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on Financial Markets |
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Issue of 2017‒01‒15
three papers chosen by |
| By: | Li, Mengling; Zheng, Huanhuan; Chong, Terence Tai Leung; Zhang, Yang |
| Abstract: | We propose an asset pricing model with heterogeneous agents allocating capital to the stock and bond markets to optimize their portfolios, utilizing the dynamic interaction between the two markets. While some agents focus on the stock market and have more expertise in it, the others specialize in the bond market. Based on their comparative advantages in a particular market, heterogeneous agents constantly revise their investment portfolios by taking into account the time-varying stock-bond return comovements and the changing market conditions. Agents’ collective investment behavior shapes the stock-bond interlinkage, which feedbacks on their subsequent capital allocations. Using monthly US stock and bond data from January 1990 to June 2014, we estimate the vector autoregression model with threshold and Markov switching mechanisms. We find evidence in support of flight-to-quality and show that it is mainly driven by the technical traders who actively sell stocks and buy bonds during periods of high market uncertainty. |
| Keywords: | Heterogeneity, Stock-Bond Comovement, Markov Switching VAR, Threshold VAR. |
| JEL: | G12 G15 |
| Date: | 2016–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75871&r=fmk |
| By: | Yesol Huh; Sebastian Infante |
| Abstract: | This paper models the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to adjust their holdings of risky assets. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger levered client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo specialness). Dealers pass on the higher intermediation cost to their clients in the form of higher bid-ask spreads. Although this method of intermediation is optimal, the use of repos significantly increases dealers' balance sheets. Limiting one dealer's balance sheet leverage, leaving all else equal, reduces the affected dealer's market making abilities and increases his bid-ask spreads. The equilibrium effect of limiting all dealers' balance sheet leverage on bid-ask spreads is unclear, and depends on the intensity of clients' demand and securities lenders' sensitivity to repo specialness. |
| Keywords: | Market liquidity ; Financial services and intermediation ; Repo ; Specialness ; U.S. Treasury market |
| JEL: | G2 G24 G28 |
| Date: | 2016–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-03&r=fmk |
| By: | Cielinska, Olga (Bank of England); Joseph, Andreas (Bank of England); Shreyas, Ujwal (Bank of England); Tanner, John (Bank of England); Vasios, Michalis (Bank of England) |
| Abstract: | The Bank of England (“the Bank”) has access to some of the granular transaction level data resulting from EMIR trade reports. The velocity, granularity and richness of this dataset puts it in the realm of Big Data in the derivatives market, which brings with it its own set of challenges. These data have a number of potential uses in monitoring the market and helping to set policy. But these uses are only possible if the data are both accurate and complete on the one hand and we are able to analyse them effectively on the other. To help determine the status of these factors, we carry out a study of an external event to see how it was represented in the data. A suitable event was identified in the decision of the Swiss National Bank to discontinue the Swiss franc’s floor of 1.20 Swiss francs per euro on the morning of 15 January 2015. This was expected to show a number of effects in the Swiss franc foreign exchange over-the-counter (FX OTC) derivatives market. The removal of the floor led to extreme price moves in the forwards market, similar to those observed in the spot market, while trading in the Swiss franc options market was practically halted. We find evidence that the rapid intraday price fluctuation was associated with poor underlying market liquidity conditions, in particular the limited provision of liquidity by dealer banks in the first hour after the event. Looking at longer-term effects, we observe a reduced level of liquidity, associated with an increased level of market fragmentation, higher market volatility and an increase in the degree of collateralisation in the weeks following the event. It is worth noting that whilst we analyse the impact of the event on the market and its visibility in the data, we are not commenting on the SNB’s policy decision itself. |
| Keywords: | Market Microstructure; FX Derivatives; Swiss franc; EMIR; Trade Reporting |
| JEL: | G15 G18 |
| Date: | 2017–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:finsta:0041&r=fmk |