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Working Paper
Credit Supply and Hedge Fund Performance: Evidence from Prime Broker Surveys
Li, Dan; Monin, Phillip J.; Petrasek, Lubomir (2024-11-21)
Constraints on the supply of credit by prime brokers affect hedge funds' leverage and performance. Using dealer surveys and hedge fund regulatory filings, we identify individual funds' credit supply from the availability of credit under agreements currently in place between a hedge fund and its prime brokers. We find that hedge funds connected to prime brokers that make more credit available to their hedge fund clients increase their borrowing and generate higher returns and alphas. These effects are more pronounced among hedge funds that rely on a small number of prime brokers, and those ...
Finance and Economics Discussion Series , Paper 2024-089

Working Paper
Sovereigns versus Banks: Credit, Crises, and Consequences
Taylor, Alan M.; Jordà, Òscar; Schularick, Moritz (2013)
Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms ...
Working Paper Series , Paper 2013-37

Report
Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms
Ajello, Andrea; Boyarchenko, Nina; Gourio, François; Tambalotti, Andrea (2022-02-01)
This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit ...
Staff Reports , Paper 1002

Report
Good news is bad news: leverage cycles and sudden stops
Akinci, Ozge; Chahrour, Ryan (2015-09-01)
We show that a model with imperfectly forecastable changes in future productivity and an occasionally binding collateral constraint can match a set of stylized facts about ?sudden stop? events. ?Good? news about future productivity raises leverage during times of expansion, increasing the probability that the constraint binds, and a sudden stop occurs, in future periods. The economy exhibits a boom period in the run-up to the sudden stop, with output, consumption, and investment all above trend, consistent with the data. During the sudden stop, the nonlinear effects of the constraint induce ...
Staff Reports , Paper 738

Discussion Paper
The Growth of Murky Finance
Sarkar, Asani; Hou, David; Antill, Samuel (2014-03-27)
Building upon previous posts in this series that discussed individual banks, we examine the historical growth of the entire financial sector, relative to the rest of the economy. This sector’s historically large share of the economy today (see chart below) and its role in disrupting the functioning of the real economy during the recent financial crisis have led to questions about the social value of costly financial services. While new regulations such as the Dodd-Frank Act impose restrictions on financial activities and increase their costs, especially those of large firms, our paper ...
Liberty Street Economics , Paper 20140327

Discussion Paper
Banking System Vulnerability: 2022 Update
Crosignani, Matteo; Eisenbach, Thomas M.; Fringuellotti, Fulvia (2022-11-14)
To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.
Liberty Street Economics , Paper 20221114

Working Paper
Levered Returns and Capital Structure Imbalances
Ippolito, Filippo; Villa, Alessandro (2022-01-08)
We revisit the relation between equity returns and financial leverage through the lens of a dynamic trade-off model with costly capital structure rebalancing. The model predicts that expected equity returns depend on whether a firm's leverage is above or below its target leverage. We provide empirical evidence in support of the model predictions. Controlling for leverage, overlevered (underlevered) firms earn higher (lower) returns. A quantitative version of our model reproduces key facts about capital structure rebalancing and equity returns for U.S. corporations. Overall, our results ...
Working Paper Series , Paper WP 2022-42

Discussion Paper
How Resilient Is the U.S. Housing Market Now?
Haughwout, Andrew F.; Fuster, Andreas; Guttman-Kenney, Benedict; Geddes, Eilidh (2017-02-13)
Housing is by far the most important asset for most households, and, not coincidentally, housing debt dwarfs other household liabilities. The relationship between housing debt and housing values figures significantly in financial and macroeconomic stability, as events during the housing bust of 2006-12 clearly demonstrated. This week, Liberty Street Economics presents five posts touching on various aspects of housing, from the changing relationship between mortgage debt and housing equity to the future of homeownership. In today’s post, we provide estimates of housing equity and explore how ...
Liberty Street Economics , Paper 20170213

Working Paper
The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration
Chatterjee, Satyajit; Eyigungor, Burcu (2022-03-17)
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties, acquire new varieties from their inventors, and borrow against the future cash flow of the firm with the option to default. A variety can die with a constant probability, implying that firms with more varieties (bigger firms) have a lower variance of sales growth and, in equilibrium, higher leverage. In this setup, a drop in the risk-free rate increases the value of an acquisition more for bigger firms because of their higher leverage: They can (and ...
Working Papers , Paper 22-07

Journal Article
Two Years into COVID, What’s the State of U.S. Businesses?
Paul, Pascal (2022-08-15)
More than two years after the outbreak of COVID-19, concerns remain that U.S. businesses are substantially more vulnerable and less productive than in the past. Using extensive data on private and public firms allows for a detailed assessment of these concerns. According to a number of performance measures, businesses borrowing from large U.S. banks appear relatively healthy, increased leverage is concentrated among safer companies rather than riskier ones, and probabilities of default are close to pre-crisis levels.
FRBSF Economic Letter , Volume 2022 , Issue 22 , Pages 6

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