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on Financial Markets |
| By: | Sriya Anbil; Alyssa G. Anderson; Ethan Cohen; Romina Ruprecht |
| Abstract: | We present a new constraint on the size of the Fed’s balance sheet: repo market capacity. Calibrating a structural model to the recent monetary tightening cycle, we show that repo market capacity—driven by money market fund liquidity supply—is the binding constraint on the Fed’s balance sheet, not bank reserve demand, which was highlighted in the events of September 2019. We also demonstrate a novel complementarity between interest rate and balance sheet policies: higher policy rates expand repo capacity, allowing the central bank to operate with a smaller balance sheet. |
| Keywords: | monetary policy implementation; quantitative tightening; reserves; overnight reverse repo facility; shadow banks |
| Date: | 2026–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103441 |
| By: | Austin Pollok; Kevin Robik |
| Abstract: | Timing-based tilts across asset classes can drive much of the risk and return of a diversified cross-asset portfolio. The standard approach forecasts returns and then optimizes weights. We instead study an end-to-end AI-based policy that maps market states directly to portfolio weights, and we then ask when this one-step modeling approach outperforms simple rules-based strategies. We train these policies on the sixteen most liquid CME futures, where an edge is unlikely to be due to illiquidity, using a differentiable Sharpe ratio loss function, and we benchmark them against equal weighting, risk parity, and time-series momentum. The learned policies rank above the rules on the pooled cross-asset portfolio and in several sub-asset classes, but not uniformly. In gross terms, an LSTM and a transformer-based architecture perform comparably out-of-sample, but diverge when we consider transaction costs. The transformer generates the stronger learned policy, trades far less than the LSTM, and matches or exceeds equal weighting through moderate cost. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.00475 |
| By: | Valentin Haddad; Zhiguo He; Paul Huebner; Péter Kondor; Erik Loualiche |
| Abstract: | Portfolio choice involves substituting across many assets at once, complicating inference about asset demand. An elementary condition often captures this behavior in theory and practice: homogeneous substitution conditional on observables (e.g., factor loadings, maturity, credit ratings). We characterize natural experiments identifying demand elasticity and price impact under this condition. Cross-sectional IV and difference-in-differences identify relative elasticity, own- minus cross-price elasticity for assets sharing observables. But a missing-coefficient problem leaves substitution unidentified: the coefficients on observables mechanically absorb it. Identifying substitution requires time-series regressions on portfolios sorted on observables. We apply the framework to corporate bonds, comparing alternative Fed asset-purchase programs. |
| JEL: | G10 G20 L00 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35413 |
| By: | Sixtine Bigot; Aurélien Espic |
| Abstract: | In 2025, consumption in the United States proved to be unexpectedly resilient against a backdrop of inflation and uncertainty. This dynamic was partly due to the increase in the prices of financial assets and their weight in household savings. While this unique situation may have contributed to the divergence between the United States and the euro area, it leaves US households exposed to a market correction. <p> En 2025, la consommation américaine a fait preuve d’une résilience inattendue dans un contexte inflationniste et incertain. Cette dynamique s’explique en partie par la hausse des prix des actifs financiers et leur poids dans l’épargne des ménages. Si cette singularité a pu contribuer à la divergence entre Etats-Unis et zone euro, elle expose les ménages américains à une correction de marché. |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:econot:454 |
| By: | Chuck Fang; Itay Goldstein; Yao Zeng |
| Abstract: | We study fragility in semi-liquid private credit funds, which have expanded rapidly and now manage over $300 billion in assets. These funds perform liquidity transformation by holding far more illiquid loans than traditional loan mutual funds while allowing investors to redeem at NAV through quarterly repurchase offers, typically capped at 5% of shares outstanding. We show that cash buffers and contractual loan repayments are insufficient to fund repeated 5% quarterly redemptions; inflows decline precisely when outflows rise; and net outflows are met with sales of illiquid loans, external borrowing, and delayed payments through repurchases payable. As a result, strategic complementarity arises, because redemptions impose liquidation and leverage costs on the remaining investors. We show that loan liquidation, leverage increase, and NAV inflation play an important role in amplifying the current episodes of run-like redemptions. Overall, our evidence suggests that quarterly gates and redemption caps do not eliminate run-like fragility in semi-liquid private credit funds, raising cautions about expanding retail access to private credit markets. |
| JEL: | G01 G11 G23 G32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35385 |