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Discussion Paper
Introduction to a Series on Market Liquidity
Adrian, Tobias; Schaumburg, Ernst; Fleming, Michael J. (2015-08-17)
Market participants and policymakers have recently raised concerns about 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, changes in market structure, or otherwise, are therefore of great interest to policymakers and market participants alike.
Liberty Street Economics , Paper 20150817

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
Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry
Harris, Jeffrey H.; Brunetti, Celso; Mankad, Shawn (2021-03-19)
Network analysis has demonstrated that interconnectedness among market participants results in spillovers, amplifies or absorbs shocks, and creates other nonlinear effects that ultimately affect market health. In this paper, we propose a new directed network construct, the liquidity network, to capture the urgency to trade by connecting the initiating party in a trade to the passive party. Alongside the conventional trading network connecting sellers to buyers, we show both network types complement each other: Liquidity networks reveal valuable information, particularly when information ...
Finance and Economics Discussion Series , Paper 2021-017

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

Discussion Paper
The Evolution of Workups in the U.S. Treasury Securities Market
Yang, Ron; Schaumburg, Ernst; Fleming, Michael J. (2015-08-20)
The market for benchmark U.S. Treasury securities is one of the deepest and most liquid in the world. Although trading in the interdealer market for these securities is over-the-counter, it features a central limit order book (CLOB) similar to that found in exchange-traded instruments, such as equities and futures. A distinctive feature of this market is the ?workup? protocol, whereby the execution of a marketable order opens a short time window during which market participants can transact additional volume at the same price. With the broadening of the interdealer market to include hedge ...
Liberty Street Economics , Paper 20150820

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

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

Working Paper
Credit Risk, Liquidity and Lies
Lewis, Kurt F.; King, Thomas B. (2015-12-18)
We reexamine the relative effects of credit risk and liquidity in the interbank market using bank-level panel data on Libor submissions and CDS spreads. Our model synthesizes previous work by combining the fundamental determinants of interbank spreads with the effects of strategic misreporting by Libor-submitting firms. We find that interbank spreads were very sensitive to credit risk at the peak of the crisis. However, liquidity premia constitute the bulk of those spreads on average, and Federal Reserve interventions coincide with improvements in liquidity at short maturities. Accounting for ...
Finance and Economics Discussion Series , Paper 2015-112

Discussion Paper
Continuing the Conversation on Liquidity
Adrian, Tobias; Schaumburg, Ernst; Fleming, Michael J. (2016-02-08)
Market participants and policymakers have raised concerns about market liquidity?the ability to buy and sell securities quickly, at any time, at minimal cost. Market liquidity supports the efficient allocation of financial capital, which is a catalyst for sustainable economic growth. Any possible decline in market liquidity, whether due to regulation or otherwise, is of interest to policymakers and market participants alike.
Liberty Street Economics , Paper 20160208b

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