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Jel Classification:G10 

Working Paper
Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis

We endogenize the liquidity and the quality of private assets in a tractable incomplete-market model with heterogeneous agents. The model decomposes the convenience yield of government bond into a "liquidity premium" (flight to liquidity) and a "safety premium" (flight to quality) over the business cycle. When calibrated to match the U.S. aggregate output fluctuations and bond premiums, the model reveals that a sharp reduction in the quality, instead of the liquidity, of private assets was the culprit of the recent financial crisis, consistent with the perception that it was the subprime ...
Working Papers , Paper 2017-25

Report
Market sidedness: insights into motives for trade initiation

In this paper, we infer motives for trade initiation from market sidedness. We define trading as more two-sided (one-sided) if the correlation between the numbers of buyer- and seller-initiated trades increases (decreases), and assess changes in sidedness (relative to a control sample) around events that identify trade initiators. Consistent with asymmetric information, trading is more one-sided prior to merger news. Consistent with belief heterogeneity, trading is more two-sided (1) before earnings and macro announcements with greater dispersions of analyst forecasts and (2) after earnings ...
Staff Reports , Paper 292

Working Paper
FinTech and Financial Innovation : Drivers and Depth

This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why "FinTech" is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive "traditional" financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question ...
Finance and Economics Discussion Series , Paper 2017-081

Working Paper
Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets, but is not persistent following strong markets. Specifically, we construct two performance measures, DownsideReturns and UpsideReturns, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest DownsideReturns quintile outperform funds in the lowest quintile by about 7% in the subsequent year, whereas funds with better UpsideReturns do not outperform subsequently. The DownsideReturns can predict future fund performance over a horizon as ...
Finance and Economics Discussion Series , Paper 2016-030

Journal Article
Understanding the Recent Rise in Municipal Bond Yields

In late March, investors sold off municipal bonds at a rapid pace, depressing municipal bond prices and driving up their yields relative to U.S. Treasuries. We find that this initial investor run on the municipal bond market was likely due to increased liquidity demand rather than credit concerns, making the Federal Reserve’s early actions to relieve liquidity stress effective. Going forward, however, municipal bond prices will likely reflect increased credit concerns.
Economic Bulletin , Issue May 27, 2020 , Pages 4

Report
The Long and Short of It: The Post-Crisis Corporate CDS Market

We establish key stylized facts about the post-crisis evolution of trading and pricing of credit default swaps. Using supervisory contract-level data, we document that dealers become net buyers of credit protection starting in the second half of 2014, both through reducing the amount of protection they sell in the single-name market and through switching to buying protection in the index market. More generally, we argue that considering simultaneous positions in different types of credit derivatives is crucial for understanding institutions? participation decisions and how these decisions ...
Staff Reports , Paper 879

Working Paper
Estimating U.S. Cross-Border Securities Positions: New Data and New Methods

The role of capital flows in the buildup to the global financial crisis and the potential vulnerabilities posed by capital flows to emerging market economies highlight the importance of reliable and timely measures of cross-border investment activity to better monitor developments as they unfold. We present new monthly estimates of U.S. cross-border securities investment, combining information from detailed annual Treasury International Capital (TIC) surveys with new information from the TIC form SLT. We also show how changes in the new monthly data can be decomposed into flows, estimated ...
International Finance Discussion Papers , Paper 1113

Report
Fire-sale spillovers and systemic risk

We reveal and track over time the factors making the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing in 2004, before any other major systemic risk measure, more than doubling by 2008. The fire-sale-specific factors of delevering speed and concentration of illiquid assets account for the majority of this increase. Individual banks? contributions to aggregate vulnerability are an excellent five-year-ahead predictor of SRISK, one of the most prominent systemic risk measures. Had our estimates been available at the time, ...
Staff Reports , Paper 645

Working Paper
The Shift from Active to Passive Investing : Potential Risks to Financial Stability?

The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift for financial stability through four different channels: (1) effects on investment funds? liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be ...
Finance and Economics Discussion Series , Paper 2018-060

Working Paper
The Value and Risk of Human Capital

Human capital embodies the knowledge, skills, health and values that contribute to making people productive. These qualities, however, are hard to measure, and quantitative studies of human capital are typically based on the valuation of the lifetime income that a person generates in the labor market. This article surveys the theoretical and empirical literature that models a worker?s life-cycle earnings and identifies appropriate discount rates to translate those cash flows into a certainty equivalent of wealth. This paper begins with an overview of a stylized model of human capital ...
Working Paper Series , Paper WP-2015-6

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