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on Financial Markets |
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Issue of 2011‒06‒11
five papers chosen by |
| By: | Deborah Gefang (Department of Economics, University of Lan~~#badcaster); Gary Koop (Department of Economics, University of Strathclyde); Simon Potter (Research and Statistics Group, Federal Reserve Bank of New York) |
| Abstract: | This paper develops a structured dynamic factor model for the spreads between London Interbank O¤ered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which relect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 financial crisis were largely driven by liquidity risk. However, credit risk played a more significant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk. |
| Keywords: | LIBOR-OIS spread, factor model, credit default swap, Bayesian |
| JEL: | C11 C22 G21 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:1114&r=fmk |
| By: | Turhan, Ibrahim M. |
| Abstract: | Since the outbreak of the global crisis in mid 2007, there has been an extensive discussion on root causes. Some blame the greed and corruption of financial actors. Others put the blame on central bankers for easy money or regulators who remained idle as too much risks accumulated in financial markets. According to advanced economies, global imbalances have been caused by emerging surplus countries that keep their currency undervalued and their domestic consumption restricted. It is unfortunate that all these arguments and counter arguments, which may be valid in their own way, prevents a more general discussion on the deep-seated conflicts and contradictions in the global economic, social and political paradigm upon which the world order is built. To put it another way, the problems we face today do not arise from some operational failures, but from the system itself and the underlying philosophical framework. In fact this is a crisis of three main pillars of our existing system: the crisis of the economic theory, the crisis of the globalization, and the crisis of market based financial system. |
| Keywords: | global financial crisis; economic theory; financial system |
| JEL: | E44 A11 B41 |
| Date: | 2010–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31209&r=fmk |
| By: | Jan Willem Slingenberg; Jakob de Haan |
| Abstract: | This paper uses a Financial Stress Index (FSI) for 13 OECD countries to examine which variables can help predicting financial stress. A stress index measures the current state of stress in the financial system and summarizes it in a single statistic. We employ three criteria for indicators to be used in constructing a multi-country FSI (the index covers the entire financial system, indicators used are available at a high frequency for many countries for a long period, and are comparable) to come up with our FSI. Our results suggest that financial stress is hard to predict. Only credit growth has predictive power for most countries. Several other variables have predictive power for some countries, but not for others. |
| Keywords: | financial stress index; predicting financial stress |
| JEL: | E5 G10 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:292&r=fmk |
| By: | Andrea Monticini (Universita Cattolica - Milano); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)) |
| Abstract: | Market efficiency hypothesis suggests a zero level for the intraday interest rate. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. A long memory approach outperforms random walk and autoregressive benchmarks in terms of point and density forecasting. The gains are particular high when the full distribution is predicted and probabilistic assessments of future movements of the interest rate derived by the model can be used as a policy tool for central banks to plan supplementary market operations during turbulent times. Adding exogenous variables to proxy funding liquidity and counterparty risks does not improve forecast accuracy and the predictability seems to derive from the econometric properties of the series more than from news available to financial markets in realtime. |
| Keywords: | Interbank market, Intraday interest rate, Forecasting, Density forecasting, Policy tools. |
| JEL: | C22 C53 E4 E5 |
| Date: | 2011–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_06&r=fmk |
| By: | Enrico Perotti; Javier Suarez |
| Abstract: | This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relative merit of price versus quantity rules, showing how they target different incentives for risk creation. When banks differ in credit opportunities, a Pigovian tax on short-term funding is efficient in containing risk and preserving credit quality, while quantity-based funding ratios are distorsionary. Liquidity buffers are either fully ineffective or similar to a Pigovian tax with deadweight costs. Critically, they may be least binding when excess credit incentives are strongest. When banks differ instead mostly in gambling incentives (due to low charter value or overconfidence), excess credit and liquidity risk are best controlled with net funding ratios. Taxes on short-term funding emerge again as efficient when capital or liquidity ratios keep risk shifting incentives under control. In general, an optimal policy should involve both types of tools. |
| Keywords: | liquidity requirements; liquidity risk; liquidity risk levies; macroprudential regulation; systemic risk |
| JEL: | G21 G28 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:291&r=fmk |