Search Results
Report
Time variation in asset price responses to macro announcements
Although the effects of economic news announcements on asset prices are well established, these relationships are unlikely to be stable. This paper documents the time variation in the responses of yield curves and exchange rates using high-frequency data from January 2000 through August 2011. Significant time variation in news effects is present for those announcements that have the largest effects on asset prices. The time variation in effects is explained by economic conditions, including the level of policy rates at the time of the news release, and risk conditions: Government bond yields ...
Discussion Paper
Leverage Ratio Arbitrage All Over Again
Leverage limits as a form of capital regulation have a well-known, potential bug: If banks can’t lever returns as desired, they can boost returns on equity by shifting toward riskier, higher yielding assets. That reach for yield is the leverage rule “arbitrage.” But would banks do that? In a previous post, we discussed evidence from our working paper that banks did do just that in response to the new leverage rule that took effect in 2018. This post discusses new findings in our revised paper on when and how banks arbitraged.
Report
International Trade, Risk and the Role of Banks
Banks play a critical role in international trade by providing trade finance products that reduce the risk of exporting. This paper employs two new data sets to shed light on the magnitude and structure of this business, which, as we show, is highly concentrated in a few large banks. The two principal trade finance instruments, letters of credit and documentary collections, covered about 10 percent of U.S. exports in 2012. They are preferred for larger transactions, which indicates the existence of substantial fixed costs in the provision and use of these instruments. Letters of credit are ...
Community Banking Conference Highlights Risks Industry Faces
Risk in its various forms and how it is evaluated was a prominent theme at a fall gathering of academics, bankers and regulators. A blog post summarizes some key findings presented.
Working Paper
Why Have Interest Rates Fallen Far Below the Return on Capital
Risk-free rates have been falling since the 1980s while the return on capital has not. We analyze these trends in a calibrated OLG model with recursive preferences, designed to encompass many of the "usual suspects'' cited in the debate on secular stagnation. Declining labor force and productivity growth imply a limited decline in real interest rates and deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium. If we allow for a change in the (perceived) risk to productivity growth to fit the data, we find that the decline in the risk-free rate ...
Working Paper
Risk Management for Monetary Policy Near the Zero Lower Bound
As projections have inflation heading back toward target and the labor market continuing to improve, the Federal Reserve has begun to contemplate an increase in the federal funds rate. There is however substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In many standard models uncertainty has no effect. In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty. In the current context this result implies that a delayed liftoff is ...
Working Paper
Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations
This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that U.S. BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs? internal controls and risk management play an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking ...
Working Paper
International Stock Comovements with Endogenous Clusters
We examine international stock return comovements of country-industry portfolios. Our model allows comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster compositions substantially changed over time, with the emergence of clusters among European countries from the early 2000s. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except ...
Journal Article
Risk of Business Insolvency during Coronavirus Crisis
Many businesses had amassed high levels of debt, or leverage, before the COVID-19 pandemic. Out of precaution or necessity, firms increased their borrowing further after the onset. Although the shock to those firms’ value significantly increased their risk, measured by their distance-to-default, the default risk remains relatively small for most corporate debt. Nevertheless, the amount of outstanding liabilities among firms with elevated risk of insolvency is more than two times higher than at the peak of the global financial crisis.
Working Paper
The system of national accounts and alternative economic perspectives
Brent Moulton and Nicole Mayerhauser (2015) point out that, for more than 50 years, economists have featured the concept of human capital in their models of labor, growth, productivity, and distribution of income. The authors recommend the addition to the System of National Accounts (SNA) of supplemental person-level accounts: i.e., a System of Person Accounts (SPA). They see this as the best way of recognizing the processes of human capital creation as well as related issues of how income is distributed among individuals and families. The authors argue that this change would support three ...