Corporate bond returns and the financial crisis

We examine effects of government actions and related accounting policies on the corporate bond market implied by changes in relations between aggregate bond returns and cash flow and discount rate news. We capture the influence of risk by partitioning bonds into investment and speculative grades. We use earnings changes as a proxy for cash flow news and T-Bill rate changes as a proxy for discount rate news. As expected, during non-crisis periods, we observe a positive relation between earnings changes and bond returns and a negative relation for T-Bill rate changes. A combination of government bailouts of large financial institutions and mark-to-market accounting preserves the positive relation for earnings changes during the crisis for investment grade bonds, while absence of these factors leads to an insignificant relation for speculative grade. Intervention by the Federal Reserve to induce lower interest rates as earnings were declining, a flight to safety shifting demand from corporate bonds to T-Bills, and low cost funds invested in risk free investments explain a reversal of the relation between bond returns and T-Bill rate changes for both grades.     

Bank Structure Conference Impact Study

The first Conference on Bank Structure and Competition was held at the Federal Reserve Bank of Chicago in 1963. Since that time, the Conference has served to stimulate and disseminate policy relevant research on issues affecting the financial services industry and as a forum for debating the relevant policy issues of the day. We evaluate the impact of the Conference on public policy and the banking and finance literature. We provide a qualitative argument that the Conference has helped promote policy change by showing that major financial reforms were typically discussed years earlier at the Conference. We then analyze data from the Social Science Citation Index and find that the Conference has had a strong and systematic impact on the banking and finance literature.     

The U.S. Treasury yield curve: 1961 to the present

The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website http://www.federalreserve.gov/pubs/feds/2006 and which will be updated quarterly, will provide a benchmark yield curve that will be useful to applied economists.     

Equity prices and financial globalization

This paper examines the association between equity returns, economic shocks, and economic integration. The empirical findings show that oil prices and U.S. Federal Reserve funds rates are associated with negative responses of international equity returns, of which a simple asset-pricing model is capable of explaining the international differences. Using vector autoregressions, we find that the effects of global economic shocks operate through the current excess returns of equity prices. Empirically, trade integration increases the responses of international equity returns to oil prices, while finance integration increases the responses of equity returns to Federal Reserve funds rates across countries.     

An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions

Abstract:   This paper extends the existing literature by analysing the dual impact of changes in the interest rate and interest rate volatility on the distribution of Australian financial sector stock returns. In addition, a multivariate GARCH‐M model is used to analyse the impact of deregulation on the financial institutions sector. It was found that there is a consistent inter‐temporal trade off between risk and return over the different regulatory periods. Moreover, finance corporations were found to be highly sensitive to new shocks across the financial sector and deregulation increased the risk faced by finance corporations and small banks – effectively increasing the required rate of return and explaining the continued rationalisation of these sectors. Furthermore, deregulation has changed the fundamental relationship between interest rates and large bank stock excess returns from positive in the pre‐deregulation period to negative in the post‐deregulation period. This reflects the changing institutional environment from one of controlled credit rationing to a more competitive environment.     

The Impact of the Federal Reserve's Large‐Scale Asset Purchase Programs on Corporate Credit Risk

Estimating the effect of Federal Reserve's announcements of Large‐Scale Asset Purchase (LSAP) programs on corporate credit risk is complicated by the simultaneity of policy decisions and movements in prices of risky financial assets, as well as by the fact that both interest rates of assets targeted by the programs and indicators of credit risk reacted to other common shocks during the recent financial crisis. This paper employs a heteroskedasticity‐based approach to estimate the structural coefficient measuring the sensitivity of market‐based indicators of corporate credit risk to declines in the benchmark market interest rates prompted by the LSAP announcements. The results indicate that the LSAP announcements led to a significant reduction in the cost of insuring against default risk—as measured by the CDX indexes—for both investment‐ and speculative‐grade corporate credits. While the unconventional policy measures employed by the Federal Reserve to stimulate the economy have substantially lowered the overall level of credit risk in the economy, the LSAP announcements appear to have had no measurable effect on credit risk in the financial intermediary sector.     

国际金融秩序的无序是通货紧缩的根源

发生全球性通货紧缩已经引起越来越多人的关注。其根本原因是布雷顿森林体制被废除之后,国际金融秩序的无序造成的。美联储是站在美国利益的基础上处理问题,他们设计的国际金融体制也只符合美国的利益。未来很长一段时间,美国人都不会改变这一方式。因此,我们要维护自己的利益,就要用全新的眼光看世界,深入了解西方人建立的金融秩序,进行更加深入的探索。     

Does the federal reserve possess an exploitable informational advantage?

