Financial markets
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Constrained Efficiency with Adverse Selection and Directed Search
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. -
Strategic Complementarities and Money Market Fund Liquidity Management
Following the financial crisis, there has been increased regulatory focus on the management of liquidity in mutual funds and, specifically, whether funds hold enough liquidity to guard against the potential for investor runs. -
What Explains the Recent Increase in Canadian Corporate Bond Spreads
The spread between the yield of a corporate bond and the yield of a similar Government of Canada bond reflects compensation for possible default by the issuing firm and compensation for additional risks beyond default. -
Small‐Sample Tests for Stock Return Predictability with Possibly Non‐Stationary Regressors and GARCH‐Type Effects
We develop a simulation-based procedure to test for stock return predictability with multiple regressors. The process governing the regressors is left completely free and the test procedure remains valid in small samples even in the presence of non-normalities and GARCH-type effects in the stock returns. -
Banking Regulation and Market Making
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. -
Repo Market Functioning when the Interest Rate Is Low or Negative
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. -
What Fed Funds Futures Tell Us About Monetary Policy Uncertainty
The uncertainty around future changes to the Federal Reserve target rate varies over time. In our results, the main driver of uncertainty is a “path” factor signaling information about future policy actions, which is filtered from federal funds futures data. -
Equity Option-Implied Probability of Default and Equity Recovery Rate
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. -
15 December 2016 Toward More Resilient Markets: Over-the-Counter Derivatives Reform in Canada
In Toward More Resilient Markets: Over-the-Counter Derivatives Reform in Canada, Michael Mueller and André Usche show that the implementation of derivatives market reforms in Canada is well under way and has lessened vulnerabilities. But accompanying changes to market structure have both positive and negative effects that require ongoing attention from authorities. -
15 December 2016 Monitoring Shadow Banking in Canada: A Hybrid Approach
In Monitoring Shadow Banking in Canada: A Hybrid Approach, Bo Young Chang, Michael Januska, Gitanjali Kumar and André Usche discuss how lending that occurs outside the traditional banking system provides benefits to the economy but must be monitored carefully for potential financial sector vulnerabilities. They describe how the Bank defines and measures shadow banking and how it assesses vulnerabilities in the sector, using an approach that examines both markets and entities.