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Working Paper
Cheapest-to-Deliver Pricing, Optimal MBS Securitization, and Market Quality
Huh, Yesol; Kim, You Suk (2021-05-06)
We study optimal securitization and its impact on market quality when the secondary market structure leads to cheapest-to-deliver pricing in the context of agency mortgage-backed securities (MBS). A majority of MBS are traded in the to-be-announced (TBA) market, which concentrates trading of heterogeneous MBS into a few liquid TBA contracts but induces adverse selection. We find that lenders segregate loans of like values into separate pools and tend to trade low-value MBS in the TBA market and high-value MBS outside the TBA market. We then present a model of optimal securitization for agency ...
Finance and Economics Discussion Series , Paper 2021-031

Working Paper
Credit and Liquidity Policies during Large Crises
Ebsim, Mahdi; Faria-e-Castro, Miguel; Kozlowski, Julian (2021-09-10)
We study the evolution of firm financials during two large crises: the Great Financial Crisis (GFC) and the COVID-19 pandemic. While the two crises featured similar increases in corporate spreads, corporate debt and liquid asset holdings moved in opposite directions. The micro-data reveal that firm leverage was a more important predictor of firm-level credit spreads and investment during the GFC, but that firm funding liquidity was more important during the pandemic. We augment a dynamic model of firm capital structure with an explicit motive to hold liquid assets, and calibrate it to match ...
Working Papers , Paper 2020-035

Working Paper
To sell or to borrow: a theory of bank liquidity management
Kowalik, Michal (2014-12-01)
Research Working Paper , Paper RWP 14-18

Working Paper
The Effects of Volatility on Liquidity in the Treasury Market
Meldrum, Andrew C.; Sokolinskiy, Oleg (2023-05-05)
We study the relationship between volatility and liquidity in the market for on-the-run Treasury securities using a novel framework for quantifying price impact. We show that at times of relatively low volatility, marginal trades that go with the flow of existing trades tend to have a smaller price impact than trades that go against the flow. However, this difference tends to diminish at times of high volatility, indicating that the perceived information content of going against the flow is less when volatility is high. We also show that market participants executing trades aggressively using ...
Finance and Economics Discussion Series , Paper 2023-028

Working Paper
Bank Complexity, Governance, and Risk
Goldberg, Linda S.; Correa, Ricardo (2020-07-02)
Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the the costs of bank resolution when organizations fail, the effect of complexity on BHCs' broader risk profiles is less well understood. Business, organizational, and geographic complexity can engender explicit trade-offs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The outcomes of such trade-offs may ...
International Finance Discussion Papers , Paper 1287

Working Paper
Price Pressure and Price Discovery in the Term Structure of Interest Rates
Mixon, Scott; Tuzun, Tugkan (2018-09-28)
We study the price pressure and price discovery effects in the U.S. Treasury market by using a term structure model. Our model decomposes yield curve shifts into two components: a virtually permanent change related to order flow and a transitory, price pressure effect due to dealer inventories. We find strong evidence that net dealer Treasury inventories has impact on the yield curve. Cash Treasury instruments in inventory have a larger impact on yields than futures contracts, suggesting that cash and futures inventories are not perfect substitutes. Price discovery in the level of interest ...
Finance and Economics Discussion Series , Paper 2018-065

Working Paper
COVID-19 as a Stress Test: Assessing the Bank Regulatory Framework
Mooney, Timothy; Martinez, Francis; Loudis, Bert; Wix, Carlo; Iercosan, Diana A.; Duncan, Elizabeth; Warusawitharana, Missaka; Wang, Ke; Abboud, Alice; Ranish, Benjamin; Horvath, Akos (2021-04-06)
The widespread economic damage caused by the ongoing COVID-19 pandemic poses the first major test of the bank regulatory reforms put in place following the global financial crisis. This study assesses this framework, with an emphasis on capital and liquidity requirements. Leading up to the COVID-19 crisis, banks were well-capitalized and held ample liquid assets, reflecting in part heightened requirements. Capital requirements were comparable across major jurisdictions, despite differences in the implementation of the international Basel standards. The overall robust capital and liquidity ...
Finance and Economics Discussion Series , Paper 2021-024

Working Paper
Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms
Ajello, Andrea; Boyarchenko, Nina; Gourio, François; Tambalotti, Andrea (2022-02-15)
This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit ...
Finance and Economics Discussion Series , Paper 2022-005

Working Paper
Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses
Klee, Elizabeth C.; Ferris, Erin E. Syron; Cashin, David B. (2020-01-31)
Treasury securities normally possess unparalleled safety and liquidity and, consequently, carry a money premium. We use recent debt limit impasses, which temporarily increased the riskiness of Treasuries, to investigate the relationship between the money premium, safety, and liquidity. Our results shed light on Treasury market dynamics specifically, and debt more generally. We first establish that a decline in the perceived safety of Treasuries erodes the money premium at all times. Meanwhile, changes in liquidity only affected the money premium during the impasses. Next, we show that ...
Finance and Economics Discussion Series , Paper 2020-008

Newsletter
Central Counterparty Risk Management: Beyond Default Risk
Lewis, Rebecca (2017)
On October 17, 2017, the Federal Reserve Bank of Chicago held its fourth annual Central Counterparty (CCP) Risk Management Conference: Beyond Default Risk. Attendees included representatives from regulators, CCPs, clearing members, and end-user market participants from across North America, Europe, and Asia. Panelists and keynote speakers discussed the challenges for CCPs and market participants that arise from stresses other than a clearing member default
Chicago Fed Letter

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