Assessing systemic risk due to fire sales spillover through maximum entropy network reconstruction

Assessing systemic risk in financial markets is of great importance but it often requires data that are unavailable or available at a very low frequency. For this reason, systemic risk assessment with partial information is potentially very useful for regulators and other stakeholders. In this paper we consider systemic risk due to fire sales spillover and portfolio rebalancing by using the risk metrics defined by Greenwood et al. (2015). By using the Maximum Entropy principle we propose a method to assess aggregated and single bank's systemicness and vulnerability and to statistically test for a change in these variables when only the information on the size of each bank and the capitalization of the investment assets are available. We prove the effectiveness of our method on 2001-2013 quarterly data of US banks for which portfolio composition is available.Comment: 36 pages, 6 figures, Accepted on Journal of Economic Dynamics and Contro

Optimal Trade Execution Under Endogenous Pressure to Liquidate: Theory and Numerical Solutions

We study optimal liquidation of a trading position (so-called block order or meta-order) in a market with a linear temporary price impact (Kyle, 1985). We endogenize the pressure to liquidate by introducing a downward drift in the unaffected asset price while simultaneously ruling out short sales. In this setting the liquidation time horizon becomes a stopping time determined endogenously, as part of the optimal strategy. We find that the optimal liquidation strategy is consistent with the square-root law which states that the average price impact per share is proportional to the square root of the size of the meta-order (Bershova and Rakhlin, 2013; Farmer et al., 2013; Donier et al., 2015; T´oth et al., 2016). Mathematically, the Hamilton-Jacobi-Bellman equation of our optimization leads to a severely singular and numerically unstable ordinary differential equation initial value problem. We provide careful analysis of related singular mixed boundary value problems and devise a numerically stable computation strategy by re-introducing time dimension into an otherwise time-homogeneous task

Essays on Monetary Policy

This dissertation consists of three chapters focusing on the transmission of monetary policy surprises and the challenges faced in modeling unconventional monetary policy. Of that, two chapters analyze the effects of both conventional and unconventional monetary policies on the financial markets and the overall economy. The empirical findings support the argument that the unconventional monetary policies followed by the U.S. Federal Reserve are effective and the Federal Reserve is not very constrained by the lower bound on nominal interest rates. The chapter focusing on modeling of unconventional policy surprises highlights that extensions to standard macroeconomic models are required to realistically reflect the future effects of such policy.In the first chapter, I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchase announcements, along with the effects of interest rate changes under conventional policy, on the U.S. stock market, and assess their transmission channels. Although the overall stock market responds meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make smaller contributions to the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across different types of policy shocks. The contribution from future dividends is found to be relatively high for a forward guidance shock than a current federal funds rate shock. Large-scale asset purchases shocks are found to have transmission channels making both positive and negative contributions supporting the arguments on information effects associated with such announcements. Meanwhile, the sector-wise analysis highlights that for a federal funds rate shock, the sectors which are more interest rate sensitive tend to report large excess equity return responses. Further, the sectoral equity premium responses derived for a forward guidance shock reaffirmed the relatively homogeneous effects of forward guidance on equity prices.The second chapter proposes a potential solution to the open economy version of the forward guidance puzzle. Standard models for monetary policy analysis show that far future forward guidance has implausibly large effects on current output and inflation, and these effects grow with the forward guidance horizon, a phenomenon known as the forward guidance puzzle. I attempt to analyze the effectiveness of forward guidance policies in a small open economy model, focusing on an open economy version of the forward guidance puzzle, in order to assess its impact on the exchange rates, in addition to output and inflation. In a standard small open economy model with complete international financial markets, not only the output gap and inflation, but also the exchange rates tend to overreact in a forward guidance experiment. In order to find a possible resolution to this phenomenon, a perpetual youth structure is incorporated into the benchmark small open economy model under consideration. I then show that the presence of agents with finite lives tends to weaken the excessive response of key macroeconomic variables to a forward guidance announcement, including the exchange rate.In the third chapter, I estimate the high-frequency changes in interest rate expectations and term premia across the yield curve due to monetary policy surprises on the Federal Open Market Committee (FOMC) announcement days, and analyze its effects on the financial markets and the overall economy. Disaggregation of yield curve responses shows that a current federal funds rate shock has a bigger impact on expectations than on term premium for short-term yields. For long-term yields, a forward guidance shock has a bigger impact on expectations than on term premium. A large-scale asset purchase shock is mainly transmitted through expectations supporting the signaling channel of balance sheet policies. It is shown that instruments for the changes in expectations could be identified along the lines of conventional short-term rate shocks as well as forward guidance and asset purchase shocks. In the financial markets, a shock to expectations for the short end of the yield curve is associated with substantial and statistically significant effects on short-term debt instruments, while shocks to expectations about the future interest rate path and asset purchases are associated with substantial and statistically significant effects on long-term debt instruments. Term premium effects, although orthogonalized against expectations, relate to meaningful responses in both short- and long-term instruments. Regarding the macroeconomic impact, a shock to expectations for the short end of the yield curve brings about the usual contractionary effects. A shock to expectations about the future rate path results in an increase in long-term yields and a drop in consumer prices, although with an expansion in economic activity suggesting the presence of either the "Fed response to news'' channel or the "Fed information effect'' channel. A surprise to asset purchase expectations leads to an increase in economic activity and employment, supporting the arguments for the balance sheet policies of the Federal Reserve. Meanwhile, orthogonalized term premium effects on the economy are found to be similar to those of a policy uncertainty shock

Compressing over-the counter markets. ECMI Working Paper No 11 12 Nov 2020.

