Financial markets

• Banking Regulation and Market Making

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

  We model how securities dealers respond to regulations on leverage, position, and liquidity such as those imposed by the Basel III framework. The dealers respond by endogenously moving to make markets on an agency basis, matching buyers to sellers rather than taking client positions on the balance sheet.

  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

• Contagion in Dealer Networks

  Staff Working Paper 2020-1 Jean-Sébastien Fontaine, Adrian Walton

  Dealers connect investors who want to buy or sell securities in financial markets. Over time, dealers and investors form trading networks to save time and resources. An emerging field of research investigates how networks form.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Financial markets, Market structure and pricing, Payment clearing and settlement systems JEL Code(s): E, E4, G, G1, G2, G21, L, L1, L14

• Creations and Redemptions in Fixed-Income Exchange-Traded Funds: A Shift from Bonds to Cash

  Staff Analytical Note 2019-34 Rohan Arora, Sébastien Betermier, Guillaume Ouellet Leblanc, Adriano Palumbo, Ryan Shotlander

  The creation and redemption activity of fixed-income exchange-traded funds listed in the United States has shifted. Funds of established issuers have traditionally exchanged their shares for baskets of bonds. In contrast, young funds managed by new issuers tend to create and redeem their shares almost exclusively in cash. Cash transactions imply that new funds are taking on exposure to liquidity risk. This has implications for financial stability.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G1, G2, G20, G23

• Furor over the Fed : Presidential Tweets and Central Bank Independence

  Staff Analytical Note 2019-33 Antoine Camous, Dmitry Matveev

  We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Central bank research, Credibility, Financial markets, Monetary Policy JEL Code(s): E, E4, E44, E5, E52, E58

• The Cyber Incident Landscape

  Staff Analytical Note 2019-32 Nikil Chande, Dennis Yanchus

  The Canadian financial system is vulnerable to cyber threats. But for many firms, cyber risk is difficult to quantify. We examine public information on past cyber incidents to better understand the current risk landscape and find that a holistic view is needed to fully grasp the nature of this risk.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G2, G28, M, M1, M15, O, O3, O33, O38

• Loan Insurance, Market Liquidity, and Lending Standards

  Staff Working Paper 2019-47 Toni Ahnert, Martin Kuncl

  Third parties often assume default risk at loan origination in return for a fee. Insurance, various guarantees and external credit enhancements protect the owner of the loan against borrower default. Governments often assume such default risk through guarantees for various types of loans, including mortgages, student loans and small business loans.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Financial Institutions, Financial markets, Financial system regulation and policies JEL Code(s): G, G0, G01, G2, G21, G28

• Borrowing Costs for Government of Canada Treasury Bills

  Staff Analytical Note 2019-28 Jessica Lee, Jabir Sandhu, Adrian Walton

  The cost of borrowing Government of Canada treasury bills (t-bills) in the repurchase (repo) market is mainly explained by the relationship between the parties involved. Some pairs of parties conduct most of their repos for t-bills rather than bonds, and at relatively high borrowing costs. We speculate that these pairs have formed a mutually beneficial service relationship in which one party consistently receives t-bills, while the other receives cash at a relatively cheap rate.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets JEL Code(s): G, G1, G10, G11, G12, G2, G20, G21, G23, G3, G32

• What Does Structural Analysis of the External Finance Premium Say About Financial Frictions?

  Staff Working Paper 2019-38 Jelena Zivanovic

  I use a structural vector autoregression (SVAR) with sign restrictions to provide conditional evidence on the behavior of the US external finance premium (EFP). The results indicate that the excess bond premium, a proxy for the EFP, reacts countercyclically to supply and monetary policy shocks and procyclically to demand shocks.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Economic models, Financial markets, Recent economic and financial developments JEL Code(s): E, E3, E32, E4, E44

• Bridging Canadian Business Lending and Market-Based Risk Measures

  Staff Analytical Note 2019-26 Guillaume Ouellet Leblanc, Maxime Leboeuf

  Lending to business is central to economic growth because it supports investment by firms. Knowing how market participants view risk in the financial system can give the Bank of Canada information about future growth in business loans. In this note, we look at three market-based risk measures and find that sudden increases in the perception of risk in the Canadian banking system are associated with a weaker outlook for business loans and real gross domestic product.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Business fluctuations and cycles, Financial markets JEL Code(s): E, E3, E32, E4, E44, G, G1, G12

• Using Exchange-Traded Funds to Measure Liquidity in the Canadian Corporate Bond Market

  Staff Analytical Note 2019-25 Rohan Arora, Guillaume Ouellet Leblanc, Jabir Sandhu, Jun Yang

  We introduce a new proxy for measuring corporate bond liquidity, using the price of exchange-traded funds (ETFs) that hold corporate bonds. It measures the average liquidity across 900 corporate bonds every day, many more than other proxies used in previous Bank of Canada analysis. The new proxy nonetheless paints a very similar picture of liquidity conditions and confirms the previous findings: the liquidity of bonds has generally improved since 2010.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets JEL Code(s): G, G1, G12, G14