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Jel Classification:G23 

Working Paper
How Does Monetary Policy Affect Prices of Corporate Loans?

We study the impact of unanticipated monetary policy news around FOMC announcements on secondary market corporate loan spreads. We find that the reaction of loan spreads to monetary policy news is weaker than that of bond spreads: following an unanticipated monetary policy tightening (easing) shock, loan spreads do not increase (decrease) as much as bond spreads do. Decomposition of the spreads into compensations for expected defaults and risk premiums shows that differential reactions of loan and bond risk premiums are the main driver of the differential spread reactions. We further find ...
Finance and Economics Discussion Series , Paper 2022-008

Report
Intraday market making with overnight inventory costs

The U.S. Treasury market is highly intermediated by nonbank principal trading firms (PTFs). Limited capital forces PTFs to end the trading day roughly flat. We construct a continuous time market making model to analyze the trade-off faced by a profit-maximizing firm with overnight inventory costs, and develop closed-form representations of the optimal price policy functions. Our model reveals that bid-ask spreads widen as the end of the trading day approaches, and that increases in order arrival rates do not always lead to higher price volatility. Our empirical analysis shows that ...
Staff Reports , Paper 799

Journal Article
An empirical analysis of the GCF Repo® Service

This article examines how dealers use the GCF Repo service. It begins by explaining the strategies that dealers employ when trading GCF Repo and then uses empirical analysis to quantify the predominance of these strategies. Looking across all dealers and all days, the study finds that on an average day, at least 23 percent of dealers focus on strategies to raise cash and at least 20 percent focus on managing their inventory of securities. This activity involves using GCF Repo to both exclusively source collateral and perform collateral swaps.
Economic Policy Review , Issue 2 , Pages 25-37

Report
Buyout activity: the impact of aggregate discount rates

Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the ...
Staff Reports , Paper 606

Working Paper
Reputation and Investor Activism: A Structural Approach

We measure the impact of reputation for proxy fighting on investor activism by estimating a dynamic model in which activists engage a sequence of target firms. Our estimation produces an evolving reputation measure for each activist and quantifies its impact on campaign frequency and outcomes. We find that high reputation activists initiate 3.5 times as many campaigns and extract 85% more settlements from targets, and that reputation-building incentives explain 20% of campaign initiations and 19% of proxy fights. Our estimates indicate these reputation effects combine to nearly double the ...
Finance and Economics Discussion Series , Paper 2017-036r1

Working Paper
Financing Affordable and Sustainable Homeownership with Fixed-COFI Mortgages

The 30-year fixed-rate fully amortizing mortgage (or ?traditional fixed-rate mortgage?) was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With this sluggish equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowners might have better uses for this ...
Finance and Economics Discussion Series , Paper 2018-009

Working Paper
Money Market Fund Vulnerabilities: A Global Perspective

Money market funds (MMFs) are popular around the world, with over $9 trillion in assets under management globally. From their origins in the 1970s, MMFs have operated in a niche between the capital markets and the banking system, as investment funds that offer private money‐like assets with features similar to those of bank deposits. Hence, they are vulnerable to runs that arise from liquidity transformation and from sudden changes in investor perceptions of the funds’ ability to serve as money‐like assets. Since 2000, MMF runs have occurred in many countries and under many regulatory ...
Finance and Economics Discussion Series , Paper 2022-012

Working Paper
Liquidity Crises in the Mortgage Market

Non-banks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how non-bank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how the same liquidity issues unfolded during the financial crisis, leading to the failure of many non-bank companies, requests for ...
Finance and Economics Discussion Series , Paper 2018-016

Report
Trends in credit market arbitrage

Market participants and policymakers alike were surprised by the large, prolonged dislocations in credit market arbitrage trades during the second half of 2015 and the first quarter of 2016. In this paper, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by some market participants, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period but limited evidence of asset managers changing their positioning in derivative products. While we cannot quantify the contribution of these ...
Staff Reports , Paper 784

Working Paper
Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility

In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from ...
Finance and Economics Discussion Series , Paper 2016-096

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