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Discussion Paper
“YOLOing the Market”: Market Manipulation? Implications for Markets and Financial Stability
Since the start of the Covid-19 pandemic in 2020, retail investors have increasingly participated at higher rates in the U.S. equities markets, particularly in day trading and short-term trading. In January 2021, amid a surge of online postings and interest by retail investors who use free trading apps, GameStop stock began moving up and down by billions of dollars a day—resulting in big gains for some investors and billions in losses for others. To the extent the proliferation of free trading democratizes the market, increases the diversity of participants able to participate in the ...
Report
Merger options and risk arbitrage
Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio ...
Newsletter
Distributed Ledger Technology
The reduction of carbon emissions is a critical part of the transition to a more sustainable economy. Reducing carbon emissions is expected to lead to fewer natural disasters, lower energy transitions risk, and a lower impact on financial risks resulting from physical damage caused by climate change.
Newsletter
A Retrospective on the Crypto Runs of 2022
In this article, we describe the spectacular collapse of several crypto-asset platforms in 2022 following investment losses and widespread customer withdrawals. These platforms offered and marketed to customers a number of products and services related to crypto-assets, including high-yield investments, trading, and custody services. The platforms were subject to run risk: They allowed customers to withdraw funds on demand while using those funds to make illiquid and risky investments, in part to generate the high rates of returns promised to customers on investment products. In one of the ...
Newsletter
The Impact of the Covid-19 Pandemic on Health Insurers
The U.S. health insurance industry, which owns over $380 billion in financial assets, was placed in the spotlight when the Covid-19 pandemic began in the spring of 2020.1 The pandemic led to health-care-specific changes, such an increase in Covid-19 testing and related hospitalizations, as well as a temporary postponement or cancellation of elective procedures to make space for Covid-19 patients. It also led to changes in financial markets, notably a decrease in interest rates. These changes affected the risks that health insurers are subject to and the overall profitability of the industry.
Newsletter
UK Pension Market Stress in 2022 - Why It Happened and Implications for the U.S.
A steep increase in British sovereign yields and swap rates and an equally steep drop in the value of the British pound (GBP) in September 2022 put substantial liquidity pressures on United Kingdom pension funds. This repricing in risk assets was triggered by the UK chancellor’s mini-budget announcement on September 23, 2022, which led to reactions from market participants. The structure and investment strategies of pension funds made them particularly ill-prepared to deal with market turmoil.