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Keywords:liquidity risk 

Discussion Paper
Internal Liquidity’s Value in a Financial Crisis

A classic question for U.S. financial firms is whether to organize themselves as entities that are affiliated with a bank-holding company (BHC). This affiliation brings benefits, such as access to liquidity from other affiliated entities, as well as costs, particularly a larger regulatory burden. This post highlights the results from a recent Staff Report that sheds light on this tradeoff. This work uses confidential data on the population of broker-dealers to study the benefits of being affiliated with a BHC, with a focus on the global financial crisis (GFC). The analysis reveals that ...
Liberty Street Economics , Paper 20240408

Working Paper
The Benefit of Inflation-Indexed Debt: Evidence from an Emerging Bond Market

Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance through greater reliance on inflation-indexed bonds for a representative emerging economy, Colombia. Using an arbitrage-free dynamic term structure model of fixed-coupon and inflation-indexed bond prices, we account for inflation and liquidity risk premia and calculate the net benefit of issuing inflation-indexed bonds over nominal bonds. Our results suggest that the Colombian government could lower its funding costs by as much as ...
Working Paper Series , Paper 2023-04

Working Paper
Bond Flows and Liquidity: Do Foreigners Matter?

In their search for yield in the current low interest rate environment, many investors have turned to sovereign debt in emerging economies, which has raised concerns about risks to financial stability from these capital flows. To assess this risk, we study the effects of changes in the foreign-held share of Mexican sovereign bonds on their liquidity premiums. We find that recent increases in foreign holdings of these securities have played a significant role in driving up their liquidity premiums. Provided the higher compensation for bearing liquidity risk is commensurate with the chance of a ...
Working Paper Series , Paper 2019-08

Discussion Paper
Did Third Avenue's Liquidation Reduce Corporate Bond Market Liquidity?

The announced liquidation of Third Avenue’s high-yield Focused Credit Fund (FCF) on December 9, 2015, drew widespread attention and reportedly sent ripples through asset markets. Events of this kind have the potential to increase the demand for market liquidity, as investors revise expectations, reassess risk exposures, and fulfill the need to trade. Moreover, portfolio effects and general fears of contagion may increase the demand for liquidity in assets only remotely related to a liquidating firm’s direct holdings. In this post, we examine whether FCF’s announced liquidation affected ...
Liberty Street Economics , Paper 20160219a

Report
Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico

To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence of large and time-varying liquidity premia in nominal and real bond prices that are only weakly correlated, the results indicate that long-term inflation expectations in Mexico are well anchored close to the inflation target of the Bank of Mexico. Furthermore, Mexican inflation risk premia are larger ...
Staff Reports , Paper 961

Working Paper
Modeling Money Market Spreads: What Do We Learn about Refinancing Risk?

We quantify the effect of refinancing risk on euro area money market spreads, a major factor driving spreads during the financing crisis. With the advent of the crisis, market participants' perception of their ability to refinance over a given period of time changed radically. As a result, borrowers preferred to obtain funding for longer tenors and lenders were willing to provide funding for shorter tenors. This discrepancy resulted in a need to refinance more frequently in order to borrow over a given horizon, thus increasing refinancing risk. We measure refinancing risk by quantifying the ...
Finance and Economics Discussion Series , Paper 2014-112

Discussion Paper
Has Liquidity Risk in the Treasury and Equity Markets Increased?

Market participants have argued that market liquidity has deteriorated since the financial crisis. However, inspection of common metrics such as bid-ask spreads, market depth, and price impact do not show pronounced reductions in liquidity compared with precrisis levels. In this post, we argue that recent changes in liquidity conditions may best be described in terms of heightened liquidity risk, as opposed to general declines in liquidity levels. We propose a measure that shows liquidity risk has risen in equity and Treasury markets and discuss some factors behind the increase.
Liberty Street Economics , Paper 20151006a

Working Paper
Central Clearing and Systemic Liquidity Risk

By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or ...
Working Paper Series , Paper WP 2019-12

Working Paper
Accounting for Low Long-Term Interest Rates: Evidence from Canada

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term ...
Working Paper Series , Paper 2020-35

Working Paper
Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico

To study inflation expectations and associated risk premia in emerging bond markets, thispaper provides estimates for Mexico based on an arbitrage-free dynamic term structuremodel of nominal and real bond prices that accounts for their liquidity risk. In addition todocumenting the existence of large and time-varying liquidity premia in nominal and realbond prices that are only weakly correlated, the results indicate that long-term inflationexpectations in Mexico are well anchored close to the inflation target of the Bank ofMexico. Furthermore, Mexican inflation risk premia are larger and more ...
Working Paper Series , Paper 2021-08

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