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Working Paper
QE Auctions of Treasury Bonds
Song, Zhaogang; Zhu, Haoxiang (2014-06-16)
The Federal Reserve (Fed) uses a unique auction mechanism to purchase U.S. Treasury securities in implementing its quantitative easing (QE) policy. In this paper, we study the outcomes of QE auctions and participating dealers' bidding behaviors from November 2010 to September 2011, during which the Fed purchased $780 billion Treasury securities. Our data include the transaction prices and quantities of each traded bond in each auction, as well as dealers' identities. We find that: (1) In QE auctions the Fed tends to exclude bonds that are liquid and on special, but among included bonds, ...
Finance and Economics Discussion Series , Paper 2014-48

Working Paper
Counterparty Risk and Counterparty Choice in the Credit Default Swap Market
Gordy, Michael B.; Gadgil, Salil; Du, Wenxin; Vega, Clara (2016-09-08)
We investigate how market participants price and manage counterparty risk in the post-crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is relatively low. Furthermore, we examine ...
Finance and Economics Discussion Series , Paper 2016-087

Working Paper
Trader Positions and Marketwide Liquidity Demand
Tuzun, Tugkan; Roberts, John S.; Onur, Esen (2017-10-05)
In electronic, liquid markets, traders frequently change their positions. The distribution of these trader position changes carries important information about liquidity demand in the market. From this distribution of trader position-changes, we construct a marketwide measure for intraday liquidity demand that does not necessarily depend on aggressive trading. Using a rich regulatory dataset on S&P 500 E-mini futures and 10-year Treasury futures markets, we show that this liquidity demand measure has a positive impact on prices. We then decompose our measure of liquidity demand into three ...
Finance and Economics Discussion Series , Paper 2017-103

Report
Simple and reliable way to compute option-based risk-neutral distributions
Malz, Allan M. (2014-06-01)
This paper describes a method for computing risk-neutral density functions based on the option-implied volatility smile. Its aim is to reduce complexity and provide cookbook-style guidance through the estimation process. The technique is robust and avoids violations of option no-arbitrage restrictions that can lead to negative probabilities and other implausible results. I give examples for equities, foreign exchange, and long-term interest rates.
Staff Reports , Paper 677

Journal Article
U.S. Cross-Border Derivatives Data: A User's Guide
Curcuru, Stephanie E. (2007-05)
The global derivatives market has grown rapidly in the past decade. By one measure of market size--the notional value, which is used to determine the payments made on a derivatives contract--the derivatives market expanded from $87 trillion in June 1998 to $454 trillion in June 2006. Measured by the price at which a derivatives contract can be purchased in a current transaction, or the market value, the derivatives market grew from $3 trillion in June 1998 to $10 trillion as of June 2006.
Federal Reserve Bulletin , Volume 93 , Issue May , Pages pp. A1-A16

Working Paper
Monetary policy surprises, positions of traders, and changes in commodity futures prices
Jamali, Ibrahim; Gospodinov, Nikolay (2013-11-01)
Using futures data for the period 1990?2008, this paper finds evidence that expansionary monetary policy surprises tend to increase crude and heating oil prices, and contractionary monetary policy shocks increase gold and platinum prices. Our analysis uncovers substantial heterogeneity in the magnitude of this response to positive and negative surprises across different commodities and commodity groups. The results also suggest that the positions of futures traders for the metals and energy commodities strongly respond to monetary policy shocks. The adjustment of the net long positions of ...
FRB Atlanta Working Paper , Paper 2013-12

Working Paper
Generating Options-Implied Probability Densities to Understand Oil Market Events
Londono, Juan M.; Datta, Deepa Dhume; Ross, Landon J. (2014-10-29)
We investigate the informational content of options-implied probability density functions (PDFs) for the future price of oil. Using a semiparametric variant of the methodology in Breeden and Litzenberger (1978), we investigate the fit and smoothness of distributions derived from alternative PDF estimation methods, and develop a set of robust summary statistics. Using PDFs estimated around episodes of high geopolitical tensions, oil supply disruptions, and macroeconomic data releases, we explore the extent to which oil price movements are expected or unexpected, and whether agents believe ...
International Finance Discussion Papers , Paper 1122

Working Paper
International Evidence on Extending Sovereign Debt Maturities
Christensen, Jens H. E.; Lopez, Jose A.; Mussche, Paul (2021-07-22)
Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance by examining the extension of the maximum maturity of issued debt. In particular, we examine the potential costs to the U.S. Treasury of introducing 50-year bonds as a financing option. Based on evidence from foreign government bond markets with such long-term debt, our results suggest that a 50-year Treasury bond would likely trade at an average yield that is at most 20 basis points above that of a 30-year bond. Our results based on ...
Working Paper Series , Paper 2021-19

Working Paper
Tale About Inflation Tails
Grishchenko, Olesya V.; Wilcox, Laura (2024-05-08)
We study probabilities of extreme inflation events in the Unites States and the euro area. Using a state-space model that incorporates information from a large set of professional forecasters, we generate the term structure of inflation forecasts as well as probabilities of future inflation for any range of inflation outcomes in closed form at any horizon. Since the onset of the COVID-19 pandemic, inflation expectations increased materially amid heightened uncertainty about future inflation. Likelihood of significant departures of inflation targets in the longer term reached about 15 percent ...
Finance and Economics Discussion Series , Paper 2024-028

Report
Broker-dealer risk appetite and commodity returns
Etula, Erkko (2009-11-01)
This paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity derivatives markets. Commodity derivatives are the principal instrument used by producers and purchasers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset pricing model where producers and purchasers of commodities share risk with broker-dealers who are ...
Staff Reports , Paper 406

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