This paper provides evidence that the Federal Reserve has an informational advantage over the public that can be exploited to improve activist monetary policy. The informational superiority does not result from the Fed having earlier access to publicly released financial data. Instead, this advantage is generated by confidential supervisory knowledge about troubled, non-publicly traded institutions. As a result, this information can remain confidential for an extended period, since these banks have neither the desire to fully disclose the extent of their financial troubles, nor the requirement to do so. The informational advantage is both statistically significant and economically important, providing a potential justification for activist monetary policy.     

互联网金融、存款竞争与银行风险承担

本文通过构建纳入互联网金融的银行环形城市模型,推演了“互联网金融→存款结构/付息成本→银行风险承担”的传导机制。在此基础上,以2003-2016年我国83家商业银行为样本,建立多重中介效应模型进行实证检验。研究结果表明:(1)互联网金融发展经由恶化存款结构和抬高付息成本两种渠道显著加重了银行风险承担水平,其中,恶化存款结构效应的相对贡献为50%左右,抬高付息成本效应的相对贡献为35%左右;(2)相较于互联网渠道构筑业态,互联网支付结算、互联网资源配置和互联网财富管理业态对银行存款结构和付息成本的不利影响更为强烈;(3)相对于国有、大规模、低流动性和低资本充足率商业银行,面对互联网金融的冲击,非国有、小规模、高流动性和高资本充足率商业银行的客户存款流失更快,平均付息成本上涨更多。     

Immediate Disclosure or Secrecy? The Release of Information in Experimental Asset Markets

This paper reports the results of experimental asset markets designed to investigate how the public disclosure of uncertain information affects market and individual outcomes. In some markets, no information is released as trading starts, and in others, an imperfect pre‐announcement is disclosed. The reliability of the pre‐announcement varies across markets. Our data indicate under‐reaction to a pre‐announcement that is highly reliable and over‐reaction to one with much lower reliability. Price volatility is higher and allocational efficiency is lower with a pre‐announcement that reflects substantial uncertainty. Furthermore, when the reliability of the pre‐announcement is low, traders extract a smaller proportion of the total attainable profit. Thus, in a highly uncertain environment better outcomes may result when information is withheld. These results have important policy implications regarding the disclosure of information by the Federal Reserve. In a highly uncertain environment, better outcomes may actually result with less information.     

Credit risk dynamics in response to changes in the federal funds target: The implication for firm short-term debt

The recent credit crisis has raised a number of interesting questions regarding the role of the Federal Reserve Bank and the effectiveness of its expected and unexpected interventions in financial markets, especially during the crisis, given its mandate. This paper reviews and evaluates the impact of expected and unexpected changes in the federal funds rate target on credit risk premia. The paper's main innovation is the use of an ACH-VAR (autoregressive conditional hazard VAR) model to generate the Fed's expected and unexpected monetary policy shocks which are then used to determine the effects of a Federal Reserve policy change on counterparty credit risk and more importantly short-term firm debt financing. The findings answer a longstanding question sought by researchers on the effect of policy makers' announcements on firm debt financing. The results clearly show that the Federal Reserve influences short-term debt financing through the credit channel for both expansionary and contractionary monetary policies. In particular, we find that the growth in counterparty risk appears less responsive to anticipated responses in the Fed funds rate that fail to materialize than to an unanticipated increase in the federal funds rate. Finally, we also document that the results appear to validate the Feds interventions in financial markets to stem counterparty risk and to make liquidity more readily available to firms.     

Credit Portfolio Loss Forecasts for Economic Downturns

Recent studies find a positive correlation between default and loss given default rates of credit portfolios. In response, financial regulators require financial institutions to base their capital on 'Downturn' loss rates given default which are also known as Downturn LGDs. This article proposes a concept for the Downturn LGD which incorporates econometric properties of credit risk as well as the information content of default and loss given default models. The concept is compared to an alternative proposal by the Department of the Treasury, the Federal Reserve System and the Federal Insurance Corporation. An empirical analysis is provided for US American corporate bond portfolios of different credit quality, seniority and security.     

互联网金融对中国商业银行系统性风险的影响——基于SVAR模型的实证研究

首先运用主成分分析法测算我国商业银行的系统性风险,接着运用突变分析和 SVAR 模型等计量方法实证互联网金融对我国商业银行系统性风险的影响。结果表明：互联网金融发展影响商业银行系统性风险的路径为：“互联网金融—商业银行的资产负债结构—商业银行的成本收入比—商业银行的系统性风险”,且它对银行系统性风险的影响存在“期限结构效应”,即互联网金融在短期内会增加我国银行系统性风险,但从中长期来看,对我国银行系统性风险的影响并不大,两者可作为互利共生的事物共同发展。互联网金融的存在对我国金融改革有很好的倒逼作用,能在一定程度上促进金融监管的创新。     

Machine learning and asset allocation

Investors have access to a large array of structured and unstructured data. We consider how these data can be incorporated into financial decisions through the lens of the canonical asset allocation decision. We characterize investor preference for simplicity in models of the data used in the asset allocation decision. The simplicity parameters then guide asset allocation along with the usual risk aversion parameter. We use three distinct and diverse macroeconomic data sets to implement the model to forecast equity returns (the equity risk premium). The data sets we use are (a) price‐dividend ratios, (b) an array of macroeconomic series, and (c) text data from the Federal Reserve's Federal Open Market Committee (FOMC) meetings.     

