9,677 research outputs found
Inventories and the Propagation of Sectoral Shocks
This paper studies the dynamic properties of an imperfectly competitive economy with inventory holdings. In particular, we focus on the serial correlation in aggregate output and employment produced by the holding of inventories in one sector of the economy and the co-movement between sectors of an economy over the cycle resulting from demand linkages. This model is then contrasted with a simple, competitive real business cycle model with inventories. We find that the predictions of these models with regards to the co-movement of employment may differ. Based on this, we present empirical evidence on the co-movement of employment over the business cycle which is consistent with the predictions of the model of imperfect competition with inventory holdings and demand linkages.
Are Different-Currency Assets Imperfect Substitutes?
This paper provides a new test for whether different-currency assets are imperfect substitutes. The test exploits that under floating rates, changing public currency demand has no direct effect on monetary fundamentals, current or future. Price effects from imperfect substitutability are clearly present: the immediate price impact of public trades is 0.44 percent per 1 billion dollar (of which, about 80 percent persists indefinitely). This estimate is applicable to intervention trades in the special case when they are indistinguishable from private trades (i.e., when interventions are sterilized, anonymous, and provide no monetary-policy signal).
Size Discovery
Size-discovery mechanisms allow large quantities of an asset to be exchanged at a price that does not respond to price pressure. Primary examples include "workup" in Treasury markets, "matching sessions" in corporate bond and CDS markets, and block-trading "dark pools" in equity markets. By freezing the execution price and giving up on market clearing, size-discovery mechanisms overcome concerns by large investors over their price impacts. Price-discovery mechanisms clear the market, but cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show how augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency
Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach
The target zone model of Krugman (1991) has failed empirically. In this paper, we develop a model of the exchange rate with heterogeneous agents in a free floating and a target zone regime. We show that this simple model mimics the empirical puzzles of exchange rates: excessive volatility, fat tails, volatility clustering, and disconnection from the fundamentals. In addition, the target zone regime replicates a reduced nominal volatility for the same level of fundamental volatility as in the free floating regime and the distribution of the exchange rate within the band is hump-shaped.exchange rate, heterogeneous agents, target zones
Pricing, liquidity and the control of dynamic systems in finance and economics
The paper discusses various practical consequences of treating economics and finance as an inherently dynamic and chaotic system. On the theoretical side this looks at the general applicability of the market-making pricing approach to economics in general. The paper also discuses the consequences of the endogenous creation of liquidity and the role of liquidity as a state variable. On the practical side, proposals are made for reducing chaotic behaviour in both housing markets and stock markets.dynamic, chaotic, liquidity, market-microstructure, post-keynesian
Market liquidity and banking liquidity: linkages, vulnerabilities and the role of disclosure.
During the course of 2007, global financial markets went through noticeable periods of turbulence. In particular, complex credit markets suffered a marked set-back. Oddly, turmoil in these fairly new markets contributed to severe liquidity shortages in short-term money and interbank markets, triggering repeated large-scale monetary interventions by central banks worldwide. Recent events have thus demonstrated that banks are considerably intertwined in fi nancial markets; dependent on and exposed to them as regards liquidity. The aim of this article is to better understand this complex relationship and to frame relevant aspects of the latest fi nancial market turmoil accordingly. In particular, we explore the mechanics of a market liquidity crisis and its impact on individual banks’ liquidity, as well as possible spillovers to other banks. These dynamics of course raise a number of policy issues. Here, we focus on the role that greater disclosure to markets on banks’ liquidity situation itself could play as a market-stabilising device. In summary, global banks have increasingly integrated into capital markets and in terms of both funding and asset liquidity rely considerably on functioning, liquid financial markets. This is particularly visible in the shift towards secured lending transactions; growth of the securitisation market; the broadening of collateral to encompass complex products with shifting levels of market liquidity; and the rise in committed credit or liquidity lines to sponsored special purpose vehicles (SPVs) and corporates. While some of the recent developments in fi nancial market liquidity can be attributed to technological progress, importantly, more temporary factors resulting from an environment of low interest rates have accelerated market liquidity beyond sustainable levels. While, per se, banks’ ability to “liquify” assets represents a positive development which should help mitigate the fundamental liquidity risk that banks face, increased sensitivity with respect to market liquidity risk has also created new vulnerabilities with respect to sudden reversals of market liquidity. Importantly, adverse circumstances could trigger a combined increase in demands on liquid assets via margin requirements and activation of credit lines and reduced liquidity of assets and related market funding sources. The severe loss of liquidity in asset-backed securities markets and its repercussions on global interbank markets during 2007 provide a vivid illustration of the channels that link market liquidity to banks’ funding and asset liquidity and of the wider externalities of idiosyncratic liquidity shocks. How can these risks be addressed? Together with active liquidity management, disclosure may represent one tool through which such vulnerability may be reduced. A large literature exists on the merits of transparency in banking. Greater transparency should alleviate refi nancing frictions related to asymmetric information. When information problems are however deeper and concern aggregate uncertainty, improved disclosure on credit fundamentals may be less effective to restore confidence. Instead, better information on liquidity itself may be necessary. We explore the current availability of information on banks’ liquidity and funding risks. Overall, information appears to be limited –failing to disclose in a comprehensive and comparable way the underlying dynamics of liquidity demands and funding sources. But liquidity is volatile and banks are subject to inherent liquidity mismatches. Can greater disclosure in this area ever be a useful tool to reinforce market discipline in a systemically stabilising fashion? While this question merits serious reflection, the 2007 market events have shown that current information gaps are large and need addressing.
Adverse selection costs, trading activity and price discovery in the NYSE: An empirical analysis
This paper studies the role that trading activity plays in the price discovery process of a NYSE-listed stock. We measure the expected information content of each trade by estimating its permanent price impact. It depends on observable trade features and market conditions. We also estimate the time required for quotes to incorporate all the information content of a particular trade. Our results show that price discovery is faster after risky trades and also at the extreme intervals of the session. The quote adjustment to trade-related shocks is progressive and this causes risk persistency and unusual short-term market conditions.Publicad
High frequency trading and end-of-day price dislocation : [Version 28 Oktober 2013]
We show that the presence of high frequency trading (HFT) has significantly mitigated the frequency and severity of end-of-day price dislocation, counter to recent concerns expressed in the media. The effect of HFT is more pronounced on days when end of day price dislocation is more likely to be the result of market manipulation on days of option expiry dates and end of month. Moreover, the effect of HFT is more pronounced than the role of trading rules, surveillance, enforcement and legal conditions in curtailing the frequency and severity of end-of-day price dislocation. We show our findings are robust to different proxies of the start of HFT by trade size, cancellation of orders, and co-location
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