Updated and Expanded Report Provides Greater Transparency and Depth for Assessing Market Liquidity
This data informs market participants and regulators about trading volumes and the structure of the market to assist in their determination of which single reference entities might have sufficient liquidity to be cleared through a central counterparty (CCP).
The most active CDS (Kingdom of Spain) averages 29 trades a day across all maturities and including standard and non-standard contracts.
Source: DTCC
6 Month Market Activity Analysis: Explanation of the data
Market Risk Activity Analysis (.xlsx), this will be a weekly release
Markets currently “significantly overestimate” the risk of sovereign debt default in the advanced economies, which is leading to higher risk premia on debt issuance.
IMF position note ==> examines recent speculation among market participants and commentators that worsening public finances could lead to a debt default in certain advanced countries, in particular some “peripheral” European countries. The paper judges that the risk of debt restructuring is currently significantly overestimated, arguing that whereas debt defaults by primarily emerging markets in preceding decades have been triggered foremost by spiraling debt service costs, the current challenges to fiscally stressed advanced countries stem from their large primary deficits. Because of the long maturity of public debt in advanced countries at the beginning of the crisis, their debt service is still relatively contained: the problem is not the debt burden, but the primary deficit. As highlighted in the accompanying papers, the long-term drivers of public spending need to be tackled over the medium term to ensure fiscal sustainability. The study concludes that therefore defaulting on debt would make little sense for these countries.
FRBNY paper by Spence Hilton and Warren B. Hrung
Abstract:
We analyze the impact that reserve levels accumulated through the preceding day in a reserve maintenance period have on the level of the federal funds rate each morning prior to when open-market operations are arranged. Our empirical results and other evidence provided about intraday patterns of the federal funds rate demonstrate that the pace at which reserves are supplied over a maintenance period to meet banks’ total reserve requirements is an important determinant of federal funds rate behavior.
About reverse convertibles:
Some investors were shocked to learn that the investments sold to them as safe alternatives to bank certificates of deposit or Treasury securities actually were highly complex structured products with significant amounts of downside risk.
Full story: Investors’ Reversal of Fortune With Reverse Convertibles
FRBNY paper by James Vickery and Joshua Wright
Abstract:
Most mortgages in the United States are securitized through the agency mortgage-backed-securities (MBS) market. These securities are generally traded on a “to-be-announced,” or TBA, basis. This trading convention significantly improves agency MBS liquidity, leading to lower borrowing costs for households. Evaluation of potential reforms to the U.S. housing finance system should take into account the effects of those reforms on the operation of the TBA market.
ECB paper by Cristina Checherita, Philipp Rotherpe
Abstract:
This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies. At the same time, there is evidence that the annual change of the public debt ratio and the budget deficit-to-GDP ratio are negatively and linearly associated with per-capita GDP growth. The channels through which government debt (level or change) is found to have an impact on the economic growth rate are: (i) private saving; (ii) public investment; (iii) total factor productivity (TFP) and (iv) sovereign long-term nominal and real interest rates. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects.
FRBNY paper by Tobias Adrian, Erkko Etula, and Jan J. J. Groen
Abstract:
Theories of systemic risk suggest that financial intermediaries’ balance-sheet constraints amplify fundamental shocks. We provide supportive evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediary balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring.
FRBNY paper by Vasco Cúrdia and Michael Woodford
Abstract:
While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We first extend a standard New Keynesian model to allow a role for the central bank’s balance sheet in equilibrium determination and then consider the connections between these alternative policy dimensions and traditional interest rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, arguing that, according to our model, while the former is likely to be ineffective at all times, the latter can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.
BoJ/IMES paper by Pierre-Olivier Gourinchas, Helene Rey, and Nicolas Govillot
Abstract:
We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an “exorbitant privilege” that significantly weakens its external constraint. In exchange for this “exorbitant privilege” we document that the US provides insurance to the rest of the world, especially in times of global stress. This “exorbitant duty” is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.
FRBNY Paper by Stavros Peristiani, Donald P. Morgan, and Vanessa Savino
Abstract:
We investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the stress test helped quell the financial panic by producing vital information about banks. Our findings also contribute to the academic literature on bank opacity and the value of government monitoring of banks.
