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Discussion Paper
Forecasting Interest Rates over the Long Run
Diamond, Peter A.; Yu, Rui; Adrian, Tobias; Crump, Richard K. (2016-07-18)
In a previous post, we showed how market rates on U.S. Treasuries violate the expectations hypothesis because of time-varying risk premia. In this post, we provide evidence that term structure models have outperformed direct market-based measures in forecasting interest rates. This suggests that term structure models can play a role in long-run planning for public policy objectives such as assessing the viability of Social Security.
Liberty Street Economics , Paper 20160718

Discussion Paper
Dealer Balance Sheet Capacity and Market Liquidity during the 2013 Selloff in Fixed-Income Markets
Lewis, Morgan; Goldberg, Jonathan; Fleming, Michael J.; Adrian, Tobias; http://fedora:8080/fcrepo/rest/objects/authors/; Natalucci, Fabio M. (2013-10-16)
Long-term interest rates hit record-low levels in 2012 but have since increased substantially. As discussed in an earlier post, the sharpest increase occurred between May 2 and July 5 of this year, with the ten-year Treasury yield rising from 1.63 percent to 2.74 percent. During the May-July episode, market liquidity also deteriorated. Some market participants have suggested that constraints on dealer balance sheet capacity impaired liquidity during the selloff, amplifying the magnitude and speed of the rise in interest rates and volatility. In this post, we review the evolution of Treasury ...
Liberty Street Economics , Paper 20131016a

Report
Financial intermediary leverage and value at risk
Adrian, Tobias; Shin, Hyun Song (2008)
We study a contracting model for the determination of leverage and balance sheet size for financial intermediaries that fund their activities through collateralized borrowing. The model gives rise to two features: First, leverage is procyclical in the sense that leverage is high when the balance sheet is large. Second, leverage and balance sheet size are both determined by the riskiness of assets. For U.S. investment banks, we find empirical support for both features of our model, that is, leverage is procyclical, and both leverage and balance sheet size are determined by measured risks. In a ...
Staff Reports , Paper 338

Working Paper
Financial stability monitoring
Liang, J. Nellie; Covitz, Daniel M.; Adrian, Tobias (2013)
While the Dodd Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of pre-emptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from ...
Finance and Economics Discussion Series , Paper 2013-21

Report
Multimodality in Macro-Financial Dynamics
Giannone, Domenico; Boyarchenko, Nina; Adrian, Tobias (2019-11-01)
We estimate the evolution of the conditional joint distribution of economic and financial conditions. While the joint distribution is approximately Gaussian during normal periods, sharp tightenings of financial conditions lead to the emergence of additional modes. The U.S. economy has historically resolved quickly to the “good” mode, but we conjecture that poor policy choices could lead to prolonged periods of multimodality. We argue that multimodality arises naturally in a macro-financial intermediary model with occasionally binding intermediary constraints.
Staff Reports , Paper 903

Discussion Paper
Corporate Bond Market Liquidity Redux: More Price-Based Evidence
Vogt, Erik; Fleming, Michael J.; Wojtowicz, Zachary; Adrian, Tobias (2016-02-09)
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

Report
Regression-based estimation of dynamic asset pricing models
Moench, Emanuel; Adrian, Tobias; Crump, Richard K. (2011)
We propose regression-based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross-sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The estimators explicitly allow for time-varying prices of risk, time-varying betas, and serially dependent pricing factors. Our approach nests the Fama-MacBeth two-pass estimator as a special case. We provide asymptotic multistage standard errors necessary to conduct inference for asset pricing test. We ...
Staff Reports , Paper 493

Journal Article
The Federal Reserve's Primary Dealer Credit Facility
Burke, Christopher R.; Adrian, Tobias; McAndrews, James J. (2009-08)
As liquidity conditions in the "repo market"--the market where broker-dealers obtain financing for their securities--deteriorated following the near-bankruptcy of Bear Stearns in March 2008, the Federal Reserve took the step of creating a special facility to provide overnight loans to dealers that have a trading relationship with the Federal Reserve Bank of New York. Six months later, in the wake of new strains in the repo market, the Fed expanded the facility by broadening the types of collateral accepted for loans. Both initiatives were designed to help restore the orderly functioning ...
Current Issues in Economics and Finance , Volume 15 , Issue Aug

Report
An index of Treasury Market liquidity: 1991-2017
Vogt, Erik; Adrian, Tobias; Fleming, Michael J. (2017-11-01)
Order book and transactions data from the U.S. Treasury securities market are used to calculate daily measures of bid-ask spreads, depth, and price impact for a twenty-six-year sample period (1991-2017). From these measures, a daily index of Treasury market liquidity is constructed, reflecting the fact that the varying measures capture different aspects of market liquidity. The liquidity index is then correlated with various metrics of funding liquidity, volatility, and macroeconomic conditions. The liquidity index points to poor liquidity during the 2007-09 financial crisis and around the ...
Staff Reports , Paper 827

Report
The shadow banking system: implications for financial regulation
Adrian, Tobias; Shin, Hyun Song (2009-07-01)
The current financial crisis has highlighted the growing importance of the "shadow banking system," which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries ...
Staff Reports , Paper 382

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