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Working Paper
Institutional Herding and Its Price Impact : Evidence from the Corporate Bond Market
Cai, Fang; Li, Yi; Li, Dan; Han, Song (2016-10)
Among growing concerns about potential financial stability risks posed by the asset management industry, herding has been considered as an important risk amplification channel. In this paper, we examine the extent to which institutional investors herd in their trading of U.S. corporate bonds and quantify the price impact of such herding behavior. We find that, relative to what is documented for the equity market, the level of institutional herding is much higher in the corporate bond market, particularly among speculative-grade bonds. In addition, mutual funds have become increasingly likely ...
Finance and Economics Discussion Series , Paper 2016-091

Working Paper
Financial Stability Considerations for Monetary Policy: Empirical Evidence and Challenges
Boyarchenko, Nina; Favara, Giovanni; Schularick, Moritz (2022-02-15)
This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in ...
Finance and Economics Discussion Series , Paper 2022-006

Working Paper
Credit and Liquidity Policies during Large Crises
Ebsim, Mahdi; Faria-e-Castro, Miguel; Kozlowski, Julian (2021-09-10)
We study the evolution of firm financials during two large crises: the Great Financial Crisis (GFC) and the COVID-19 pandemic. While the two crises featured similar increases in corporate spreads, corporate debt and liquid asset holdings moved in opposite directions. The micro-data reveal that firm leverage was a more important predictor of firm-level credit spreads and investment during the GFC, but that firm funding liquidity was more important during the pandemic. We augment a dynamic model of firm capital structure with an explicit motive to hold liquid assets, and calibrate it to match ...
Working Papers , Paper 2020-035

Report
The Risk of Becoming Risk Averse: A Model of Asset Pricing and Trade Volumes
Atkeson, Andrew; Alvarez, Fernando (2018-12-31)
We develop a new general equilibrium model of asset pricing and asset trading volume in which agents? motivations to trade arise due to uninsurable idiosyncratic shocks to agents? risk tolerance. In response to these shocks, agents trade to rebalance their portfolios between risky and riskless assets. We study a positive question ? When does trade volume become a pricing factor? ? and a normative question ? What is the impact of Tobin taxes on asset trading on welfare? In our model, economies in which marketwide risk tolerance is negatively correlated with trade volume have a higher risk ...
Staff Report , Paper 577

Working Paper
Collateral Runs
Vardoulakis, Alexandros; Infante, Sebastian (2018-04-04)
This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Finance and Economics Discussion Series , Paper 2018-022

Discussion Paper
When Do Trade Frictions Increase Liquidity?
Afonso, Gara (2011-12-19)
Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.
Liberty Street Economics , Paper 20111219

Report
A Demand System Approach to Asset Pricing
Yogo, Motohiro; Koijen, Ralph S. J. (2015-04-17)
This Staff Report was previously titled "An Equilibrium Model of Institutional Demand and Asset Prices." {{p}} We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings data. The equilibrium price vector is uniquely determined by market clearing, which equates the supply of each asset to aggregate demand. We estimate the model on U.S. stock market data by instrumental variables, under an identifying assumption that allows for price impact. The model sheds light on the role of institutions in stock market ...
Staff Report , Paper 510

Journal Article
Central Bank Lending in a Liquidity Crisis
Occhino, Filippo (2016-04)
Solvent banks may appear insolvent in the midst of a liquidity crisis, due to the plunge of their assets? value below their normal value. The responsibility of the central bank is to provide liquidity to the banks that would be solvent under normal economic conditions, at lending terms consistent with normal market conditions.
Economic Commentary , Issue April

Discussion Paper
Has MBS Market Liquidity Deteriorated?
Podjasek, Rich; Fleming, Michael J.; Molloy, Linsey; Fuster, Andreas (2016-02-08)
Mortgage-backed securities guaranteed by the government-backed entities Fannie Mae, Freddie Mac, and Ginnie Mae, or so-called ?agency MBS,? are the primary funding source for U.S. residential housing. A significant deterioration in the liquidity of the MBS market could lead investors to demand a premium for transacting in this important market, ultimately raising borrowing costs for U.S. homeowners. This post looks for evidence of changes in agency MBS market liquidity, complementing similar posts studying liquidity in U.S. Treasury and corporate bond markets.
Liberty Street Economics , Paper 20160208a

Discussion Paper
Introduction to a Series on Market Liquidity: Part 2
Adrian, Tobias; Schaumburg, Ernst; Fleming, Michael J. (2015-10-05)
Market participants and policymakers have raised concerns about the potential adverse effects of financial regulation on market liquidity?the ability to buy and sell securities quickly, at any time, at minimal cost. Market liquidity supports the efficient allocation of capital through financial markets, which is a catalyst for sustainable economic growth. Changes in market liquidity, whether due to regulation or other forces, are therefore of great interest to policymakers and market participants alike.
Liberty Street Economics , Paper 20151005

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