Loss Sharing Rules for Bank Holding Companies: An Assessment of the Federal Reserve's Source‐of‐Strength Policy and the FDIC's Cross Guarantee Authority

In this article, we critically examine two policies designed to protect the deposit insurance funds—the Federal Reserve Board's source‐of‐strength policy and the FDIC's cross‐guarantee authority. We discuss why each of the policies was adopted and how effective each has been in practice since its implementation. We then evaluate the future application and usefulness of the two policies in light of the structural changes that have resulted from industry consolidation and the financial modernization of the 1990s.     

印度金融市场震荡的成因，前景及应对启示

自2013年5月美联储释放退出量化宽松（QE）的政策信号之后,印度金融市场出现剧烈震荡。文章在与亚洲金融危机期间印度金融市场表现进行历史对比的基础上,对此次印度金融市场动荡的成因及危机治理措施进行了评析,指出印度固有经济结构缺陷和美联储货币政策退出信号是导致市场波动的重要内外部诱因。未来1～2年内印度金融市场出现阶段性震荡的概率仍然较大。此外,文章还探讨了此次印度市场案例带给中国经济金融的影响和启示。     

A Bayesian interpretation of the Federal Reserve's dual mandate and the Taylor Rule

When the Federal Reserve was established by the US Congress in 1913, its charter mandated that the new central bank “promote an elastic currency” and the institution was given extraordinary powers to serve as a lender of last resort to the banking system. Congress was reacting to the cycle of financial panics that had beset the country since the Civil War and had worsened with the Panic of 1907. Congress sought to find a remedy to prevent runs on banks turning into full-fledged financial crises. The term “elastic” in the opening words of the charter was intended to underscore the need for a robust banking system that could withstand shocks and not collapse upon itself. There was no mention whatsoever of a dual mandate of promoting price stability and encouraging full employment.With prodding from the US Congress, the Federal Reserve became highly involved in the management of the economy of the United States after WWII, focusing on inflation and full employment objectives. In 1993 Professor John Taylor set forth an elegant and simple framework (aka, the Taylor Rule) for analyzing the interest rate policy of the Federal Reserve in terms of its dual mandate.This paper examines Federal Reserve behavior from the mid-1950s to 2011 through the lens of the Taylor Rule. Our contribution is to use a dynamic linear model with Bayesian inference to update the evolution through time of the key parameters surrounding the inflation and full employment mandates, using only the information available to the Federal Reserve at each point in time. Our findings provide a more nuanced quantitative view than is previously available in the literature of how the Federal Reserve shifted its management of its dual mandate over time and in response to different economic challenges. Moreover, our research leads to serious questions of how Federal Reserve decision making may change in the future, following the financial panic of 2008, pointing toward numerous avenues for new research.     

The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets

We develop a model to analyze monetary policy implementation with multiple Federal Reserve liabilities and superabundant reserves. The analysis demonstrates the Federal Reserve's tools including interest on excess reserves (IOER), overnight reverse repurchase agreements (ON RRP), and term deposits should allow the Federal Reserve to raise the short‐term interest rates to any desired level. We find the contribution of each the increase in the IOER and ON RRP offering rates in firming money market rates suggested by the data during the December 2015 policy tightening event is remarkably similar to the effect of each tool implied by the calibrated model.     

金融危机条件下美联储新货币政策工具的运用

次贷危机爆发后,美联储根据本国金融市场变化情况,在《联邦储备法令》的授权下,创设了包括定期标售工具、定期证券借贷工具、一级交易商信用工具、货币市场投资者融资工具在内的7种新型货币政策工具,旨在为各类金融机构提供流动性支持,鼓励金融机构的放贷积极性,及恢复金融市场功能。该文详细介绍这些新型货币政策工具的操作规则及市场功能。     

A practitioner's perspective: Comments on “Analysis of U.S. savings bonds”

In this issue, Potts and Reichenstein describe features of U.S. savings bonds and discuss their evaluation. The article can serve as a reference for busy practitioners who may not follow changes in the savings bond market closely, especially those who tend to rely on product-related education for updates on financial instruments.Savings bonds remain an important investment for individuals; on March 31, 1994, individuals held $174.9 million in U.S. savings bonds, a 7% increase from one year prior (Williams, 1994). Further, as Table 1, “Demographic Characteristics of Individual Savings Bond Holders,” indicates, the holding of savings bonds is not exclusive to any particular age group or income level (Federal Reserve Bulletin, 1994).