Market structure and pricing

• Constrained Efficiency with Adverse Selection and Directed Search

  Staff Working Paper 2017-15 Mohammad Davoodalhosseini

  Constrained efficient allocation (CE) is characterized in a model of adverse selection and directed search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Economic models, Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): D, D8, D82, D83, E, E2, E24, G, G1, J, J3, J31, J6, J64

• Banking Regulation and Market Making

  Staff Working Paper 2017-7 David A. Cimon, Corey Garriott

  We present a model of market makers subject to recent banking regulations: liquidity and capital constraints in the style of Basel III and a position limit in the style of the Volcker Rule.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): G, G1, G14, G2, G20, L, L1, L10

• Repo Market Functioning when the Interest Rate Is Low or Negative

  Staff Discussion Paper 2017-3 Jean-Sébastien Fontaine, James Hately, Adrian Walton

  This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively.

  Content Type(s): Staff Research, Staff Discussion Papers Topic(s): Financial markets, Interest rates, Market structure and pricing JEL Code(s): D, D4, G, G1, G10, G12

• Information Sharing and Bargaining in Buyer-Seller Networks

  Staff Working Paper 2016-63 Sofia Priazhkina, Frank H. Page

  This paper presents a model of strategic buyer-seller networks with information exchange between sellers. Prior to engaging in bargaining with buyers, sellers can share access to buyers for a negotiated transfer. We study how this information exchange affects overall market prices, volumes and welfare, given different initial market conditions and information sharing rules.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Economic models, Firm dynamics, Market structure and pricing JEL Code(s): C, C7, C71, C78, D, D2, D21, D4, D43, D8, D85, L, L1, L13

• Equity Option-Implied Probability of Default and Equity Recovery Rate

  Staff Working Paper 2016-58 Bo Young Chang, Greg Orosi

  There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Asset Pricing, Financial markets, Market structure and pricing JEL Code(s): G, G1, G13, G3, G33

• Options Decimalization

  Staff Working Paper 2016-57 Faith Chin, Corey Garriott

  We document the outcome of an options decimalization pilot on Canada’s derivatives exchange. Decimalization improves measures of liquidity and price efficiency. The impact differs by the moneyness of an option and is greatest for out-of-the-money options.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): G, G1, G14, G2, G20, L, L1, L10

• Firm-Specific Shocks and Aggregate Fluctuations

  Staff Working Paper 2016-51 Leonid Karasik, Danny Leung, Ben Tomlin

  In order to understand what drives aggregate fluctuations, many macroeconomic models point to aggregate shocks and discount the contribution of firm-specific shocks. Recent research from other developed countries, however, has found that aggregate fluctuations are in part driven by idiosyncratic shocks to large firms.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Business fluctuations and cycles, Firm dynamics, Market structure and pricing JEL Code(s): E, E2, E22, E23, E24, E3, L, L6

• Broker Routing Decisions in Limit Order Markets

  Staff Working Paper 2016-50 David A. Cimon

  The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Financial markets, Market structure and pricing JEL Code(s): G, G2, G24, G28

• 9 June 2016 Securities Financing and Bond Market Liquidity

  Financial System Review - June 2016 Jean-Sébastien Fontaine, Corey Garriott, Kyle Gray

  This report investigates how the markets for repurchase agreements and securities-lending agreements support the liquidity of Canadian bond markets. It also discusses how recent regulatory changes, as well as low interest rates and settlement failures, are potentially affecting securities-financing markets and, as a result, bond market liquidity.

  Content Type(s): Publications, Financial System Review Article Topic(s): Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): G, G1, G12, G2

• Retail Order Flow Segmentation

  Staff Working Paper 2016-20 Corey Garriott, Adrian Walton

  In August 2012, the New York Stock Exchange launched the Retail Liquidity Program (RLP), a trading facility that enables participating organizations to quote dark limit orders executable only by retail traders.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): G, G1, G14, G2, G20, L, L1, L10