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on Financial Markets |
| By: | Tobias Adrian; Michael J. Fleming; Kleopatra Nikolaou |
| Abstract: | This article examines U.S. Treasury securities market functioning from the global financial crisis (GFC) through the Covid-19 pandemic given the ensuing market developments and associated policy responses. We describe the factors that have affected intermediaries, including regulatory changes, shifts in ownership patterns, and increased electronic trading. We also discuss their implications for market functioning in both normal times and times of stress. We find that alternative liquidity providers have stepped in as constraints on dealer liquidity provision have tightened, supporting liquidity during normal times, but with less clear effects at times of stress. We conclude with a brief discussion of more recent policy initiatives that are intended to promote market resilience. |
| Keywords: | intermediation; liquidity; regulation; market structure; Treasury securities |
| JEL: | G12 G24 G28 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99757 |
| By: | Aurora García-Gallego (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain); Tibor Neugebauer (Department of Finance, Luxembourg School of Finance, University of Luxembourg, Luxembourg) |
| Abstract: | This study explores the impact of free-form chat on asset pricing and trading in a lab setting. In a mispricing-prone market, participants facing team-performance incentives communicated in chat groups. We compare three chat treatments: "friends", where participants personally knew their chat partners, and "random teams" with/out price prediction, where groups were assigned anonymously. While free-form chat does not reduce mispricing, it seems to influence transaction volume. A textual analysis using dictionaries focused on strategic coordination, risk management, market understanding, and information sharing shows that groups focusing on the former two tend to perform better. We review the contributions of Gary Charness to the area of communication in experiments. |
| Keywords: | experimental asset market, communication, textual analysis |
| JEL: | C92 D83 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:jau:wpaper:2025/03 |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | Recent literature suggests that both stock returns and economic growth are significantly higher under Democratic presidential administrations. This is a puzzle in that persistent differences in stock returns seem unlikely in efficient markets, and it is not obvious why Democrats should do better. Often these kinds of results go away upon further analysis or more data, and this appears to be true in the present case. In this paper the sample is extended to 28 administrations, fromWilson-1 through Biden. While the mean stock return under the Democrats is higher, none of the differences in means is significant at conventional significance levels. There is\ considerable variation in the mean return across administrations, which results in lack of significance. Similarly, while the mean output growth rate under the Democrats is larger, the difference is not significant. Again, there is considerable variation in output growth across administrations. Results are also presented with the nine administrations between Hayes and Taft added, a total of 37 administrations. While the added data are likely not as good, the conclusion is the sameÑno significant differences. |
| Keywords: | Stock returns, Output growth, Political parties |
| JEL: | G01 |
| Date: | 2025–03–12 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2277r1 |
| By: | Andrew C. Meldrum; Oleg Sokolinskiy |
| Abstract: | Analysis of market liquidity often focuses on measures of the current cost of trading. However, investors and policy-makers also care about what would happen to liquidity in the event of an adverse shock. If liquidity were to deteriorate rapidly at times when investors were seeking to rebalance portfolios, this could amplify the effects of shocks to the financial system even if liquidity is high most of the time. We examine the potential for such fragility of liquidity in the Treasury market. We show that a reduction in the availability of resting orders to trade ("market depth") increases liquidity fragility, likely because lower depth increases the dependence of low trading costs on prompt replenishment of resting orders. Our results apply to all major benchmark Treasury securities individually, which enables us to establish analogous conclusions for market-wide liquidity fragility. |
| Keywords: | Liquidity; Fragility; Treasury market; Price impact; Volatility; Market depth; Hidden Markov model |
| JEL: | G01 G10 G12 C51 C58 |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-14 |
| By: | Tsvetelina Nenova |
| Abstract: | This paper provides novel empirical evidence on portfolio rebalancing in international bond markets through the prism of investors' demand for bonds. Using a granular dataset of global government and corporate bond holdings by mutual funds domiciled in the world's two largest currency areas, I estimate heterogeneous and time varying demand elasticities for bonds. Safe assets such as US Treasuries or German Bunds face especially inelastic demand from investment funds compared to riskier bonds. But spillovers from these safe assets to global bond markets are strikingly different. Funds substitute US Treasuries with global bonds, including risky corporate and emerging market bonds, whereas German Bunds are primarily substitutable within a narrow set of euro area safe government bonds. Substitutability deteriorates in times of stress, impairing the transmission of monetary policy. |
| Keywords: | international finance, portfolio choice, safe assets |
| JEL: | F30 G11 G15 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1254 |
| By: | Shengwu Du; Travis D. Nesmith |
| Abstract: | Filtered historical simulation (FHS)—a simple method of calculating Value-at-Risk that reacts quickly to changes in market volatility—is a popular method for calculating margin at central counterparties. However, FHS does not address how correlation can vary through time. Typically, in margin systems, each risk factor is filtered individually so that the computational burden increases linearly as the number of risk factors grows. We propose an alternative method that filters historical returns using latent risk factors derived from principal component analysis. We compare this method's performance with "traditional" FHS for different simulated and constructed portfolios. The proposed method performs much better when there are large changes in correlation. It also performs well when that is not the case, although some care needs to be taken with certain concentrated portfolios. At the same time, the computational requirements can be reduced significantly. Backtesting comparisons are performed using data from 2020 when markets were stressed by the COVID-19 crisis. |
| Keywords: | Portfolio risk; Value-at-Risk; Margin; CCPs; Principal component analysis (PCA); Historical simulation; FHS |
| JEL: | G00 G20 |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-16 |
| By: | Ricardo Barahona (BANCO DE ESPAÑA) |
| Abstract: | In the United States, investors leave large amounts of money on the table when investing in index funds. I show that even though high fees strongly predict poor performance, investors have little sensitivity to fees. This can be explained by fund intermediation in the retail sector and the legal standard of care that intermediaries have towards their clients. Net inflows to high-fee funds are higher when brokers and financial advisors receive sales commissions from the investment management company. When funds are sold through intermediaries held to higher standard of care, such as those sold to employer sponsored defined contribution pension plans, this is no longer the case. Together, this evidence suggests imposing fiduciary duties on fund intermediaries improves investor welfare. |
| Keywords: | index funds, mutual funds, defined contribution |
| JEL: | G23 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2518 |
| By: | Georgarakos, Dimitris; Kenny, Geoff; Laeven, Luc; Meyer, Justus |
| Abstract: | We field a series of experiments in a population-representative survey of European consumers to examine their attitudes towards the possible introduction of a digital euro. First, we show that a short video explaining the key features of the digital euro is effective in changing consumers’ beliefs about such a new form of payment and increases the likelihood of adoption by 12pp relative to a control group that is not shown the video. Second, we find that on aggregate consumers would allocate a relatively small fraction from a positive wealth shock to digital euros and their allocation to other liquid assets would be little affected. Third, holding limits in the range of €1, 000 to €10, 000 have insignificant differential effects on the composition of liquid asset holdings. We also show that a non-trivial fraction of consumers report that they will not adopt the digital euro due to strong preferences for existing forms of payment. JEL Classification: E41, E58, D12, D14, G51 |
| Keywords: | Central Bank Digital Currencies (CBDC), consumer expectations survey, household expectations, household finance, money, payments, Randomized Control Trial (RCT) |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253035 |