Search Results
Working Paper
Black Swans and Financial Stability: A Framework for Building Resilience
This article refines the concept of black swans, typically described as highly unlikely and catastrophic events, by clearly distinguishing between knowable and unknowable events. By emphasizing that black swans are “unknown unknowns,” the article highlights that the realization of new black swans cannot be prevented and motivates a need for policies that build the financial system's resilience to unforeseeable crises. The article introduces a "resilience principle" that calls for policies that are adaptable, universal, and systemic. Examples are provided of policies with these features, ...
Discussion Paper
Recent Developments in Hedge Funds’ Treasury Futures and Repo Positions: is the Basis Trade “Back"?
In short, the answer is "probably", at least to some degree. This note summarizes recent developments in hedge funds' Treasury futures and repo positions derived from the Commodities Futures and Trading Commission's (CFTC's) Traders in Financial Futures data and the Office of Financial Research's ("OFR") Cleared Repo Collection.
Working Paper
Hidden Risk
Since 2013, large U.S. hedge fund advisers have been required to report risk exposures in their regulatory filings. Using these data, we first establish that managers’ perceptions of risk contain useful information that is not embedded in fund returns. Investor flows do not respond to this information when managers perceive higher risk than what their past returns would indicate, suggesting managers strategically communicate their risk assessments with investors. During market downturns, investors withdraw capital from funds whose managers perceive higher risk, suggesting they find the ...
Report
Reducing moral hazard at the expense of market discipline: the effectiveness of double liability before and during the Great Depression
Prior to the Great Depression, regulators imposed double liability on bank shareholders to ensure financial stability and protect depositors. Under double liability, shareholders of failing banks lost their initial investment and had to pay up to the par value of the stock in order to compensate depositors. We examine whether double liability was effective at mitigating bank risks and providing a safety net for depositors before and during the Great Depression. We first develop a model that demonstrates two competing effects of double liability: a direct effect that constrains bank risk ...