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Author:Lopez, Jose A. 

Working Paper
Alternative measures of the Federal Reserve banks' cost of equity capital

The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are ?woefully? and ?unavoidably? imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the CAPM model and compare them using econometric and materiality criteria. Our results suggests that the ...
Working Paper Series , Paper 2005-06

Working Paper
Pricing deflation risk with U.S. Treasury yields

We use an arbitrage-free term structure model with spanned stochastic volatility to determine the value of the deflation protection option embedded in Treasury inflation-protected securities (TIPS). The model accurately prices the deflation protection option prior to the financial crisis when its value was near zero; at the peak of the crisis in late 2008 when deflationary concerns spiked sharply; and in the post-crisis period. During 2009, the average value of this option at the five-year maturity was 41 basis points on a par-yield basis.
Working Paper Series , Paper 2012-07

Working Paper
Inflation expectations and risk premiums in an arbitrage-free model of nominal and real bond yields

Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums from the BEI rates. We provide such decompositions using an estimated affine arbitrage-free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long-term inflation expectations have been well anchored over the past few ...
Working Paper Series , Paper 2008-34

Journal Article
Using CAMELS ratings to monitor bank conditions

FRBSF Economic Letter

Journal Article
How financial firms manage risk

FRBSF Economic Letter

Working Paper
Evaluating credit risk models

Over the past decade, commercial banks have devoted many resources to developing internal models to better quantify their financial risks and assign economic capital. These efforts have been recognized and encouraged by bank regulators; for example, the 1997 Market Risk Amendment (MRA) formally incorporates banks' internal, value-at-risk models into regulatory capital calculations. A key component in the implementation of the MRA was the development of standards, such as for model validation, that must be satisfied in order for banks' models to be used for regulatory capital purposes. ...
Working Papers in Applied Economic Theory , Paper 99-06

Working Paper
Heat waves, meteor showers, and trading volume: an analysis of volatility spillovers in the U.S. Treasury market

The market for U.S. Treasury securities operates around-the-clock from the three main trading centers of Tokyo, London, and New York. We examine this market for volatility spillovers using the methodology employed by Engle, Ito, and Lin (1990) for the foreign exchange market. We find meteor showers in Tokyo and London but not New York; i.e., volatility spills over into Tokyo and London from the other trading centers, but not into New York. We also find that lagged trading volume significantly impacts U.S. Treasury yield volatility for the overseas trading centers, although it does not ...
Working Papers in Applied Economic Theory , Paper 99-09

Journal Article
The Basel proposal for a new capital adequacy framework

FRBSF Economic Letter

Journal Article
Gauging aggregate credit market conditions

The Federal Reserve and other central banks have responded to the current financial crisis by taking a range of aggressive policy actions aimed at reviving credit markets. In particular, the Fed has pushed the federal funds rate, its key policy instrument, to historically low levels. Research suggests that overall credit conditions since late 2007 have remained tighter than would have been expected based on historical experience and that this tightness may be partly offsetting the Fed?s policy actions.
FRBSF Economic Letter

Journal Article
Stress tests: useful complements to financial risk models

Many supervisory agencies have begun using stress-testing techniques to assess the capital adequacy of individual firms and even national financial systems. In this Economic Letter, I define stress testing, describe its possible applications, highlight certain techniques developed to conduct this testing, and survey its recent use by supervisory agencies.
FRBSF Economic Letter

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