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Report
Taking orders and taking notes: dealer information sharing in financial markets
The use of order flow information by financial firms has come to the forefront of the regulatory debate. Central to this discussion is whether a dealer who acquires information by taking client orders can share that information. We explore how information sharing affects dealers, clients, and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counterfactuals. We estimate that yearly auction revenues with full information sharing (with clients and between dealers) ...
Discussion Paper
A Peek behind the Curtain of Bank Supervision
Since the financial crisis, bank regulatory and supervisory policies have changed dramatically both in the United States (Dodd-Frank Wall Street Reform and Consumer Protection Act) and abroad (Third Basel Accord). While these shifts have occasioned much debate, the discussion surrounding supervision remains limited because most supervisory activity? both the amount of supervisory attention and the demands for corrective action by supervisors?is confidential. Drawing on our recent staff report ?Parsing the Content of Bank Supervision,? this post provides a peek behind the scenes of bank ...
Discussion Paper
In a Relationship: Evidence of Underwriters’ Efforts to Stabilize the Share Price in the Facebook IPO
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 ...
Discussion Paper
Real Inventory Slowdowns
Inventory investment plays a central role in business cycle fluctuations. This post examines whether inventory investment amplifies or dampens economic fluctuations following a tightening in financial conditions. We find evidence supporting an amplification mechanism. This analysis suggests that inventory accumulation will be a drag on economic activity this year but provide a boost in 2020.
Discussion Paper
Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness
Last month the New York Fed held a conference on supervising large, complex financial institutions. The event featured presentations of empirical and theoretical research by economists here, commentary by academic researchers, and panel discussions with policymakers and senior supervisors. The conference was motivated by the recognition that supervision is distinct from regulation, but that the difference between them is often not well understood. The discussion focused on defining objectives for supervising the large, complex financial companies that figure so prominently in our financial ...
Report
Resource Allocation in Bank Supervision: Trade-offs and Outcomes
We estimate a structural model of resource allocation on work hours of Federal Reserve bank supervisors to disentangle how supervisory technology, preferences, and resource constraints impact bank outcomes. We find a significant effect of supervision on bank risk and large technological scale economies with respect to bank size. Consistent with macro-prudential objectives, revealed supervisory preferences disproportionately weight larger banks, especially post-2008 when a resource reallocation to larger banks increased risk on average across all banks. Shadow cost estimates show tight ...
Report
The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under
We study the recent Australian experience with yield curve control (YCC) of government bonds as perhaps the best evidence of how this policy might work in other developed economies. We interpret the evidence with a simple model in which YCC affects prices of both government and other bonds via “broad” transmission channels, but only government bond prices through “narrow” liquidity channels. YCC seemingly worked well in 2020 while the market expected short rates to stay at zero for long. But as the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, ...
Discussion Paper
Just Released: What Do Banking Supervisors Do?
In most developed economies, banking is among the most regulated and supervised sectors. While 'regulation' and 'supervision' are often used interchangeably, these two activities are distinct. Banking supervision is a complement to regulation, but its scope is much broader than simply ensuring that an institution is in compliance with regulation. Despite the importance of supervision, information about it is often limited, both because of the heavy reliance upon banks' confidential information and because many supervisory activities and actions are themselves confidential. In a recently ...
Discussion Paper
The Puzzling Pre-FOMC Announcement “Drift”
For many years, economists have struggled to explain the ?equity premium puzzle??the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)?a phenomenon we call the pre-FOMC announcement ?drift.?
Discussion Paper
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. ...