The federal funds market,excess reserves,and unconventional monetary policy

Following the bankruptcy of Lehman Brothers, interbank borrowing and lending dropped, whereas reserve holdings of depository institutions skyrocketed, as the Fed injected liquidity into the U.S. banking sector. This paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows, in an analytically tractable way, how interbank trade and excess reserves emerge in general equilibrium. Investigating the role of the federal funds market and unconventional monetary policy for the propagation of aggregate real and financial shocks, I find that federal funds market participation is irrelevant in response to standard supply and demand shocks, whereas it matters for “uncertainty shocks”, i.e. mean-preserving spreads in the cross-section of liquidity risk. Liquidity injections by the central bank can absorb the effects of financial shocks on the real economy, although excess reserves might increase and federal funds might be crowded out, as a side effect.     

How does HFT activity impact market volatility and the bid-ask spread after an exogenous shock? An empirical analysis on S&P 500 ETF

In this paper, we empirically analyse infra-second datasets of the SPDR S&P 500 ETF (specifically, the ETF of the S&P 500 exchanged on BATS, named SPY.Z) in order to explain how high-frequency trading (HFT) activities (aggressive and passive) impact market volatility and the bid-ask spread before and after an exogenous shock (i.e., the 2016 US presidential election). Using SPDR S&P 500 ETF datasets as a proxy for the market on regular volume trading days (November 3, 2016) and on high-volume trading days (November 9, 2016), we show that HFT, on average, has a disturbing action mainly on regular volume trading days, whereas on high-volume trading days, it appears to have a stabilizing effect by balancing both the volatility and bid-ask spread. That is, HFT as a whole has a more neutral impact on the market’s volatility and bid-ask spread than the single aggressive and passive components. In fact, aggressive HFT has a consistent negative effect that increases, on average, both the volatility and bid-ask spread, whereas passive HFT displays a positive effect that decreases, on average, the volatility and bid-ask spread.     

Federal deposit insurance coverage and bank failures: A cointegration analysis with semi-annual data, 1965–91

This study examines empirically the link between bank failures and statutorially created increases in the extent of federal deposit insurance coverage. The model includes such factors as the percentage of deposits at federally insured banks that was covered by federal deposit insurance (FDICOV), the tangible capital/asset ratio, the commercial bank cost of funds, and the prime rate of interest. Using cointegration techniques involving maximum eigenvalue, trace, and likelihood ratio tests, together with semi-annual data for 1965–91, the study reveals that the bank failure rate is cointegrated with FDICOV, the capital/asset ratio, and the commercial bank cost of funds. Accordingly, it is inferred that—consistent with previous studies—the system of federal deposit insurance very likely induced bank failures during the study period.     

Asymmetric information and term lending in the Euro money market: Evidence from the beginning of the turmoil

We address the role of information heterogeneity in the Euro interbank market for unsecured term lending. We use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the euro area money market. We find that the probability of finding a trading counterparty with a wider information set has risen since the eruption of the turmoil. Our results also show that the probability of trading with a better-informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. This suggests that the loose supply of money of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market.     

Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market?

This paper examines the impact of gross foreign equity inflows on aggregate liquidity of the Malaysian stock market using newly assembled foreign trading data and the best performing bid-ask spread proxy. Employing vector autoregression, we discover a one-way causality from gross inflows to aggregate liquidity, and foreign investors erode liquidity of the Malaysian stock market. Additional analyses reveal that uncertainties in the U.S. markets negatively affect aggregate liquidity through the flows of foreign institutions, whose positive feedback trading destabilizes the local bourse. Despite the shocks, there is sufficient liquidity provision from local state-backed institutional funds and local proprietary day traders.     

The reaction of financial markets to changes in FDIC policies on bank failures

The decade of the eighties was the most turbulent era for commercial banks since the Great Depression. Various bank-related events contributed to this agitation including deregulation, astronomical interest rates, massive bailouts, and great uncertainty. In this study the researchers examine the effects of these events on the cost of the leading source of funds for the banking industry during this period—purchased funds. The results indicate the pricing structure of the federal funds market reacts more to changes in Federal Reserve policy regarding monetary growth and economic stabilization activity than to particular bank problems.     

The impact of individual investor trading on information asymmetry in the Korean stock market

This paper examines the impact of individual investor trading on information asymmetry in the market. In particular, we examine the relationship between the trading volume by individual investors and the corresponding bid-ask spread in the Korean stock market, where the majority of the trading activity is driven by individual investors and therefore information asymmetry can be evident. We find that high trading activity by individual investors increases the bid-ask spread in a short investment horizon, suggesting that individual investors, as uninformed and unsophisticated traders, amplify the degree of information asymmetry in the market through trading.     

