Search Results
Report
Market liquidity and trader welfare in multiple dealer markets: evidence from dual trading restrictions
Dual trading is the practice whereby futures floor traders execute trades both for their own and customers' accounts on the same day. We provide evidence, in the context of restrictions on dual trading, that aggregate liquidity measures, such as the average bid-ask spread, may be misleading indicators of traders' welfare in markets with multiple, heterogeneously skilled dealers. In our theoretical model, hedgers and informed customers trade through futures floor traders of different skill levels: more skilled floor traders attract more hedgers to trade. We show that customers' welfare and ...
Discussion Paper
Did the Fed’s Term Auction Facility Work?
The Federal Reserve introduced the Term Auction Facility (TAF) in December 2007 to provide term loans to banks during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the “liquidity premium,” one component of a bank’s borrowing cost. In other words, the TAF worked as intended.
Discussion Paper
Discount Window Stigma After the Global Financial Crisis
The rapidity of deposit outflows during the March 2023 banking run highlights the important role that the Federal Reserve’s discount window should play in strengthening financial stability. A lack of borrowing, however, has plagued the discount window for decades, likely due to banks’ concerns about stigma—that is, their unwillingness to borrow at the discount window because it may be viewed as a sign of financial weakness in the eyes of regulators and market participants. The discount window has been reformed several times to alleviate this problem. Although the presence of stigma ...
Report
Financial amplification mechanisms and the Federal Reserve's supply of liquidity during the crisis
The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve's interventions during different stages of the crisis in light of this literature. We interpret the Fed's early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between ...
Report
Is there an S&P 500 index effect?
We find that the firms included in the S&P 500 index are characterized by large increases in earnings, appreciation in market value, and positive price momentum in the period preceding their index inclusion. This strong preinclusion performance predicts 1) the permanent increase of market value and 2) the change in return comovement, reflected in declines of size, value, and momentum betas, following index inclusion. Nonevent firms with similar performance experience similar appreciation in value and changes in comovement coincident with the event firms. Contrary to the consensus in the ...
Journal Article
The Term Asset-Backed Securities Loan Facility
The COVID-19 pandemic disrupted the asset-backed securities (ABS) market, resulting in higher spreads on ABS and briefly halting the issuance of some ABS. On March 23, 2020, the Federal Reserve established the Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses by re-enabling the issuance of ABS. In this article, the authors describe how TALF works, how much it was used, and its effect on the issuance and spreads of TALF-eligible securities relative to those of TALF-ineligible securities. They find that both the introduction of TALF and ...
Report
Liquidity in U.S. fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets
We examine the determinants of the realized bid-ask spread in the U.S. corporate, municipal and government bond markets for the years 1995 to 1997, based on newly available transactions data. Overall, we find that liquidity is an important determinant of the realized bid-ask spread in all three markets. Specifically, in all markets, the realized bid-ask spread decreases in the trading volume. Additionally, risk factors are important in the corporate and municipal markets. In these markets, the bid-ask spread increases in the remaining-time-to maturity of a bond. The corporate bond spread also ...
Journal Article
The global financial crisis and offshore dollar markets
Facing a shortage of U.S. dollars and a growing need to support their dollar-denominated assets during the financial crisis, international firms increasingly turned to the foreign exchange swap market and other secured funding sources. An analysis of the ensuing strains in the swap market shows that the dollar "basis"--the premium international institutions pay for dollar funding--became persistently large and positive, chiefly as a result of the higher funding costs paid by smaller firms and non-U.S. banks. The widening of the basis underscores the severity and breadth of the crisis as ...
Report
Liquidity Regulations, Bank Lending, and Fire-Sale Risk
We examine whether U.S. banks subject to the Liquidity Coverage Ratio (LCR) reduce lending (an unintended consequence) and/or become more resilient to liquidity shocks, as intended by regulators. We find that LCR banks tighten lending standards, and reduce liquidity creation that occurs mainly through lower lending relative to non-LCR banks. However, covered banks also contribute less to fire-sale externalities relative to exempt banks. For LCR banks, we estimate that the total after-tax benefits of reduced fire-sale risk (net of the costs associated with foregone lending) exceed $50 billion ...
Journal Article
Should U.S. investors hold foreign stocks?
U.S. investors have traditionally been reluctant to acquire foreign securities_in part, perhaps, because they fear that restrictions on trading in foreign markets will sharply limit any gains they might realize from diversifying their portfolios. An analysis of the effects of one type of restriction, short-sale constraints, on stock returns between 1976 and 1999 suggests that investing in emerging market stocks offers substantial benefits even when a ban on short sales is in place.