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Discussion Paper
What’s in A(AA) Credit Rating?
Boyarchenko, Nina; Shachar, Or (2020-01-08)
Rising nonfinancial corporate business leverage, especially for riskier “high-yield” firms, has recently received increased public and supervisory scrutiny. For example, the Federal Reserve’s May 2019 Financial Stability Report notes that “growth in business debt has outpaced GDP for the past 10 years, with the most rapid growth in debt over recent years concentrated among the riskiest firms.” At the upper end of the credit spectrum, “investment-grade” firms have also increased their borrowing, while the number of higher-rated firms has decreased. In fact, there are currently ...
Liberty Street Economics , Paper 20200108

Report
Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure
Zeng, Xuran; Jung, Hyeyoon; Ge, Shan; Engle, Robert (2023-07-01)
We construct a novel physical risk factor using a portfolio of REITs, long on those with properties highly exposed to climate risk and short on those with less exposure. Combined with a transition risk factor, we assess U.S. insurers’ climate risk through operations and $13 trillion in asset holdings. Estimating dynamic climate betas, we find higher stock return sensitivity to the physical risk among insurers operating in riskier regions and to transition risk among those holding more brown assets. Using these betas, we calculate capital shortfalls under climate stress scenarios, offering ...
Staff Reports , Paper 1066

Discussion Paper
What Do Climate Risk Indices Measure?
Jung, Hyeyoon; Hannaoui, Oliver Zain (2024-10-07)
As interest in understanding the economic impacts of climate change grows, the climate economics and finance literature has developed a number of indices to quantify climate risks. Various approaches have been employed, utilizing firm-level emissions data, financial market data (from equity and derivatives markets), or textual data. Focusing on the latter approach, we conduct descriptive analyses of six text-based climate risk indices from published or well-cited papers. In this blog post, we highlight the differences and commonalities across these indices.
Liberty Street Economics , Paper 20241007

Working Paper
The impact of unconventional monetary policy on firm financing constraints: evidence from the maturity extension program
Yu, Edison; Ramcharan, Rodney; Foley-Fisher, Nathan (2015-08-13)
This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve?s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP?s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment ...
Working Papers , Paper 15-30

Report
Effects of Financing Constraints on Maintenance Investments in Rent-Stabilized Apartments
Seltzer, Lee (2021-12-01)
This paper studies whether financing constraints adversely affect renters by reducing maintenance. Consistent with a sensitivity of maintenance to financial resources, housing code violations increased after a change in the law that effectively decreased cash flows available to maintain some rent stabilized buildings in New York City. The effect is most severe when financing constraints are present. Moreover, results of panel regressions using a dataset of 45 cities obtained with Freedom of Information Act (FOIA) requests are consistent with a hypothesis that buildings with higher LTV ratio ...
Staff Reports , Paper 1000

Working Paper
Claim Dilution in the Municipal Debt Market
Zimmermann, Thomas; Ivanov, Ivan T. (2018-02-05)
Using loan-level municipal bank lending data, we examine the debt structure of municipalities and its response to exogenous income shocks. We show that small, more indebted, low-income, and medium credit quality counties are particularly reliant on private bank financing. Low income counties are more likely to increase bank debt share after an adverse permanent income shock while high income counties do not shift their debt structure in response. In contrast, only high income counties draw on their credit lines after adverse transitory income shocks. Overall, our paper raises concerns about ...
Finance and Economics Discussion Series , Paper 2018-011

Discussion Paper
The Costs of Corporate Debt Overhang Following the COVID-19 Outbreak
Santos, Joao A. C.; Blickle, Kristian S. (2020-12-01)
Leading up to the COVID-19 outbreak, there were growing concerns about corporate sector indebtedness. High levels of borrowing may give rise to a “debt overhang” problem, particularly during downturns, whereby firms forego good investment opportunities because of an inability to raise additional funding. In this post, we show that firms with high levels of borrowing at the onset of the Great Recession underperformed in the following years, compared to similar—but less indebted—firms. These findings, together with early data on the revenue contractions following the COVID-19 outbreak, ...
Liberty Street Economics , Paper 20201201

Discussion Paper
Regulatory Changes and the Cost of Capital for Banks
Zborowski, Brandon; Van Tassel, Peter; Kovner, Anna (2018-10-01)
In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks? cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act (DFA), banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries (NBFI).
Liberty Street Economics , Paper 20181001a

Discussion Paper
Do Corporate Profits Increase When Inflation Increases?
Andler, Mathias; Kovner, Anna (2022-07-13)
When inflation is high, companies may raise prices to keep up. However, market watchers and journalists have wondered if corporations have taken advantage of high inflation to increase corporate profits. We look at this question through the lens of public companies, finding that in general, increased prices in an industry are often associated with increasing corporate profits. However the current relationship between inflation and profit growth is not unusual in the historical context.
Liberty Street Economics , Paper 20220713

Discussion Paper
Credit Market Choice
Boyarchenko, Nina; Shachar, Or; Costello, Anna M. (2018-10-17)
Credit default swaps (CDS) are frequently credited with being the cause of AIG’s collapse during the financial crisis. A Reuters article from September 2008, for example, notes “[w]hen you hear that the collapse of AIG […] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure […] instrument known as a credit default swap.” Yet, despite the prominent role that CDS played during the financial crisis, little is known about how individual financial institutions utilize CDS contracts on individual companies. In a recent New ...
Liberty Street Economics , Paper 20181017

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