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Working Paper
Lottery Loans in the Eighteenth Century
Velde, Francois R. (2018-05-12)
In the 18th century Britain frequently issued lottery loans, selling bonds whose size was determined by a draw soon after the sale. The probability distribution was perfectly known ex-ante and highly skewed. After the draw the bonds were identical (except for size) and indistinguishable from regular bonds. I collect market prices for the lottery tickets and show that investors were paying a substantial premium to be exposed to this purely artificial risk. I show that investors were well-to-do and included many merchants and bankers. I turn to cumulative prospect theory to make sense of these ...
Working Paper Series , Paper WP-2018-7

Working Paper
Credit-Market Sentiment and the Business Cycle
López-Salido, J. David; Zakrajšek, Egon; Stein, Jeremy C. (2015-04-25)
Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t and t+1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t-2 also forecasts a change in the composition of external finance: Net debt ...
Finance and Economics Discussion Series , Paper 2015-28

Report
Cyber Risk and the U.S. Financial System: A Pre-Mortem Analysis
Eisenbach, Thomas M.; Lee, Michael Junho; Kovner, Anna (2020-01-01)
We model how a cyber attack may be amplified through the U.S. financial system, focusing on the wholesale payments network. We estimate that the impairment of any of the five most active U.S. banks will result in significant spillovers to other banks, with 38 percent of the network affected on average. The impact varies and can be larger on particular days and geographies. When banks respond to uncertainty by liquidity hoarding, the potential impact in forgone payment activity is dramatic, reaching more than 2.5 times daily GDP. In a reverse stress test, interruptions originating from banks ...
Staff Reports , Paper 909

Working Paper
First to \"Read\" the News: New Analytics and Algorithmic Trading
von Beschwitz, Bastian; Keim, Donald B.; Massa, Massimo (2018-07)
Exploiting a unique identification strategy based on inaccurate news analytics, we document a causal effect of news analytics on the market irrespective of the informational content of the news. We show that news analytics speed up the stock price and trading volume response to articles, but reduce liquidity. Inaccurate news analytics lead to small price distortions that are corrected quickly. The market impact of news analytics is greatest for press releases, which are timelier and easier to interpret algorithmically. Furthermore, we provide evidence that high frequency traders rely on the ...
International Finance Discussion Papers , Paper 1233

Working Paper
Bubbles and Leverage: A Simple and Unified Approach
Bogusz, Theodore (2013-11-13)
In this paper, we lay out a simple framework that captures much of what the theoretical literature has to say about the role of credit in systemically important asset booms and busts. In addition, we suggest ways in which to incorporate physical investment in the bubble asset as well as monetary policy.
Working Paper Series , Paper WP-2013-21

Journal Article
The Real Term Premium in a Stationary Economy with Segmented Asset Markets
Lee, Junsang; Chien, YiLi (2019)
This article proposes a general equilibrium model to explain the positive and sizable term premia implied by the data. The authors introduce a slow mean-reverting process of consumption growth and a segmented asset-market mechanism with heterogeneous trading technologies into an otherwise standard heterogeneous agent general equilibrium model. First, the slow mean-reverting consumption growth process implies that the expected consumption growth rate is only slightly countercyclical and the process can exhibit near-zero first-order autocorrelation, as observed in the data. This slight ...
Review , Volume 101 , Issue 2 , Pages 115-134

Working Paper
Momentum Trading, Return Chasing and Predictable Crashes
Jagannathan, Ravi; Chabot, Benjamin; Ghysels, Eric (2014-11-13)
We combine self-collected historical data from 1867 to 1907 with CRSP data from 1926 to 2012, to examine the risk and return over the past 140 years of one of the most popular mechanical trading strategies ? momentum. We find that momentum has earned abnormally high risk-adjusted returns ?a three factor alpha of 1 percent per month between 1927 and 2012 and 0.5 percent per month between 1867 and 1907 ? both statistically significantly different from zero. However, the momentum strategy also exposed investors to large losses (crashes) during both periods. Momentum crashes were predictable ? ...
Working Paper Series , Paper WP-2014-27

Report
The term structure of the price of variance risk
Eisenbach, Thomas M.; Schmalz, Martin C.; Wang, Yichuan; Andries, Marianne (2015-08-01)
We estimate the term structure of the price of variance risk (PVR), which helps distinguish between competing asset-pricing theories. First, we measure the PVR as proportional to the Sharpe ratio of short-term holding returns of delta-neutral index straddles; second, we estimate the PVR in a Heston (1993) stochastic-volatility model. In both cases, the estimation is performed separately for different maturities. We find the PVR is negative and decreases in absolute value with maturity; it is more negative and its term structure is steeper when volatility is high. These findings are ...
Staff Reports , Paper 736

Report
The microstructure of a U.S. Treasury ECN: the BrokerTec platform
Nguyen, Giang; Mizrach, Bruce; Fleming, Michael J. (2009-07-01)
We assess the microstructure of the U.S. Treasury securities market following its migration to electronic trading. We model price discovery using a vector autoregression model of price and order flow. We show that both trades and limit orders affect price dynamics, suggesting that traders also choose limit orders to exploit their information. Moreover, while limit orders have smaller price impact, their greater variation contributes more to the variance of price updates. Lastly, we find increased price impact of trades and especially limit orders following major announcements (such as FOMC ...
Staff Reports , Paper 381

Discussion Paper
Financial Stability and the Coronavirus Pandemic
Wall, Larry D. (2020-11-30)
The Atlanta Fed recently helped organize a conference titled "Financial Stability and the Coronavirus Pandemic." The conference had three sessions devoted to problems focusing on various aspects of how the markets for corporate credits responded to the COVID-19 shock including corporate bond investment funds, the corporate bond market, and the corporate loan market. This article summarizes some of the important findings of the papers presented at the conference.
Policy Hub , Paper 2020-13

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