Optimal clearing arrangements for financial trades

Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that participants clear periodically. We study efficient clearing arrangements for exchanges, where traders must clear with a clearinghouse, and for over-the-counter (OTC) markets, where traders can clear bilaterally. When clearing is costly, it can be efficient to subsidize OTC clearing by charging a higher clearing price for transactions conducted on exchanges. The clearinghouse then operates across both markets. Since clearinghouses offer credit, intertemporal incentives are needed to ensure settlement. When liquidity costs increase, concerns about default lead to a tightening of liquidity provision.     

摆脱“美元陷阱”路径论析

经济活动严重依赖于美元致使我国对外贸易和国际储备安全受制于美国的战略黑箱,宏观调控的独立性受到掣肘,汇率政策面临二难选择。出于自身狭隘利益的考量,美国当局不可能自愿改变我行我素的行事风格,所以跳出“美元陷阱”不能奢望于美国当局的良心发现,只有唯一路径———“去美元化”———在美元之外构建一种新的国际支付手段为我所用。构建这种新的国际支付手段的应然路径是联合主要大宗矿产资源大国构建共同货币。     

Optimal exchange-rate policy in a low interest rate environment

This paper examines optimal monetary policy with an explicit zero lower bound in a small open-economy model. The paper finds that the gains from commitment are increasing in the openness of the economy while the optimal rate of inflation is decreasing in the openness of the economy. These results imply that the main findings of Adam and Billi (2007) for a closed-economy model are also true for an open-economy model. Finally, the paper finds that the effectiveness of the exchange-rate channel as a stabilization tool in the low interest rate environment depends on whether the central bank can make a credible commitment. If the central bank cannot commit and makes monetary-policy decisions on a discretionary basis, the optimal path of the nominal exchange rate will exhibit an appreciation, rather than depreciation as suggested in the literature.     

Are REITs more resilient than non-REITs? Evidence from natural experiments

REITs draw attention from investors around the world, yet our understanding of the various risks associated with such securities is limited. Using the introduction of Arrowhead, a low-latency high-frequency trading platform, to the Tokyo Stock Exchange and the financial crisis of 2008 as natural experiments, we compare the resilience of REITs and equities in terms of liquidity and volatility. The results indicate that the introduction of Arrowhead improved the quality of the Japanese REIT market but also increased the probability of flash crashes. We also find that although the financial crisis significantly deteriorated overall equity market quality, the Japanese REIT market was resilient. Finally, using a difference-in-differences regression model, we show that the higher transparency and better price discovery of REITs, compared to non-REITS, protected them from the negative effects of the financial crisis and the introduction of Arrowhead. Overall, our analysis shows that REITs are more resilient than non-REITs.     

European quanto option pricing in presence of liquidity risk

In this paper, we study the pricing problems of the European quanto options in which the underlying foreign asset is in imperfectly liquid markets. First, we assume that the dynamics of the underlying foreign asset price are affected by market liquidity and propose a liquidity-adjusted quanto model. This allows for the effects of market liquidity on European quanto option pricing. And then we derive the analytical pricing formulas for four different types of European quanto options. Finally, we empirically investigate the pricing performance of our proposed model with a European quanto construction involving the SSE 50 ETF, as the underlying asset, and the CNY/HKD exchange rate. Empirical results demonstrate that the pricing accuracy of the proposed model is markedly superior to that of the Black-Scholes quanto model. In other words, allowing for liquidity risk in the framework of European quanto option pricing can make markedly improvements in fitting the real market data. Particularly, the improvement rate is high for medium-term and out-of-the-money options. Moreover, these results are robust for different liquidity measures.     

Liquidity risk and stock performance during the financial crisis

We investigate whether and how ex-ante liquidity risk affects realized stock returns during the global financial crisis of 2008–2009 in international equity markets. We find that stocks with higher pre-crisis return exposure to global market liquidity shocks experience larger price reductions during the crisis period. Our findings provide further insight into the comprehensive picture of the effect of liquidity risk on asset prices, especially in an international context and under different market conditions.     

Stabilizing the market with short sale constraint? New evidence from price jump activities

We re-examine the impact of short-sale constraints (SSC) on market stabilization via realized jump activities during 2002–2009 to circumvent the reverse causality in identifying the policy effects of SSC. We observed that the abnormal downturns under tighter short sale constraints are significantly larger whereas there is no difference for abnormal upturns. Our empirical results survive across a sequence of robustness examinations controlled for market illiquidity. The findings do not support the claims by regulators that restraining short-sales can stabilize prices; instead, SSC has led to a less efficient market with stronger extreme downward returns.     

Carry

We apply the concept of carry, which has been studied almost exclusively in currency markets, to any asset. A security’s expected return is decomposed into its “carry,” an ex-ante and model-free characteristic, and its expected price appreciation. Carry predicts returns cross-sectionally and in time series for a host of different asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options. Carry is not explained by known predictors of returns from these asset classes, and it captures many of these predictors, providing a unifying framework for return predictability. We reject a generalized version of Uncovered Interest Parity and the Expectations Hypothesis in favor of models with varying risk premia, in which carry strategies are commonly exposed to global recession, liquidity, and volatility risks, though none fully explains carry’s premium.     

Liquidity risk and maturity management over the credit cycle

We show that firm demand-side factors are strong drivers of procyclical refinancing behavior over the credit cycle using novel data from the Shared National Credit program. Firms are more likely to refinance early when credit conditions are good to keep the effective maturity of their loans long and hedge against having to refinance in tight credit conditions. High credit quality firms are better able to hedge, making their refinancing propensity more sensitive to credit cycles than less creditworthy firms. There is a strong relationship between refinancing a loan, and subsequent growth in capital expenditure, especially when a loan is refinanced early.     

OTC trades and liquidity in the European carbon market more than meets the eye

ABSTRACT

This study investigates whether the previously reported price impact of OTC trades in the EU ETS can be attributed to their distinctively larger size (liquidity related) or to their discretionary feature (information related). The findings suggest that OTC trades induce volatility shocks that are higher in magnitude and faster resolved than those of solely high trading-intensity trades, which appears to be driven mainly by their presence, rather than by their size. An analysis of intraday price premia reveals that they are strategically placed by interacting with the organized market whenever their price and volatility impact is lower.