Report
Rollover risk as market discipline: a two-sided inefficiency
Eisenbach, Thomas M. (2013)
Why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises? This paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk. However, if assets are correlated, a two-sided inefficiency arises: Good aggregate states have intermediaries taking excessive risks, while bad aggregate states suffer from costly fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline. ...
Staff Reports , Paper 597

Working Paper
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Macchiavelli, Marco; Eisenbach, Thomas M.; Anadu, Kenechukwu E.; Cipriani, Marco; La Spada, Gabriele; Wang, J. Christina; Huang, Catherine; Malfroy-Camine, Antoine; Azar, Pablo D.; Landoni, Mattia (2024-03-26)
Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Like MMFs, stablecoins suffer from “flight-to-safety” dynamics: we document net flows from riskier to safer stablecoins on days of crypto-market stress and estimate a discrete “break-the-buck” threshold of $1, below which stablecoin redemptions accelerate. We then focus on two specific stablecoin runs, in 2022 and 2023, showing that the same flight-to-safety dynamics also ...
Supervisory Research and Analysis Working Papers , Paper SRA 23-02

Discussion Paper
At the N.Y. Fed: Workshop on the Risks of Wholesale Funding
Eisenbach, Thomas M.; Fleming, Michael J.; de Fontnouvelle, Patrick; Choi, Dong Beom (2014-09-18)
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. ...
Liberty Street Economics , Paper 20140918

Discussion Paper
In a Relationship: Evidence of Underwriters’ Efforts to Stabilize the Share Price in the Facebook IPO
Shen, Karen; Lucca, David O.; Eisenbach, Thomas M. (2012-10-31)
Stocks are usually offered in initial public offerings (IPOs) at a discount, leading to large first-day IPO returns. When there is a risk of a negative initial return, underwriters are known to actively support the aftermarket price of a stock through buying activities. In this post, we look at the trading book for Facebook stock on May 18, 2012, the day of its highly anticipated IPO. Using what we call a ?large integer?price bid? identification assumption to indirectly infer which investors are bidding, we find evidence of significant trading by underwriters seeking to stabilize the stock?s ...
Liberty Street Economics , Paper 20121031

Report
Anxiety and pro-cyclical risk taking with Bayesian agents
Schmalz, Martin C.; Eisenbach, Thomas M. (2015-02-01)
We provide a model that can explain empirically relevant variations in confidence and risk taking by combining horizon-dependent risk aversion (?anxiety?) and selective memory in a Bayesian intrapersonal game. In the time series, overconfidence is more prevalent when actual risk levels are high, while underconfidence occurs when risks are low. In the cross section, more anxious agents are more prone to biased confidence and their beliefs fluctuate more. This systematic variation in confidence levels can lead to objectively excessive risk taking by ?insiders? with the potential to amplify ...
Staff Reports , Paper 711

Discussion Paper
Mission Almost Impossible: Developing a Simple Measure of Pass-Through Efficiency
Afonso, Gara; Eisenbach, Thomas M.; Biesenbach, Adam (2017-11-06)
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.
Liberty Street Economics , Paper 20171106

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