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Jel Classification:G10 

Broker-dealer risk appetite and commodity returns

This paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity derivatives markets. Commodity derivatives are the principal instrument used by producers and purchasers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset pricing model where producers and purchasers of commodities share risk with broker-dealers who are ...
Staff Reports , Paper 406

Understanding mortgage spreads

Most mortgages in the U.S. are securitized in agency mortgage-backed securities (MBS). Yield spreads on these securities are thus a key determinant of homeowners? funding costs. We study variation in MBS spreads over time and across securities, and document a cross-sectional smile pattern in MBS spreads with respect to the securities? coupon rates. We propose non-interest-rate prepayment risk as a candidate driver of MBS spread variation and present a new pricing model that uses ?stripped? MBS prices to identify the contribution of this prepayment risk to the spread. The pricing model finds ...
Staff Reports , Paper 674

The 2015 economic outlook and the implications for monetary policy

Remarks at Bernard M. Baruch College, New York City.
Speech , Paper 153

Trends in credit market arbitrage

Market participants and policymakers alike were surprised by the large, prolonged dislocations in credit market arbitrage trades during the second half of 2015 and the first quarter of 2016. In this paper, we examine three explanations proposed by market participants: increased idiosyncratic risks, strategic positioning by some market participants, and regulatory changes. We find some evidence of increased idiosyncratic risk during the relevant period but limited evidence of asset managers changing their positioning in derivative products. While we cannot quantify the contribution of these ...
Staff Reports , Paper 784

Working Paper
The Impact of Global Uncertainty on the Global Economy, and Large Developed and Developing Economies

Global uncertainty shocks are associated with a sharp decline in global inflation, global growth and in the global interest rate. Over 1981 to 2014 global financial uncertainty forecasts 18.26% and 14.95% of the variation in global growth and global inflation respectively. Global uncertainty shocks have more protracted, statistically significant and substantial effects on global growth, inflation and interest rate than U.S. uncertainty shocks. U.S. uncertainty lags global uncertainty by one month. When controlling for domestic uncertainty, the decline in output following a rise in global ...
Globalization Institute Working Papers , Paper 303

Working Paper
Tying loan interest rates to borrowers' CDS spreads

We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse ...
Finance and Economics Discussion Series , Paper 2014-70

Working Paper
Why Does the Yield-Curve Slope Predict Recessions?

Why is an inverted yield-curve slope such a powerful predictor of future recessions? We show that a decomposition of the yield curve slope into its expectations and risk premia components helps disentangle the channels that connect fluctuations in Treasury rates and the future state of the economy. In particular, a change in the yield curve slope due to a monetary policy easing, measured by the current real-interest rate level and its expected path, is associated with an increase in the probability of a future recession within the next year. In contrast, a decrease in risk premia is ...
Working Paper Series , Paper WP-2018-15

Working Paper
Intergenerational Linkages in Household Credit

We document economically important correlations between children?s future credit outcomes and their parents? credit risk scores, default, and the extent of credit constraints ? intergenerational linkages in household credit. Using observations on siblings, we find that the linkages are due to unobserved household heterogeneity rather than parental credit conditions directly affecting children?s credit outcomes. In particular, in the sample of siblings, there is no correlation between parental and child credit attributes after controlling for household fixed effects. The linkages are stronger ...
Working Paper , Paper 15-14

Working Paper
The Origins of Aggregate Fluctuations in a Credit Network Economy

I show that inter-firm lending plays an important role in business cycle fluctuations. I first build a tractable network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms propagate financial shocks, amplifying their aggregate effects by about 30 percent. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I then estimate aggregate and idiosyncratic shocks to ...
Finance and Economics Discussion Series , Paper 2018-031

More on U.S. Treasury term premiums: spot and expected measures

Several studies that use affine term structure models (ATSMs) or survey data suggest that subdued nominal U.S. Treasury yields during the global financial crisis and its aftermath primarily reflected exceptionally low, if not negative, term premiums as distinct from depressed anticipated short rates. However, this literature pays little attention to the length of time market participants anticipated low term premiums to prevail, as captured by the ?forward? or ?expected? term premium over a given horizon, distinct from the ?spot? term premium. Besides the implications for investors at the ...
Staff Reports , Paper 658


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