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Journal Article
Considerations on ESG Investment Implementation
Although interest in investing according to environmental, social, and corporate governance (ESG) standards is widespread, investment managers face a number of basic considerations with their portfolio choices. In this article, I give a high-level overview of these considerations within the context of the investor motivation: ESG values, ESG value, or both. These considerations include whether investors should exclude certain firms or use a positive tilt; how they could integrate ESG into an investment approach; the role of third-party ESG ratings; how they should measure and report their ...
Report
Zero Settlement Risk Token Systems
How might modern settlement systems with distributed ledger technology achieve zero settlement risk? We consider the design of settlement systems that satisfies two integral features: information-leakage proof and zero settlement risk. Legacy settlement systems partition private information but are vulnerable to settlement fails. A token system with dynamic ownership representation, or a dynamic ledger, can be designed to achieve both, as long as it employs a protocol that enforces two restrictions: programs must be immediately implemented and must involve transactions based on verifiable ...
Working Paper
Identity, Identification and Identifiers : The Global Legal Entity Identifier System
Identity is a critical concept in the rational interactions of any set of objects involving subject-object relationships. The objects must be distinguished according to some framework in order for such relationships to have meaning. In the world of economic systems, relationships such as ownership and responsibility require specific parties to be fixed with a high degree of certainty. This need is particularly strong in financial markets, where transactions can take place in nanoseconds. This paper discusses a particular framework for defining economic actors, the Global Legal Entity ...
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 ...
Journal Article
Decentralized Finance (DeFi): Transformative Potential and Associated Risks
Financial services in the crypto finance world are provided by a combination of centralized finance (CeFi) organizations and decentralized finance (DeFi). CeFi's are roughly similar to traditional financial intermediaries, but DeFi seeks to provide services using smart contracts (computer code) rather than an intermediary. DeFi's unusual structure creates some interesting potential but also raises new risks in addition to those already inherent in blockchains and crypto finance. This paper reviews some of the opportunities and risks.
Journal Article
An Introduction to Web3 with Implications for Financial Services
Web3 is used to describe the next iteration of the internet in which decentralized services are automated on blockchains. This paper describes the elements of Web3 including blockchains and tokens. It describes the largest decentralized finance protocols and some specific services where blockchain and tokens can be used. The paper concludes with a brief discussion of some regulatory challenges.
Journal Article
Case studies on disruptions during the crisis
The 2007-09 financial crisis saw many funding mechanisms challenged by a drastic reduction in market liquidity, a sharp increase in the cost of transactions, and, in some cases, a drying-up in financing. This article presents case studies of several key financial markets and intermediaries under significant distress at this time. For each case, the author discusses the size and evolution of the funding mechanism, the sources of the disruptions, and the policy responses aimed at mitigating distress and making markets more liquid. The review serves as a reference on the vulnerabilities of ...
Report
Counterparty risk in material supply contracts
This paper explores the sources of counterparty risk in material supply relationships. Using long-term supply contracts collected from SEC filings, we test whether three sources of counterparty risk?financial exposure, product quality risk, and redeployability risk?are priced in the equity returns of linked firms. Our results show that equity holders require compensation for exposure to all three sources of risk. Specifically, offering trade credit to counterparties and investing in relationship-specific assets increase the firm?s exposure to counterparty risk. Further, we show that contracts ...
Report
It’s What You Say and What You Buy: A Holistic Evaluation of the Corporate Credit Facilities
We evaluate the impact of the Federal Reserve corporate credit facilities (PMCCF and SMCCF). A third of the positive effect on prices and liquidity occurred on the announcement date. We document immediate pass-through into primary markets, particularly for eligible issuers. Improvements continue as additional information is shared and purchases begin, with the impact of bond purchases larger than the impact of purchases of ETFs. Exploiting cross-sectional evidence, we see the greatest impact on investment grade bonds and in industries less affected by COVID, concluding that the improvement in ...
Report
COVID Response: The Primary and Secondary Corporate Credit Facilities
The Federal Reserve introduced the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF) in response to the severe disruptions in corporate bond markets triggered by the COVID-19 pandemic and subsequent economic shutdowns. The Corporate Credit Facilities (CCFs) were designed to work together to restore functioning of credit markets, with an overarching goal of facilitating credit provision to the non-financial corporate sector of the U.S. economy. This paper provides an overview of the CCFs, including detailing the facilities’ design, ...