Changes in the liquidity of closed-end country funds after the introduction of World Equity Benchmarks

In 1996, the first exchange-traded funds (ETFs) designed to track a subset of the Morgan Stanley Capital International country indices were approved under the name World Equity Benchmarks (acronym “WEBS”™). We examine the impact of early WEBS-trading on the liquidity of corresponding closed-end country funds (CECFs), previously one of the main avenues for retail investors to achieve country-specific equity exposure. We document a decline in both the trading volume and the trading frequency for CECFs, suggesting that some investors migrate to WEBS. At the same time, the market depth for CECFs increases and the bid-ask spread for CECFs decreases following the introduction of WEBS. Our results support the hypothesis that despite the decline in volume and trading frequency, the liquidity of CECFs is favorably affected by the advent of WEBS.     

Stock prices,firm size,and changes in the federal funds rate target

The Fed targeted the federal funds rate during the period 1974–1979; they returned to that procedure in the late 1980s and have maintained it since then. For both periods, we find that stock prices reacted significantly to unanticipated changes in the federal funds rate target. Consistent with the prediction of imperfect capital market theories, the estimated impact of monetary shocks is significantly larger for small stocks than for big stocks in the late 1970s, when business conditions were typically bad. However, the “size effect” is not present in the 1990s, when business conditions were typically good.     

Forecasting the daily federal funds rate

This paper compares two alternative one-day-ahead forecasts of tomorrow's federal funds rate. The first forecast is a simple random walk forecast in which the forecast of tomorrow's federal funds rate is taken to be today's federal funds rate. The second forecast is an ARIMA model forecast that was allowed to vary with changes in the Federal Reserve System's operating procedures. These two forecasts are compared in terms of their general forecast accuracy and the decision support they provide to a financial institution hypothesized to be borrowing $7 million a week in the federal funds market. Even in cases felt to be most favorable to the ARIMA forecasts, the degree of forecast accuracy and decision support superiority of the ARIMA forecasts is found to be quite small.     

Arbitrage, linear programming and martingales¶in securities markets with bid-ask spreads

In a general, finite-dimensional securities market model with bid-ask spreads, we characterize absence of arbitrage opportunities both by linear programming and in terms of martingales. We first show that absence of arbitrage is equivalent to the existence of solutions to the linear programming problems that compute the minimum costs of super-replicating the feasible future cashflows. Via duality, we show that absence of arbitrage is also equivalent to the existence of underlying frictionless (UF) state-prices. We then show how to transform the UF state-prices into state-price densities, and use them to characterize absence of arbitrage opportunities in terms of existence of a securities market with zero bid-ask spreads whose price process lies inside the bid-ask spread. Finally, we argue that our results extend those of Naik (1995) and Jouini and Kallal (1995) to the case of intermediate dividend payments and positive bid-ask spreads on all assets.     

Day-of-the-week effects in commercial paper yield rates

In order to minimize short-term financing costs, corporations issue commercial paper instead of seeking bank loans. We examine the changes in the daily rates of commercial paper over the last two decades. Our most interesting finding is based on a consistent and significant negative return on Wednesdays as compared to other weekdays over the sample period. We use t-tests, non-parametric tests and the binary regression developed by French [J. Finan. Econ. 8 (1) (1980) 55] to confirm our results. Finally, we deduct the return for each Wednesday from the average return for that week and find that Wednesday returns are significantly lower. Consistent with other money market instruments like T-bills and federal funds, we show that a day-of-the-week effect exists in the commercial paper rates.     

Risk pricing of wholesale funds and the behavior of retail deposit rates

We explore the relationship between bank risk and retail deposits. Predicted risk premiums on wholesale funds explain retail rate heterogeneity through two channels. First, increased bank risk premiums encourage the bank to substitute from wholesale funds to small certificates of deposits (CD) by increasing small CD rates. Second, increased rival risk premiums in a local market require the bank to increase small CD rates even more. Our results are consistent with risk encouraging the use of small CDs as a marginal source of funds and promoting local market competition for small CDs. As risk premiums rise, banks also reduce rates on other retail deposits. Our approach has implications for regulatory and monetary policies and financial stability.     

The impact of reduced pre-trade transparency regimes on market quality

This paper studies the effects of pre-trade quote transparency on spread, price discovery and liquidity in an artificial limit order market with heterogeneous trading rules. Our agent-based numerical experiments suggest that full quote transparency incurs substantial transaction costs to traders and dampens trading activity in an order-driven market. Our finding reveals that exogenous restriction of displayed depth, up to several best quotes, does not benefit market performance. On the contrary, endogenous restriction of displayed quote depth, by means of iceberg orders, improves market quality in multiple dimensions: it reduces average transaction costs, maintains higher liquidity and moderate volatility, balances the limit order book, and enhances price discovery.     

