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Author:Adrian, Tobias 

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Stock returns and volatility: pricing the short-run and long-run components of market risk

We decompose the time series of equity market risk into short- and long-run volatility components. Both components have negative and highly significant prices of risk in the cross section of equity returns. A three-factor model with the market return and the two volatility components compares favorably to benchmark models. We show that the short-run component captures market skewness risk, while the long-run component captures business cycle risk. Furthermore, short-run volatility is the more important cross-sectional risk factor, even though its average risk premium is smaller than the ...
Staff Reports , Paper 254

Discussion Paper
Dealer Balance Sheets and Corporate Bond Liquidity Provision

Regulatory reforms since the financial crisis have sought to make the financial system safer and severe financial crises less likely. But by limiting the ability of regulated institutions to increase their balance sheet size, reforms?such as the Dodd-Frank Act in the United States and the Basel Committee's Basel III bank regulations internationally?might reduce the total intermediation capacity of the financial system during normal times. Decreases in intermediation capacity may then lead to decreased liquidity in markets in which the regulated institutions intermediate significant trading ...
Liberty Street Economics , Paper 20170524

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Shadow banking: a review of the literature

We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic ...
Staff Reports , Paper 580

Discussion Paper
What Do Financial Conditions Tell Us about Risks to GDP Growth?

The economic fallout from the COVID-19 pandemic has been sharp. Real U.S. GDP growth in the first quarter of 2020 (advance estimate) was -4.8 percent at an annual rate, the worst since the global financial crisis in 2008. Most forecasters predict much weaker growth in the second quarter, ranging widely from an annual rate of -15 percent to -50 percent as the economy pauses to allow for social distancing. Although growth is expected to begin its rebound in the third quarter absent a second wave of the pandemic, the speed of the recovery is highly uncertain. In this post, we estimate the risks ...
Liberty Street Economics , Paper 20200521

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Decomposing real and nominal yield curves

We present an affine term structure model for the joint pricing of Treasury Inflation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS? relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specification with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected inflation provides a better prediction of actual inflation than ...
Staff Reports , Paper 570

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Liquidity policies and systemic risk

The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries? leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies? implications for household welfare. Within the context of our model, liquidity requirements are preferable to ...
Staff Reports , Paper 661

Report
Which financial frictions? Parsing the evidence from the financial crisis of 2007-09

We provide an overview of data requirements necessary to monitor repurchase agreements (repos) and securities lending (sec lending) markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets, and argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and sec lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and ...
Staff Reports , Paper 528

Discussion Paper
Corporate Bond Market Liquidity Redux: More Price-Based Evidence

In a recent post, we presented some preliminary evidence suggesting that corporate bond market liquidity is ample. That evidence relied on bid-ask spread and price impact measures. The findings generated significant discussion, with some market participants wondering about the magnitudes of our estimates, their robustness, and whether such measures adequately capture recent changes in liquidity. In this post, we revisit these measures to more thoroughly document how they have varied over time and the importance of particular estimation approaches, trade size, trade frequency, and the ...
Liberty Street Economics , Paper 20160209

Discussion Paper
Treasury Term Premia: 1961-Present

Treasury yields can be decomposed into two components: expectations of the future path of short-term Treasury yields and the Treasury term premium. The term premium is the compensation that investors require for bearing the risk that short-term Treasury yields do not evolve as they expected. Studying the term premium over a long time period allows us to investigate what has historically driven changes in Treasury yields. In this blog post, we estimate and analyze the Treasury term premium from 1961 to the present, and make these estimates available for download here.
Liberty Street Economics , Paper 20140512

Discussion Paper
Has Liquidity Risk in the Corporate Bond Market Increased?

Recent commentary suggests concern among market participants about corporate bond market liquidity. However, we showed in our previous post that liquidity in the corporate bond market remains ample. One interpretation is that liquidity risk might have increased, even as the average level of liquidity remains sanguine. In this post, we propose a measure of liquidity risk in the corporate bond market and analyze its evolution over time.
Liberty Street Economics , Paper 20151006b

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