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Jel Classification:G1 

Working Paper
The cyclicality of (bilateral) capital inflows and outflows

Recent research has shown that gross capital inflows and outflows are positively correlated and highly procyclical. This poses a puzzle since most theory predicts that capital inflows and outflows should be negatively correlated, and while capital inflows should be procyclical, capital outflows should be countercyclical. This previous work has examined the behavior of aggregate capital inflows and outflows (capital flows between a country and the rest of the world). This paper shows that bilateral capital inflows and outflows (flows between a pair of countries) are also positively correlated ...
Globalization Institute Working Papers , Paper 247

Discussion Paper
The Overnight Drift in U.S. Equity Returns

Since the advent of electronic trading in the late 1990s, S&P 500 futures have traded close to 24 hours a day. In this post, which draws on our recent Staff Report, we document that holding U.S. equity futures overnight has earned a large positive return during the opening hours of European markets. The largest positive returns in the 1998–2019 sample have accrued between 2 a.m. and 3 a.m. U.S. Eastern time—the opening of European stock markets—and averaged 3.6 percent on an annualized basis, a phenomenon we call the overnight drift.
Liberty Street Economics , Paper 20210526

Discussion Paper
Dealer Balance Sheets and Corporate Bond Liquidity Provision

Regulatory reforms since the financial crisis have sought to make the financial system safer and severe financial crises less likely. But by limiting the ability of regulated institutions to increase their balance sheet size, reforms?such as the Dodd-Frank Act in the United States and the Basel Committee's Basel III bank regulations internationally?might reduce the total intermediation capacity of the financial system during normal times. Decreases in intermediation capacity may then lead to decreased liquidity in markets in which the regulated institutions intermediate significant trading ...
Liberty Street Economics , Paper 20170524

Discussion Paper
Ten years later – Did QE work?

By November 2008, the Global Financial Crisis, which originated in the residential housing market and the shadow banking system, had begun to turn into a major recession, spurring the Federal Open Market Committee (FOMC) to initiate what we now refer to as quantitative easing (QE). In this blog post, we draw upon the empirical findings of post-crisis academic research's including our own work's to shed light on the question: Did QE work?
Liberty Street Economics , Paper 20190508

Working Paper
Funding Liquidity Risk and the Cross-section of MBS Returns

This paper shows that funding liquidity risk is priced in the cross-section of excess returns on agency mortgage-backed securities (MBS). We derive a measure of funding liquidity risk from dollar-roll implied financing rates (IFRs), which reflect security-level costs of financing positions in the MBS market. We show that factors representing higher net MBS supply are generally associated with higher IFRs, or higher funding costs. In addition, we find that exposure to systematic funding liquidity shocks embedded in the IFRs is compensated in the cross-section of expected excess returns| agency ...
Finance and Economics Discussion Series , Paper 2016-052

Discussion Paper
Are New Repo Participants Gaining Ground?

Following the 2007-09 financial crisis, regulations were introduced that increased the cost of entering into repurchase agreements (repo) for bank holding companies (BHC). As a consequence, banks and securities dealers associated with BHCs, a set of firms which dominates the repo market, were predicted to pull back from the market. In this blog post, we examine whether this changed environment allowed new participants, particularly those not subject to the new regulations, to emerge. We find that although new participants have come on the scene and made gains, they remain a small part of the ...
Liberty Street Economics , Paper 20190403

Discussion Paper
Investigating the Proposed Overnight Treasury GC Repo Benchmark Rates

In its recent ?Statement Regarding the Publication of Overnight Treasury GC Repo Rates,? the Federal Reserve Bank of New York, in cooperation with the U.S. Treasury Department?s Office of Financial Research, announced the potential publication of three overnight Treasury general collateral (GC) repurchase (repo) benchmark rates. Each of the proposed rates is designed to capture a particular segment of repo market activity. All three rates, as currently envisioned, would initially be based on transaction-level overnight GC repo trades occurring on tri-party repo platforms. The first rate would ...
Liberty Street Economics , Paper 20161219

Discussion Paper
Lunch Anyone? Volatility on the Tokyo Stock Exchange around the Lunch Break on May 23, 2013, and Stock Market Circuit Breakers

Stock market circuit breakers halt trading activity on a single stock or an entire exchange if a sudden large price move occurs. Their purpose is to forestall cascading trading activity caused by gaps in liquidity or order errors. Whether circuit breakers achieve this goal is contentious. This post adds to the debate by analyzing intraday price formation on the Tokyo Stock Exchange (TSE) on May 23, 2013?the pinnacle of this past year?s volatility in Japanese stock markets. While no circuit breakers were triggered on the TSE, we focus on trading conditions before and after the daily lunch ...
Liberty Street Economics , Paper 20140409

Discussion Paper
Understanding the Interbank GCF Repo® Market

In this post, we provide a different perspective on the General Collateral Finance (GCF) Repo market. Instead of looking at the market as a whole, as we did in our previous post , or breaking it down by type of dealer, as we did in this primer, we disaggregate interbank activity by clearing bank and by collateral class. This perspective highlights the most traded collateral and the extent to which dealers at a clearing bank are net borrowers or net lenders. This view of the market is informative given the proposed changes announced recently by the Fixed Income Clearing Corporation.
Liberty Street Economics , Paper 20160503a

Discussion Paper
Factors that Affect Bank Stability

In a previous Liberty Street Economics post, we introduced a framework for thinking about the risks banks face. In particular, we distinguished between asset return risk and funding risk that can interact and cause a bank to fail. In our framework, a bank can fail for two reasons: 1-Low asset returns: Fundamental insolvency due to erosion of equity by low asset returns that don’t cover a bank’s debt burden. 2-Loss of funding: Costly liquidation of assets that erode equity.
Liberty Street Economics , Paper 20140226

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