浅谈经济危机下中小企业的内部风险控制

当前金融危机仍在蔓延,并且已经导致了国内大批中小企业的倒闭,中小企业只有加快建立内部风险控制机制,才能不断提高自身的抗击金融危机冲击的能力,不断提升自身的竞争力。企业风险的形成主要有外部环境和内部风险因素构成。内部风险控制系统主要包括:市场风险控制,投资风险控制,存货风险控制,融资风险控制,资金回收风险控制和技术风险控制。这些系统的建立对中小企业尤其重要。市场风险控制包括市场营运能力,生产控制能力,技术创新能力。投资风险控制主要是指选好项目,做好评估和储备财力。不良存货风险预控,存货价格风险预控,存货规模风险预控则是构成存货风险控制的主要部分。融资风险控制包括完善自身治理能力,增强银行融资能力;创造条件争取从社会募资;处理好中长期贷款的结构;多利用商业信用和折扣等。资金回收风险控制主要关注客户档案的建立管理和信用的管理。技术风险的控制主要通过一是参与科技保险或项目保险,二是在技术创新项目中吸收技术风险投资,使技术风险的损失得到合理分摊。中小企业只有通过不断完善对自己内部风险的管理控制,全面提升风险应对能力,就能呈现出更强的活力。     

基于库存控制的房地产开发企业土地储备决策

应用库存控制理论建立了房地产开发企业土地储备库存系统,引入并修正了BOSS(buy-overpayment-slump-survival)循环模型,从周期控制和成本控制两个维度研究得出了房地产开发企业土地储备决策的原则和策略:市场上升期应保持谨慎态度,土地储备库存系统储备最小规模体量,避免无地开发;市场下降期,则应把握机会,低价购入土地,土地储备库存系统储备最大规模体量,将土地储备量控制在企业能承受的范围内;无论在哪个时期,都应从土地购置成本和土地持有成本两个层面做好土地储备库存系统的成本控制。     

Further evidence of the November effect

Tax-loss selling by individuals has long been thought to be a major factor driving the January effect. The Tax Reform Act of 1986 changed the tax-year end for mutual funds to October 31 and increased the marginal tax rate, creating a natural experiment allowing Bhabra, Dhillon, and Ramirez (1999) to empirically test the tax-selling hypothesis. They find empirical support for a postact November effect. However, a second paper by Gibson, Safieddine, and Titman (2000) finds empirical support for the November effect in only one post-act year, 1990. In this article, we respecify betas, calculate holding period returns over each tax year, construct portfolios with large, differences in mutual fund ownership, and test for the presence of a bid-ask spread bias. The empirical results offer evidence of a November effect but only in the first week of November.     

On the different impacts of fixed versus floating bid-ask spreads on an automated intraday stock trading

Trading or transaction costs are one of the most important attributes of any trading system and can be divided into two major groups: explicit (visible) and implicit (hidden). In this paper, we investigate the impact of the bid-ask spreads, a form of hidden cost, on the results of backtesting (and, therefore, the potential impact on real-time trading) of an automated trading system based on genetic programming. We concentrate on the nature (fixed or floating) of bid-ask spreads (hereafter ‘spread’) and demonstrate that the effectiveness of an automated trading system more significantly degrades in the case of floating spreads compared to fixed spreads. We investigate four fixed spreads (one, two, five and ten pips) and a floating spread with a median value of two pips and demonstrate that the floating spread with a mean value of 0.02 USD results in significantly worse performance than a fixed spread of 0.1 USD. ‘Floating spreads’ in this paper is a term used for market-determined continuously changing bid-ask spreads.     

A profitable trading rule for net borrowers on settlement Wednesday

Griffiths and Winters (1995) suggest that the rules and regulations of the bank settlement process create incentives such that banks optimizing their reserve account management will borrow on settlement Wednesday to obtain the funds necessary to meet Federal Reserve Board mandated reserves. We develop a trading rule for settlement Wednesday that reduces the cost of borrowing by exploiting the predicted daily trading behavior of the Federal Reserve Open Market Desk. The strategy reduces the cost of borrowing by approximately $43,333 per $1 billion on an annualized basis in simulated trading. Our results reinforce that optimal reserve account management is a function of the rules and regulations governing overnight money markets.     

Does transparency of central banks communication affect credit market? Empirical evidence for advanced and emerging markets

This study examines the effect of the transparency of central banks communication on credit market. In particular, this study investigates how central banks’ effort to provide more detailed information about their objectives regarding the price stability (monetary policy transparency) and financial stability (financial stability transparency) policies are able to mitigate information asymmetry on credit market, through the net interest margin charged by the banks to engage in financial intermediation (credit spread). The findings denote central bank transparency is able to reduce the credit spread. Additionally, the evidence suggests the effect of central bank transparency on the credit spread is greater in emerging markets, where there is less information available on credit market. In brief, transparency in central banks communication is an important tool to mitigate the information asymmetry in the credit market.