The on-the-run liquidity phenomenon

We test the implications of a model of multi-asset speculative trading in which liquidity differentials between on-the-run and off-the-run U.S. Treasury bonds ensue from endowment shocks in the presence of two realistic market frictions—information heterogeneity and imperfect competition among informed traders—and a public signal. Our evidence suggests that (i) off/on-the-run liquidity differentials are economically and statistically significant, even after controlling for several of the bonds’ intrinsic characteristics (such as duration, convexity, repo rates, or term premiums), and (ii) off/on-the-run liquidity differentials are smaller immediately following bond auction dates, and larger when the uncertainty surrounding the ensuing auction allocations is high, when the dispersion of beliefs across informed traders is high, and when macroeconomic announcements are noisy, consistent with our model.     

Unanimous subjective probabilities

This note shows that if the space of events is sufficiently rich and the subjective probability function of each individual is non-atomic, then there is a σ-algebra of events over which everyone will have the same probability function, and moreover, the range of this common probability is the entire unit interval.      

A GUIDED TOUR OF THE MARKET MICROSTRUCTURE APPROACH TO EXCHANGE RATE DETERMINATION

Abstract.  We propose a critical review of recent developments in exchange rate economics which have offered a novel approach to exchange rate determination. This new strand of research, the market microstructure approach to exchange rates, is motivated by some very stark empirical evidence, relating exchange rate dynamics to the imbalance in the sequence of purchases and sales of foreign currencies in the markets for foreign exchange. Through our review we outline the results this new strand of research has achieved alongside its open questions and future challenges.     

Informed and Strategic Order Flow in the Bond Markets

We study the role played by private and public information inthe process of price formation in the U.S. Treasury bond market.To guide our analysis, we develop a parsimonious model of speculativetrading in the presence of two realistic market frictions—informationheterogeneity and imperfect competition among informed traders—anda public signal. We test its equilibrium implications by analyzingthe response of two-year, five-year, and ten-year U.S. bondyields to order flow and real-time U.S. macroeconomic news.We find strong evidence of informational effects in the U.S.Treasury bond market: unanticipated order flow has a significantand permanent impact on daily bond yield changes during bothannouncement and nonannouncement days. Our analysis furthershows that, consistent with our stylized model, the contemporaneouscorrelation between order flow and yield changes is higher whenthe dispersion of beliefs among market participants is highand public announcements are noisy.     

Credit portfolios: What defines risk horizons and risk measurement?

The strong autocorrelation between economic cycles demands that we analyze credit portfolio risk in a multiperiod setup. We embed a standard one-factor model in such a setup. We discuss the calibration of the model to Standard & Poor’s ratings data in detail. But because single-period risk measures cannot capture the cumulative effects of systematic shocks over several periods, we define an alternative risk measure, which we call the time-conditional expected shortfall (TES), to quantify credit portfolio risk over a multiperiod horizon.     

A simple model of credit contagion

We propose a simple model of credit contagion in which we include macro- and microstructural interdependencies among the debtors within a credit portfolio. The microstructure captures interdependencies between debtors that go beyond their exposure to common factors, e.g., business or legal interdependencies. We show that even for diversified portfolios, moderate microstructural interdependencies have a significant impact on the tails of the loss distribution. This impact increases dramatically for less diversified microstructures.     

Estimating asymptotic standard errors and inconsistencies of impact multipliers in nonlinear econometric models

This paper presents and discusses an analytic simulation procedure which can be used to estimate the asymptotic standard errors of impact multipliers in a structural, nonlinear econometric model. A stochastic simulation approach is used to obtain an approximate estimate of the inconsistencies of multipliers when computed from simulated results. A numerical example for the nonlinear Klein-Goldberger model is provided.     

On the stability of the Klein-I model

This paper presents a revision of the numerical results by Theil and Boot (1962) on the asymptotic standard errors of characteristic roots in the Klein-I model.