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Working Paper
The scarcity value of Treasury collateral: Repo market effects of security-specific supply and demand factors
In the special collateral repo market, forward agreements are security-specific, which may magnify demand and supply effects. We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all outstanding U.S. Treasury securities. We find an economically and statistically significant scarcity premium. This scarcity effect is quite persistent, passes through to Treasury market prices, and explains a significant portion of the flow-effects of LSAP programs, providing additional evidence for the scarcity channel ...
Working Paper
Funding Liquidity Risk and the Cross-section of MBS Returns
This paper shows that funding liquidity risk is priced in the cross-section of excess returns on agency mortgage-backed securities (MBS). We derive a measure of funding liquidity risk from dollar-roll implied financing rates (IFRs), which reflect security-level costs of financing positions in the MBS market. We show that factors representing higher net MBS supply are generally associated with higher IFRs, or higher funding costs. In addition, we find that exposure to systematic funding liquidity shocks embedded in the IFRs is compensated in the cross-section of expected excess returns| agency ...
Discussion Paper
Monetary Policy Tightening and Debt Servicing Costs of Nonfinancial Companies
Rapid monetary policy tightening in most advanced economies in 2022 and 2023 was accompanied by substantial increases in prevailing interest rates for new credit to businesses and households. In addition to increasing the cost of new borrowing, monetary policy tightening may also be associated with increases in costs of servicing existing debt, potentially leading to the tightening of firms' and households' financial constraints, leaving them with less cash for investment and consumption.
Working Paper
Market Effects of Central Bank Credit Markets Support Programs in Europe
Using responses of credit default swap indexes to ECB monetary policy announcements, we isolate a novel credit policy component of monetary policy surprises. We examine how such unconventional monetary policy surprises affect investor perceptions of credit risk and the functioning of primary corporate debt markets. Favorable credit surprises cause declines in uncertainty about credit risk and suggest a more stable outlook on its dynamics over the following months. Both net and gross corporate bond issuance increase as a result of favorable credit surprises, with the largest response in ...
Working Paper
Corporate Bond Issuance Over Financial Stress Episodes: A Global Perspective
We use a merged global data set of security-level corporate bond issuance and firm-level financial statement data to show that, in contrast to earlier periods of financial stress, during the COVID pandemic nonfinancial firms around the world were more likely to issue bonds, driven by a boom in local-currency-denominated issuance. We observe a distinct cross-regional difference in the characteristics of issuing firms, finding that in advanced economies issuance during COVID was driven by less risky firms, as predicted by existing theories; in emerging markets, only issuance of U.S. dollar ...
Working Paper
Foreign economic policy uncertainty and U.S. equity returns
We document that foreign economic policy uncertainty (EPUF) has significant incremental predictive power for excess U.S. stock returns in the presence of domestic EPU, both in aggregate and for returns of portfolios constructed on firm characteristics, for 6 to 12-months-ahead horizons. We find that EPUF shocks primarily transmit to equity prices through cash flow news rather than the discount rate news channel. We examine whether responses of select macro-financial variables to an adverse EPUF shock are consistent with this transmission mechanism. Corporate investment outlays, payouts, and ...
Working Paper
The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors
In the repo market, forward agreements are security-specific (i.e., there are no deliverable substitutes), which makes it an ideal place to measure the value of fluctuations in a security's available supply. In this study, we quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all the outstanding U.S. Treasury securities. Our results indicate the existence of an economically and statistically significant scarcity premium, especially for shorter-term securities. The estimated scarcity effect is quite ...