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Newsletter
Interest-only mortgages and speculation in hot housing markets
Even as housing markets have temporarily shut down across the U.S. during the Covid-19 pandemic, housing remains a key sector that contributes disproportionately to fluctuations in overall economic activity and that will likely play an important role as the economy reopens. Interest in this market among research economists and policymakers intensified after the exceptional boom and bust in housing between 2003 and 2008. In this Chicago Fed Letter, we describe research in Barlevy and Fisher (2020)1 that examined patterns in the kinds of mortgages homebuyers took out in different cities during ...
Journal Article
Exchange rate changes and net positions of speculators in the futures market
Traders, strategists, and other participants in the currency markets continuously seek to understand and interpret short-term exchange rate movements. One data set frequently used in those efforts is a weekly report of net futures market positions held by speculators on the Chicago Mercantile Exchange. In this article, the authors pursue a transaction-oriented line of research to track short-term exchange rate moves. They examine the data set for six currencies over a ten-year period and document a strong contemporaneous relationship between weekly changes in speculators' net positions and ...
Journal Article
Are markets really efficient?
Briefing
How Speculation Affects the Market and Outcome-Based Values of Innovation
nnovation booms often coincide with speculative bubbles. Using data on over 1 million patents, we document two ways in which speculation creates a disconnect between the market valuation of innovation and its actual economic impact. First, an innovation during bubbles raises the stock price of its creator by 40 percent more than is justified by future outcomes. Next, competitors' stock prices move little during bubbles despite their profits suffering. We present a theory of investor disagreement about which firms will succeed that reconciles both facts. Policymakers should account for the ...
Working Paper
A leverage-based model of speculative bubbles
This paper examines whether theoretical models of bubbles based on the notion that the price of an asset can deviate from its fundamental value are useful for understanding phenomena that are often described as bubbles, and which are distinguished by other features such as large and rapid booms and busts in asset prices together with high turnover in asset ownership. In particular, I focus on riskshifting models similar to those developed in Allen and Gorton (1993) and Allen and Gale (2000). I show that such models could explain these phenomena, and discuss under what conditions booms and ...
Journal Article
Speculation in the oil market
Disentangling the true drivers of oil prices is a critical first step for allocating resources and designing good policy.
Journal Article
October postmortem
Working Paper
Currency speculation and the optimum control of bank lending in Singapore dollar: a case of partial liberalization
The Monetary Authority of Singapore (MAS) has a long-standing policy of controlling bank lending in Singapore dollars to nonresidents and to residents who use the funds outside Singapore. While the control may prevent the internationalization of the Singapore dollar and contain exchange rate volatility, it can hinder the deepening and widening of the financial markets in Singapore. ; This paper suggests three policy options that would allow traders and investors to borrow Singapore dollars without any restrictions, while making it costly for speculators since their activities can cause ...
Report
Are market makers uninformed and passive? Signing trades in the absence of quotes
We develop a new likelihood-based approach to signing trades in the absence of quotes. This approach is equally efficient as the existing Markov-chain Monte Carlo methods, but more than ten times faster. It can address the occurrence of multiple trades at the same time and allows for analysis of settings in which trade times are observed with noise. We apply this method to a high-frequency data set of thirty-year U.S. Treasury futures to investigate the role of the market maker. Most theory characterizes the market maker as an uninformed, passive supplier of liquidity. Our findings suggest, ...