Search Results
Working Paper
Linear cointegration of nonlinear time series with an application to interest rate dynamics
We derive a definition of linear cointegration for nonlinear stochastic processes using a martingale representation theorem. The result shows that stationary linear cointegrations can exhibit nonlinear dynamics, in contrast with the normal assumption of linearity. We propose a sequential nonparametric method to test first for cointegration and second for nonlinear dynamics in the cointegrated system. We apply this method to weekly US interest rates constructed using a multirate filter rather than averaging. The Treasury Bill, Commercial Paper and Federal Funds rates are cointegrated, with two ...
Working Paper
Central Clearing and Systemic Liquidity Risk
By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or ...
Working Paper
Monetary aggregation theory and statistical index numbers
This paper is the first of two from the Monetary Services Indices (MSI) Project at the Federal Reserve Bank of St. Louis. The second paper, Working Paper 96-008B, summarizes the methodology, construction and data sources for the an extensive new database of monetary services indices, often referred to as Divisia monetary aggregates, for the United States. This paper surveys the microeconomic theory of the aggregation of monetary assets, bringing together results that are not otherwise readily available in a single source. In addition to indices of the flow of monetary services, the Project's ...
Working Paper
Revisiting Risky Money
Risk was first incorporated into monetary aggregation over thirty-five years ago,using a stochastic version of the workhorse money-in-the-utility-function model.Nevertheless, the mathematical foundations of this stochastic model remain shaky.To firm the foundations, this paper employs a slightly richer probability conceptthan standard Borel-measurability, which enables me to prove the existence of awell-behaved solution and to derive stochastic Euler equations. This measurabilityapproach is long-established albeit less common in economics, possibly because the derivation of stochastic Euler ...
Working Paper
Tests for non-linear dynamics in systems of non-stationary economic time series: the case of short-term US interest rates
Using Hall and Heyde's (1980) representation theorem, we show that the stationary co-integration relations of an integrated system are generally non-linear stochastic processes. We propose a sequential non-parametric procedure to test stationary co-integration relations for non-linear dynamics, and apply this procedure to short term U.S. interest rates as an illustration. We demonstrate that the weekly federal funds rate is co-integrated with Treasury bill and commercial paper rates and that the co-integration relations are non-linear.
Working Paper
Risk and concentration in payment and securities settlement systems
Large value payment and securities settlement systems are important components of an economy's financial system. Many such systems are operated by central banks and are liquidity intensive. Central banks often provide inexpensive liquidity to facilitate settlement. This leads to a number of policy questions about the provision of such liquidity. To answer these questions, central banks need to understand what factors influence the timing of settlement. This paper offers a model to better understand intraday patterns of settlement and identifies three factors that influence the timing of ...
Working Paper
Rational seasonality
Seasonal adjustment usually relies on statistical models of seasonality that treat seasonal fluctuations as noise corrupting the `true' data. But seasonality in economic series often stems from economic behavior such as Christmas-time spending. Such economic seasonality invalidates the separability assumptions that justify the construction of aggregate economic indexes. To solve this problem, Diewert(1980,1983,1998,1999) incorporates seasonal behavior into aggregation theory. Using duality theory, I extend these results to a larger class of decision problems. I also relax Diewert's assumption ...