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Report
Nonlinearity and flight to safety in the risk-return trade-off for stocks and bonds
Vogt, Erik; Adrian, Tobias; Crump, Richard K. (2015-04-01)
We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits additional variation in the cross section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight to safety: expected returns increase for stocks when volatility increases from moderate to high levels, while they decline for Treasury securities. These findings provide support for dynamic asset pricing theories where the ...
Staff Reports , Paper 723

Working Paper
Diamond-Dybvig and Beyond: On the Instability of Banking
Gu, Chao; Monnet, Cyril; Nosal, Ed; Wright, Randall (2023-02-13)
Are financial intermediaries—in particular, banks—inherently unstable or fragile, and if so, why? We address this question theoretically by analyzing whether model economies with financial intermediation are more prone than those without it to multiple, cyclic, or stochastic equilibria. We consider several formalizations: insurance-based banking, models with reputational considerations, those with fixed costs and delegated investment, and those where bank liabilities serve as payment instruments. Importantly for the issue at hand, in each case banking arrangements arise endogenously. ...
FRB Atlanta Working Paper , Paper 2023-02

Speech
LIBOR: The Clock Is Ticking
Williams, John C. (2019-09-23)
Remarks at the 2019 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City.
Speech

Discussion Paper
Has Liquidity Risk in the Corporate Bond Market Increased?
Vogt, Erik; Fleming, Michael J.; Adrian, Tobias; Shachar, Or; Stackman, Daniel (2015-10-06)
Recent commentary suggests concern among market participants about corporate bond market liquidity. However, we showed in our previous post that liquidity in the corporate bond market remains ample. One interpretation is that liquidity risk might have increased, even as the average level of liquidity remains sanguine. In this post, we propose a measure of liquidity risk in the corporate bond market and analyze its evolution over time.
Liberty Street Economics , Paper 20151006b

Working Paper
Globalization and Heterogeneity: Evidence from Hollywood
Adler, Konrad; Fuchs, Simon (2022-10-06)
Linder (1961) conjectured that taste differences could impede trade flows. We extend Krugman (1980) to allow for producers that face taste heterogeneity with volatile demand. Consumers are characterized by different taste over product attributes and idiosyncratic risk. Firms face a portfolio type of problem where they trade off supplying the largest consumer groups against higher exposure to group-specific risk. We develop an empirical strategy to estimate consumer taste from observed market shares across multiple distinct markets of the same product, as well as the key parameters that pin ...
FRB Atlanta Working Paper , Paper 2022-14

Discussion Paper
What Can We Learn from Prior Periods of Low Volatility?
Navarro-Staicos, Juan; Rosa, Carlo; Duarte, Fernando M. (2014-10-06)
Volatility, a measure of how much financial markets are fluctuating, has been near its record low in many asset classes. Over the last few decades, there have been only two other periods of similarly low volatility: in May 2013, and prior to the financial crisis in 2007. Is there anything we can learn from the recent period of low volatility versus what occurred slightly more than one year ago and seven years ago? Probably; the current volatility environment appears quite similar to the one in May 2013, but it?s substantially different from what happened prior to the financial crisis.
Liberty Street Economics , Paper 20141006

Working Paper
Incorporating Diagnostic Expectations into the New Keynesian Framework
L’Huillier, Jean-Paul; Singh, Sanjay R.; Yoo, Donghoon (2023-03-01)
Diagnostic expectations constitute a realistic behavioral model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus ...
Working Paper Series , Paper 2023-19

Speech
Transcript of the Cornell College of Business Annual New York City Predictions Event: February 15, 2017
Dudley, William (2017-02-15)
Transcript of the Cornell College of Business Annual New York City Predictions Event: February 15, 2017.
Speech , Paper 233

Financial Market Volatility in the Spring of 2025
Neely, Christopher J. (2025-06-20)
In April 2025, U.S. financial markets experienced a sharp, temporary rise in volatility. How did this level of volatility compare with the levels seen in other periods since 1990?
On the Economy

Report
Liquidity and volatility in the U.S. treasury market
Fleming, Michael J.; Nguyen, Giang; Engle, Robert; Ghysels, Eric (2012-12-01)
We model the joint dynamics of intraday liquidity, volume, and volatility in the U.S. Treasury market, especially through the 2007-09 financial crisis and around important economic announcements. Using various specifications based on Bauwens and Giot?s (2000) Log- ACD(1,1) model, we find that liquidity, volume, and volatility are highly persistent, with volatility having a lower short-term persistence than the other two. Market liquidity and volume are important to explaining volatility dynamics but not vice versa. In addition, market dynamics change during the financial crisis, with all ...
Staff Reports , Paper 590

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