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Discussion Paper
How Does Information Affect Liquidity in Over-the-Counter Markets?
Lee, Michael Junho; Martin, Antoine (2020-01-13)
A large volume of financial transactions occur in decentralized markets that commonly depend on a network of dealers. Dealers face two impediments to providing liquidity in these markets. First, dealers may face informed traders. Second, they may face costs associated with maintaining large balance sheets, either due to inventory or liquidity costs. In a recent paper, we study a model of over-the-counter (OTC) markets in which liquidity is endogenously determined by dealers who must contend with both asymmetric information and liquidity costs. This post provides an intuitive explanation of ...
Liberty Street Economics , Paper 20200113

Report
Who Sees the Trades? The Effect of Information on Liquidity in Inter-Dealer Markets
Garratt, Rod; Lee, Michael Junho; Martin, Antoine; Townsend, Robert M. (2019-07-01)
Dealers, who strategically supply liquidity to traders, are subject to both liquidity and adverse selection costs. While liquidity costs can be mitigated through inter-dealer trading, individual dealers? private motives to acquire information compromise inter-dealer market liquidity. Post-trade information disclosure can improve market liquidity by counteracting dealers? incentives to become better informed through their market-making activities. Asymmetric disclosure, however, exacerbates the adverse selection problem in inter-dealer markets, in turn decreasing equilibrium liquidity ...
Staff Reports , Paper 892

Report
Does central clearing reduce counterparty risk in realistic financial networks?
Garratt, Rod; Zimmerman, Peter (2015-03-01)
Novating a single asset class to a central counterparty (CCP) in an over-the-counter derivatives trading network impacts both the mean and variance of total net exposures between counterparties. When a small number of dealers trade in a relatively large number of asset classes, central clearing increases the mean and variance of net exposures, which may lead to increased counterparty risk and higher margin needs. There are intermediate cases where there is a trade-off: The introduction of a CCP leads to an increase in expected net exposures but this increase is accompanied by a reduction in ...
Staff Reports , Paper 717

Report
Informational contagion in the laboratory
Cipriani, Marco; Guarino, Antonio; Guazzarotti, Giovanni; Tagliati, Federico; Fischer, Sven (2015-03-01)
We study the informational channel of financial contagion in the laboratory. In our experiment, two markets with correlated fundamentals open sequentially. In both markets, subjects receive private information. Subjects in the market opening second also observe the history of trades and prices in the first market. We find that although in both markets private information is only imperfectly aggregated, subjects are able to make correct inferences based on the public information coming from the market that opens first. As a result, we observe financial contagion in the laboratory: Indeed, the ...
Staff Reports , Paper 715

Report
The impact of CEO turnover on equity volatility
Clayton, Matthew J.; Hartzell, Jay C.; Rosenberg, Joshua V. (2003-05-01)
A change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock price volatility, and test these hypotheses using a sample of 872 CEO turnovers over the 1979-95 period. We find that volatility increases following a CEO turnover, even when the CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers - a finding consistent with the ...
Staff Reports , Paper 166

Report
The Federal Reserve and market confidence
Boyarchenko, Nina; Haddad, Valentin; Plosser, Matthew (2016-04-01)
We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions and market confidence. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage issuance, ...
Staff Reports , Paper 773

Report
Nonparametric pricing of multivariate contingent claims
Rosenberg, Joshua V. (2003)
In this paper, I derive and implement a nonparametric, arbitrage-free technique for multivariate contingent claim (MVCC) pricing. Using results from the method of copulas, I show that the multivariate risk-neutral density can be written as a product of marginal risk-neutral densities and a risk-neutral dependence function. I then develop a pricing technique using nonparametrically estimated marginal risk-neutral densities (based on options data) and a nonparametric dependence function (based on historical return data). By using nonparametric estimation, I avoid the pricing biases that result ...
Staff Reports , Paper 162

Report
The Market Events of Mid-September 2019
Copeland, Adam; Martin, Antoine; La Spada, Gabriele; Cipriani, Marco; Kovner, Anna; Afonso, Gara (2020-03-01)
This paper studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked up and, on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have ...
Staff Reports , Paper 918

Working Paper
The Closing of a Major Airport: Immediate and Longer-Term Housing Market Effects
Ross, Stephen L.; Crews, Jonas C.; Cohen, Jeffrey P.; Coughlin, Cletus C. (2020-01-08)
The closing of a busy airport has large effects on noise and economic activity. Using a unique dataset, we examine the effects of closing Denver’s Stapleton Airport on nearby housing markets. We find evidence of immediate anticipatory price effects upon announcement, but no price changes at closing likely because closing was widely anticipated. Further, after airport closure, high income and white households moved into these locations and developers upgraded the quality of houses being built. Finally, post-closing, these demographic and housing stock changes had substantial effects on ...
Working Papers , Paper 2020-001

Working Paper
Can risk explain the profitability of technical trading in currency markets?
Neely, Christopher J.; Ivanova, Yuliya; Weller, Paul A. (2020-06-12)
Academic studies show that technical trading rules would have earned substantial excess returns over long periods in foreign exchange markets. However, the approach to risk adjustment has typically been rather cursory. We examine the ability of a wide range of models: CAPM, quadratic CAPM, downside risk CAPM, Carhart’s 4-factor model, the C-CAPM, an extended C-CAPM with durable consumption, Lustig-Verdelhan (LV) carry-trade factor model, and models including macroeconomic factors, and foreign exchange volatility, skewness and liquidity, to explain these technical trading returns. No model ...
Working Papers , Paper 2014-033

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