nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒01‒26
four papers chosen by

  1. Modeling Money Market Spreads: What Do We Learn about Refinancing Risk? By Brousseau, Vincent; Nikolaou, Kleopatra; Pill, Huw
  2. Systemic risk and banking regulation: some facts on the new regulatory framework By Michele Bonollo; Irene Crimaldi; Andrea Flori; Fabio Pammolli; Massimo Riccaboni
  3. Understanding the role of debt in the financial system By Bengt Holmstrom
  4. Stock market development and real economic activity in Peru By Lahura, Erick; Vega, Marco

  1. By: Brousseau, Vincent (European Central Bank); Nikolaou, Kleopatra (Board of Governors of the Federal Reserve System (U.S.)); Pill, Huw (Goldman Sachs)
    Abstract: We quantify the effect of refinancing risk on euro area money market spreads, a major factor driving spreads during the financing crisis. With the advent of the crisis, market participants' perception of their ability to refinance over a given period of time changed radically. As a result, borrowers preferred to obtain funding for longer tenors and lenders were willing to provide funding for shorter tenors. This discrepancy resulted in a need to refinance more frequently in order to borrow over a given horizon, thus increasing refinancing risk. We measure refinancing risk by quantifying the sensitivity of the spread to the refinancing frequency. In order to do so we introduce a model to price EURIBOR-based money market spreads vis-à-vis the overnight index swap. We adopt a methodology akin to a factor model in which the parameters determining the spreads are the intensity of the crisis, its expected half-life, and the sensitivity of spreads to the refinancing frequency. Results suggest that refinancing risk affects the spread significantly across time, albeit in a largely varying manner. Central bank interventions have reduced the spreads as well as the effect of refinancing risk on them.
    Keywords: Financial crisis; liquidity risk; money market spread; money markets; refinancing risk
    JEL: E58 G12 G21
    Date: 2014–11–19
  2. By: Michele Bonollo (Credito trevigiano; IMT Lucca Institute for Advanced Studies); Irene Crimaldi (IMT Lucca Institute for Advanced Studies); Andrea Flori (IMT Lucca Institute for Advanced Studies); Fabio Pammolli (IMT Lucca Institute for Advanced Studies); Massimo Riccaboni (IMT Lucca Institute for Advanced Studies)
    Abstract: The recent financial crisis highlighted the relevant role of the systemic effects of banks’ defaults on the stability of the whole financial system. In this work we draw an organic picture of the current regulations, moving from the definitions of systemic risk to the issues concerning data availability. We show how a more detailed flow of data on traded deals might shed light on some systemic risk features taken into account only partially in the past. In particular, we analyse how the new regulatory framework allows regulators to describe OTC derivatives markets according to more detailed partitions, thus depicting a more realistic picture of the system. Finally, we suggest to study sub-markets illiquidity conditions to consider possible spill over effects which might lead to a worsening for the entire system.
    Keywords: Systemic Risk, OTC Derivatives Market, Basel Regulations, European Market Infrastructure Regulation, Trade Repositories
    JEL: G01 G18 G21
    Date: 2015–01
  3. By: Bengt Holmstrom
    Abstract: Money markets are fundamentally different from stock markets. Stock markets are about price discovery for the purpose of allocating risk efficiently. Money markets are about obviating the need for price discovery using over-collateralised debt to reduce the cost of lending. Yet, attempts to reform credit markets in the wake of the recent financial crisis often draw on insights grounded in our understanding of stock markets. This can be very misleading. The paper presents a perspective on the logic of credit markets and the structure of debt contracts that highlights the information insensitivity of debt. This perspective explains among other things why opacity often enhances liquidity in credit markets and therefore why all financial panics involve debt. These basic insights into the nature of debt and credit markets are simple but important for thinking about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets.
    Keywords: financial crisis, liquidity, money markets, shadow banking, debt, information sensitivity, pawn shops, bailouts, banking regulation
    Date: 2015–01
  4. By: Lahura, Erick (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: We explore the causal effect of stock market development on real economic activity in Peru. Based on the predictions of a simple growth model, we estimate vector autoregressive models and identify stock market shocks by imposing long-run restrictions in the dynamic response of real output per capita. Using annual time series data for the period 1965-2013, we find that stock market shocks have had a short-run causal effect on real GDP per capita only after 1991, a result that is consistent with standard Granger causality tests; however, the contribution of stock market shocks to output growth dynamics have been small. Thus, policy actions aimed at further developing the Peruvian stock market may have a positive impact on the dynamics of economic growth.
    Keywords: Stock market development, output growth, VAR, long-run restrictions
    JEL: E23 G1
    Date: 2014–12

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