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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

The Law of One Price in Equity Volatility Markets

This paper documents law of one price violations in equity volatility markets. While tightly linked by no-arbitrage restrictions, the prices of VIX futures exhibit significant deviations relative to their option-implied upper bounds. Static arbitrage opportunities occur when the prices of VIX futures violate their bounds. The deviations widen during periods of market stress and predict the returns of VIX futures. A relative value trading strategy based on the deviation measure earns a large Sharpe ratio and economically significant alpha-to-margin. There is evidence that systematic risk and ...
Staff Reports , Paper 953

Working Paper
Are Concerns About Leveraged ETFs Overblown?

Leveraged and inverse exchange-traded funds (ETFs) have been heavily criticized for exacerbating volatility in financial markets because it is thought that they mechanically rebalance their portfolios in the same direction as contemporaneous returns. We argue that these criticisms are likely exaggerated because they ignore the effects of capital flows on ETF rebalancing demand. Empirically, we find that capital flows substantially reduce the need for ETFs to rebalance when returns are large in magnitude and, therefore, mitigate the potential for these products to amplify volatility. We also ...
Finance and Economics Discussion Series , Paper 2014-106

Nonlinearity and flight to safety in the risk-return trade-off for stocks and bonds

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
Reforming Fiscal Institutions in Resource-Rich Arab Economies: Policy Proposals

This paper traces the evolution of fiscal institutions of Resource-Rich Arab Economies (RRAEs) over time since their pre-oil days, through the discovery of oil to their build-up of oil exports. It then identifies challenges faced by RRAEs and variations in their severity among the different countries over time. Finally, it articulates specific policy reforms, which, if implemented successfully, could help to overcome these challenges. In some cases, however, these policy proposals may give rise to important trade-offs that will have to be evaluated carefully in individual cases.
Globalization Institute Working Papers , Paper 346

An index of Treasury Market liquidity: 1991-2017

Order book and transactions data from the U.S. Treasury securities market are used to calculate daily measures of bid-ask spreads, depth, and price impact for a twenty-six-year sample period (1991-2017). From these measures, a daily index of Treasury market liquidity is constructed, reflecting the fact that the varying measures capture different aspects of market liquidity. The liquidity index is then correlated with various metrics of funding liquidity, volatility, and macroeconomic conditions. The liquidity index points to poor liquidity during the 2007-09 financial crisis and around the ...
Staff Reports , Paper 827

Discussion Paper
What Can We Learn from Prior Periods of Low Volatility?

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
Land prices and unemployment

We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase in the ...
FRB Atlanta Working Paper , Paper 2013-06

Global variance term premia and intermediary risk appetite

Sellers of variance swaps earn time-varying risk premia for their exposure to realized variance, the level of variance swap rates, and the slope of the variance swap curve. To measure risk premia, we estimate a dynamic term structure model that decomposes variance swap rates into expected variances and term premia. Empirically, we document a strong global factor structure in variance term premia across the U.S., U.K., Europe, and Japan. We further show that variance term premia are negatively correlated with the risk appetite of hedge funds, broker-dealers, and mutual funds. Our results ...
Staff Reports , Paper 789

Working Paper
The role of jumps in volatility spillovers in foreign exchange markets: meteor shower and heat waves revisited

This paper extends the previous literature on geographic (heat waves) and intertemporal (meteor showers) foreign exchange volatility transmission to characterize the role of jumps and cross-rate propagation. We employ heterogeneous autoregressive (HAR) models to capture the quasi-long-memory properties of volatility and the Shapley-Owen R2 measure to quantify the contributions of components. We conclude that meteor showers are more influential than heat waves, that jumps play a modest but significant role in volatility transmission and that significant, bidirectional cross-rate volatility ...
Working Papers , Paper 2014-034


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