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Working Paper
Dynamic factor value-at-risk for large, heteroskedastic portfolios
Trading portfolios at Financial institutions are typically driven by a large number of financial variables. These variables are often correlated with each other and exhibit by time-varying volatilities. We propose a computationally efficient Value-at-Risk (VaR) methodology based on Dynamic Factor Models (DFM) that can be applied to portfolios with time-varying weights, and that, unlike the popular Historical Simulation (HS) and Filtered Historical Simulation (FHS) methodologies, can handle time-varying volatilities and correlations for a large set of financial variables. We test the DFM-VaR ...
Journal Article
Appendix B: Systemic risk and the financial system (background paper)
The Federal Reserve Bank of New York released a report -- New Directions for Understanding Systemic Risk -- that presents key findings from a cross-disciplinary conference that it cosponsored in May 2006 with the National Academy of Sciences' Board on Mathematical Sciences and Their Applications. ; The pace of financial innovation over the past decade has increased the complexity and interconnectedness of the financial system. This development is important to central banks, such as the Federal Reserve, because of their traditional role in addressing systemic risks to the financial system. ; ...
Report
Vesting and control in venture capital contracts
Vesting of equity payments to an entrepreneur, which is a form of time-contingent compensation, is very common in venture capital contracts. Empirical research suggests that vesting is used to help overcome asymmetric information and agency problems. We show in a theoretical model that vesting equity to an entrepreneur over a long period of time acts as a screening device against a bad entrepreneur type. But incomplete contracts due to hold-up by the venture capitalist imply that equity compensation, in the form of either short-term or long-term vesting, cannot provide standard contractible ...
Journal Article
Worry less about systemic risk, more about inflation
In his column, St. Louis Fed President Jim Bullard downplays systemic risk to the financial system, given that failures of financial institutions would no longer be a surprise. (By now, the possibility of any failure is already being priced into the market.) As the shakeout of the industry continues in a somewhat orderly fashion, policymakers need to put the fight against inflation back on the front burner.
Speech
Lessons at the zero bound: the Japanese and U.S. experience
Remarks at the Japan Society, New York City.
Working Paper
Risk aversion, the labor margin, and asset pricing in DSGE models
In dynamic stochastic general equilibrium (DSGE) models, the household's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring the labor margin can lead to wildly inaccurate measures of the household's true attitudes toward risk. We show that risk premia on assets computed using the stochastic discount factor are proportional to Arrow-Pratt risk aversion, so that measuring risk aversion correctly is crucial for understanding asset prices. ...
Report
Shadow banking: a review of the literature
We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic ...
Speech
The U.S. financial system: where we have been, where we are and where we need to go
Remarks at the Reserve Bank of Australia's 50th Anniversary Symposium, Sydney, Australia.
Speech
Remarks at Panel Discussion on OTC Derivatives Reform and broader financial reforms agenda
Remarks at the 2013 OTC Derivatives Conference, Paris, France.