Over-the-counter markets are at the centre of the global reform of the financial system. The authors of this paper show how the size and structure of these markets can undergo rapid and extensive changes when participants engage in portfolio compression, which is an optimisation technology that exploits multilateral netting opportunities. They find that tightly knit and concentrated trading structures, as featured by many large over-the-counter markets, are especially susceptible to reductions of notional amounts and network reconfiguration resulting from compression activities. Using a unique transaction-level dataset on credit-default-swaps markets, they estimate reduction levels suggesting that the adoption of this technology can account for a large share of the historical development observed in these markets since the Global Financial Crisis. Finally, the authors test the effect of a mandate to centrally clear over the counter markets in terms of size and structure. When participants engage in both central clearing and portfolio compression with the clearinghouse, results show large netting failures if clearinghouses proliferate. Allowing for compression across clearinghouses by-and-large offsets this adverse effect

Methodology for project portfolios selection using multicriteria of the capm, semi variation, and the gini risk coefficient

Consta no arquivo em PD

Post-crisis macrofinancial modeling: Continuous time approaches

Post-crisis macrofinancial modeling: Continuous time approache

Essays on credit contagion and shocks in banking

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Essays on Financial Regulation in Macroeconomics

This dissertation investigates two aspects of how to regulate the financial sector optimally in order to increase macroeconomic stability and mitigate the risk of future financial crises. Chapter 1 analyzes the desirability of international coordination in financial regulation. It develops a two-country model of systemic liquidity risk-taking in which financial market imperfections provide a rationale for macro-prudential regulation. In the model, curbing liquidity risk-taking via regulation lowers the price of liquidity during financial crises and thereby reduces the costs associated with market incompleteness. But regulation also entails costs in the form of distortions to productive investment decisions. The discrepancy between the domestic dimension of the costs and the global dimension of the benefits of regulation generates free-riding incentives among regulators operating in different countries. The theory predicts that absent international coordination, national authorities are tempted to regulate their financial systems in a way that results in excessive illiquidity. It therefore speaks in favor of a stronger global coordination of banking regulation. Chapter 2 analyzes the social optimality of private debt maturity choices. It studies debt maturity decisions in a dynamic macroeconomic model in which financial frictions give rise to systemic risk in the form of amplification effects. Long-term liabilities provide insurance against shocks to the asset side of the balance sheet, but they come at an extra cost. The debt maturity structure therefore maps into an allocation of macroeconomic risk between lenders and leveraged borrowers, and fundamental shocks propagate more powerfully in the economy when the maturity is shorter. The market equilibrium is not constrained efficient as borrowers fail to internalize their contribution to systemic risk and take on too much short-term debt in a decentralized economy. The theory indicates that a tax on short-term debt -- a form of macroprudential policy -- leads to Pareto improvements and results in less volatile allocations and asset prices

Too-connected-to-fail Institutions and Payments System’s Stability: Assessing Challenges for Financial Authorities

The most recent episode of market turmoil exposed the limitations resulting from the traditional focus on too-big-to-fail institutions within an increasingly systemic-crisis-prone financial system, and encouraged the appearance of the too-connected-to-fail (TCTF) concept. The TCTF concept conveniently broadens the base of potential destabilizing institutions beyond the traditional banking-focused approach to systemic risk, but requires methodologies capable of coping with complex, cross-dependent, context-dependent and non-linear systems. After comprehensively introducing the rise of the TCTF concept, this paper presents a robust, parsimonious and powerful approach to identifying and assessing systemic risk within payments systems, and proposes some analytical routes for assessing financial authorities’ challenges. Banco de la Republica’s approach is based on a convenient mixture of network topology basics for identifying central institutions, and payments systems simulation techniques for quantifying the potential consequences of central institutions failing within Colombian large-value payments systems. Unlike econometrics or network topology alone, results consist of a rich set of quantitative outcomes that capture the complexity, cross-dependency, context-dependency and non-linearity of payments systems, but conveniently disaggregated and dollar-denominated. These outcomes and the proposed analysis provide practical information for enhanced policy and decision-making, where the ability to measure each institution’s contribution to systemic risk may assist financial authorities in their task to achieve payments system’s stability.Payments systems, too-connected-to-fail, too-big-to-fail, systemic risk, network topology, simulation, central bank liquidity. Classification JEL:E58, E44, C63, G21, D85.