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Keywords:liquidity 

Speech
Panel Remarks: Supervisory and Regulatory Action to Support the Economy and Protect Consumers

Panel Remarks at The Fed and Main Street during the Coronavirus Pandemic, WebEx event, April 23, 2020.
Speech

Working Paper
Corporate Bond Liquidity During the COVID-19 Crisis

We study liquidity conditions in the corporate bond market during the COVID-19 pandemic, and the effects of the unprecedented interventions by the Federal Reserve. We find that, at the height of the crisis, liquidity conditions deteriorated substantially, as dealers appeared unwilling to absorb corporate debt onto their balance sheets. In particular, we document that the cost of risky-principal trades increased by a factor of five, forcing traders to shift to slower, agency trades. The announcements of the Federal Reserve’s interventions coincided with substantial improvements in trading ...
Working Papers , Paper WP 20-43

Discussion Paper
A New Perspective on Low Interest Rates

Interest rates in the United States have remained at historically low levels for many years. This series of posts explores the forces behind the persistence of low rates. We briefly discuss some of the explanations advanced in the academic literature, and propose an alternative hypothesis that centers on the premium associated with safe and liquid assets. Our argument, outlined in a paper we presented at the Brookings Conference on Economic Activity last March, suggests that the increase in this premium since the late 1990s has been a key driver of the decline in the real return on U.S. ...
Liberty Street Economics , Paper 20180205

Report
Dealers and the Dealer of Last Resort: Evidence from MBS Markets in the COVID-19 Crisis

We study price dislocations and liquidity provision by dealers and the Federal Reserve (Fed) as the “dealer of last resort” in agency MBS markets during the COVID-19 crisis. As customers sold MBS to “scramble for cash,” dealers provided liquidity by taking inventory in the cash market and hedging inventory risk in the forward market. The cash and forward prices diverged significantly beyond the difference in the quality of MBS traded on the two markets. The Fed first facilitated dealers’ inventory hedging and then took holdings off dealers’ inventory directly. The price ...
Staff Reports , Paper 933

Working Paper
Machines vs. Machines: High Frequency Trading and Hard Information

In today's markets where high frequency traders (HFTs) act as both liquidity providers and takers, I argue that information asymmetry induced by liquidity-taking HFTs' use of machine-readable information is important. This particular type of information asymmetry arises because some machines may access the information before other machines or because of randomness in relative speed. Applying a novel statistical approach to measure HFT activity through limit order book data and using a natural experiment of index inclusion, I show that liquidity-providing HFTs supply less liquidity to stocks ...
Finance and Economics Discussion Series , Paper 2014-33

Report
Asset Pricing with Cohort-Based Trading in MBS Markets

Agency MBSs with diverse characteristics are traded in parallel with individualized specified pool (SP) contracts and standardized to-be-announced (TBA) contracts. This parallel trading environment has distinctive effects on MBS pricing and trading: (1) Although cheapest-to-deliver (CTD) issues are present only in TBA contracts and absent from SP trading by definition, MBS heterogeneity associated with CTD discounts affects SP returns positively, with the effect stronger for lower-value SPs; (2) High selling pressure amplifies the effects of MBS heterogeneity on SP returns; (3) Greater MBS ...
Staff Reports , Paper 931

Discussion Paper
Has Liquidity Risk in the Corporate Bond Market Increased?

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

Journal Article
Stability of funding models: an analytical framework

With the recent financial crisis, many financial intermediaries experienced strains created by declining asset values and a loss of funding sources. In reviewing these stress events, one notices that some arrangements appear to have been more stable?that is, better able to withstand shocks to their asset values and/or funding sources?than others. Because the precise determinants of this stability are not well understood, gaining a better grasp of them is a critical task for market participants and policymakers as they try to design more resilient arrangements and improve financial regulation. ...
Economic Policy Review , Issue Feb , Pages 29-47

Working Paper
Market-making with Search and Information Frictions

We develop a dynamic model of trading through market-makers that incorporates two canonical sources of illiquidity: trading (or search) frictions, which imply that market-makers have some amount of market power; and information frictions, which imply that market-makers face some degree of adverse selection. We use this model to study the effects of various technological innovations and regulatory initiatives that have reduced trading frictions in over-the-counter markets. Our main result is that reducing trading frictions can lead to less liquidity, as measured by bid-ask spreads. The key ...
Working Papers , Paper 18-20

Discussion Paper
What Explains the June Spike in Treasury Settlement Fails?

In June of this year?as we noted in the preceding post?settlement fails in U.S. Treasury securities spiked to their highest level since the implementation of the fails charge in May 2009. Our first post reviewed what fails are, why they arise, and how they can be measured. In this post, we dig into the fails data to identify possible explanations for the high level of fails in June. We observe that sequential fails of several benchmark securities accounted for the lion?s share of fails in June, but that fails in seasoned securities?which have been trending upward for some time?were also ...
Liberty Street Economics , Paper 20140919a

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