Monitoring the Liquidity Profile of Mutual Funds
Policymakers and academics have been particularly attuned to the issues of liquidity transformation and first mover advantage at open-end mutual funds. Open-end mutual funds engage in liquidity transformation because they promise one-day redemptions on their assets, even when the invested assets have low or uncertain liquidity.
Has international financial co-movement changed? Emerging markets in the 2007-2009 financial crisis
Emerging market (EM) assets have historically been regarded as inherently risky and particularly vulnerable to international shocks that result in a general increase in investor risk perceptions. In this paper, we assess the ongoing relevance of this view by examining the linkages between EM and non-EM stock and bond markets in the past two decades, with a focus on how these relationships played out during the global financial crisis of 2007-2009. We evaluate how these linkages have evolved over the period 1992-2009, through statistical tests of whether the volatility of EM financial markets ...
Measuring the Liquidity Profile of Mutual Funds
We measure the liquidity profile of open-end mutual funds using the sensitivity of their daily returns to aggregate liquidity. We study how this sensitivity changes around real-activity macroeconomic announcements that reveal large surprises about the state of the economy and after three relevant market events: Bill Gross's departure from PIMCO, Third Avenue Focused Credit Fund's suspension of redemptions, and the effect of Lehman Brothers' collapse on Neuberger Berman. Results show that, following negative news, the sensitivity to aggregate liquidity increases for less-liquid mutual funds, ...
Unconventional Monetary Policy and International Risk Premia
We assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound. We estimate a structural VAR including U.S. and foreign interest rates and exchange rates, and identify monetary policy shocks through a method that uses these surprises as the crucial "external instrument" that achieves identification without having to use implausible short-run restrictions. This allows us to measure effects of policy shocks on expectations, and hence risk premia. U.S. monetary policy easing shocks lower domestic and foreign bond risk premia, lead to ...
Exchange rates dependence: what drives it?
Exchange rate movements are difficult to predict but there appear to be discernible patterns in how currencies jointly appreciate or depreciate against the dollar. In this paper, we study the dependence structure of a number of exchange rate pairs against the dollar. We employ a conditional copula approach to recover the joint distributions for pairs of exchange rates and study both the correlation and the upper and lower tail dependence of these distributions. We analyze changes in dependence measures over time, and we investigate whether these measures are affected by the business cycle or ...
A bivariate model of Fed and ECB main policy rates
This paper studies when and by how much the Fed and the ECB change their target interest rates. I develop a new nonlinear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. A Bayesian estimation approach is particularly well suited to the small data sample. Empirical results support synchronization between the central banks and non-zero correlation between magnitude shocks, but they do not support follower behavior. Institutional ...
The COVID-19 Crisis and the Federal Reserve's Policy Response
The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. In this paper, we argue that the Federal Reserve acted decisively and with dispatch to deploy all the tools in its conventional kit and to design, develop, and launch within weeks a series of innovative facilities to support the flow of credit to households and businesses. These measures, taken together, provided crucial support to the economy in 2020 and are continuing to contribute to what is expected to be a robust economic recovery in ...
Macroeconomic and Financial Risks: A Tale of Mean and Volatility
We study the joint conditional distribution of GDP growth and corporate credit spreads using a stochastic volatility VAR. Our estimates display significant cyclical co-movement in uncertainty (the volatility implied by the conditional distributions), and risk (the probability of tail events) between the two variables. We also find that the interaction between two shocks--a main business cycle shock as in Angeletos et al. (2020) and a main financial shock--is crucial to account for the variation in uncertainty and risk, especially around crises. Our results highlight the importance of using ...
Real-time measurement of business conditions
We construct a framework for measuring economic activity in real time (e.g., minute-by-minute), using a variety of stock and flow data observed at mixed frequencies. Specifically, we propose a dynamic factor model that permits exact filtering, and we explore the efficacy of our methods both in a simulation study and in a detailed empirical example.
Is the Intrinsic Value of Macroeconomic News Announcements Related to their Asset Price Impact?
The literature documents a heterogeneous asset price response to macroeconomic news announcements. We explain this variation with a novel measure of the intrinsic value of an announcement - the announcement's ability to nowcast GDP growth, inflation, and the Federal Funds Target Rate-and decompose it into the announcement's relation to fundamentals, a timeliness premium, and a revision premium. We find that differences in intrinsic value can explain a significant fraction of the variation in the announcements' price impact on Treasury bond yields. The announcements' timeliness and relation to ...