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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
The Financial Stability Implications of Digital Assets
Scotti, Chiara; Carapella, Francesca; Rappoport, David E.; Baughman, Garth; Swem, Nathan; Vardoulakis, Alexandros (2022-08)
The value of assets in the digital ecosystem has grown rapidly, amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself highly fragile. However adverse digital asset markets shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial services ...
Finance and Economics Discussion Series , Paper 2022-058

Report
The Law of One Price in Equity Volatility Markets
Van Tassel, Peter (2020-12-01)
This paper documents law of one price violations in equity volatility markets. While tightly linked by no-arbitrage restrictions, the prices of VIX futures exhibit significant deviations relative to their option-implied upper bounds. Static arbitrage opportunities occur when the prices of VIX futures violate their bounds. The deviations widen during periods of market stress and predict the returns of VIX futures. A relative value trading strategy based on the deviation measure earns a large Sharpe ratio and economically significant alpha-to-margin. There is evidence that systematic risk and ...
Staff Reports , Paper 953

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

Report
The term structure of the price of variance risk
Eisenbach, Thomas M.; Kahn, R. Jay; Schmalz, Martin C.; Andries, Marianne (2015-08-01)
We empirically investigate the term structure of variance risk pricing and how it varies over time. We estimate the aversion to variance risk in a stochastic-volatility option pricing model separately for options of different maturities and find that variance risk pricing decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We find consistent non-parametric results using estimates from Sharpe ratios of delta-neutral straddles. We further show that the term structure is downward sloping both during normal times and in times of ...
Staff Reports , Paper 736

Working Paper
Is There an On-the-Run Premium in TIPS?
Christensen, Jens H. E.; Lopez, Jose A.; Shultz, Patrick (2017-05-17)
In the U.S. Treasury market, the most recently issued, or so-called ?on-the-run,? security typically trades at a price above those of more seasoned but otherwise comparable securities. This difference is known as the on-the-run premium. In this paper, yield spreads between pairs of Treasury Inflation-Protected Securities (TIPS) with identical maturities but of separate vintages are analyzed. Adjusting for differences in coupon rates and values of embedded deflation options, the results show a small, positive premium on recently issued TIPS - averaging between one and four basis points - that ...
Working Paper Series , Paper 2017-10

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

Working Paper
Variance Risk Premium Components and International Stock Return Predictability
Londono, Juan M.; Xu, Nancy R. (2019-07-19)
In this paper, we document and explain the distinct behaviors of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) and their international stock return predictability patterns. DVP, the compensation for bearing downside variance risk, is positive, highly correlated with the total variance premium, and countercyclical, whereas UVP is, on average, borderline positive and procyclical with large negative spikes around episodes of market turmoil. We then provide robust evidence that decomposing VP into its downside and upside components significantly improves domestic and ...
International Finance Discussion Papers , Paper 1247

Working Paper
Asset Co-movements: Features and Challenges
Gospodinov, Nikolay (2017-11-01)
This paper documents and characterizes the time-varying structure of U.S. and international asset co-movements. Although some of the time variation could be genuine, the sampling uncertainty and time series properties of the series can distort significantly the underlying signal dynamics. We discuss examples that illustrate the pitfalls from drawing conclusions from local trends of asset prices. On a more constructive side, we find that the U.S. main asset classes and major international stock indices share a factor that is closely related to the business cycle. At even lower frequency, the ...
FRB Atlanta Working Paper , Paper 2017-11

Working Paper
Option-Implied Libor Rate Expectations across Currencies
Gebbia, Nick (2016-10-13)
In this paper, I study risk-neutral probability densities regarding future Libor rates denominated in British pounds, euros, and US dollars as implied by option prices. I apply Breeden and Litzenberger?s (1978) result regarding the relationship between option prices and implied probabilities for the underlying to estimate full probability density functions for future Libor rates. I use these estimates in case studies, detailing the evolution of probabalistic expectations for future Libor rates over the course of several important market events. Next, I compute distributional moments from ...
International Finance Discussion Papers , Paper 1182

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