Financial markets

• Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery

  Staff Working Paper 2011-30 Jonathan Chiu, Thorsten Koeppl

  We study the trading dynamics in an asset market where the quality of assets is private information of the owner and finding a counterparty takes time. When trading of a financial asset ceases in equilibrium as a response to an adverse shock to asset quality, a large player can resurrect the market by buying up lemons which involves assuming financial losses.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): E, E6, G, G1

• Financial Frictions, Financial Shocks and Labour Market Fluctuations in Canada

  Staff Discussion Paper 2011-10 Yahong Zhang

  What are the effects of financial market imperfections on unemployment and vacancies in Canada? The author estimates the model of Zhang (2011) – a standard monetary dynamic stochastic general-equilibrium model augmented with explicit financial and labour market frictions – with Canadian data for the period 1984Q2–2010Q4, and uses it to examine the importance of financial shocks on labour market fluctuations in Canada.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Economic models, Financial markets, Labour markets JEL Code(s): E, E3, E32, E4, E44, J, J6

• Security Transaction Taxes and Market Quality

  Staff Working Paper 2011-26 Anna Pomeranets, Daniel G. Weaver

  We examine nine changes in the New York State Security Transaction Taxes (STT) between 1932 and 1981. We find that imposing or increasing an STT results in wider bidask spreads, lower volume, and increased price impact of trades.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets, Market structure and pricing JEL Code(s): C, C4, C43, G, G1, G10, G12

• Determinants of Financial Stress and Recovery during the Great Recession

  Staff Working Paper 2011-24 Joshua Aizenman, Gurnain Pasricha

  In this paper, we explore the link between stress in the domestic financial sector and the capital flight faced by countries in the 2008-9 global crisis. Both the timing of emergence of internal financial stress in developing economies, and the size of the peak-trough declines in the stock price indices was comparable to that in high income countries, indicating that there was no decoupling, even before Lehman Brothers’ demise.

  Content Type(s): Staff research, Staff working papers Topic(s): Balance of payments and components, Financial markets, International topics JEL Code(s): F, F3, F32, G, G1, G15

• Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada

  Staff Working Paper 2011-17 Jason Allen, Ali Hortaçsu, Jakub Kastl

  This paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial markets, Payment clearing and settlement systems JEL Code(s): E, E4, E42, E5, E58, G, G0, G01, G2, G28

• Lessons from International Central Counterparties: Benchmarking and Analysis

  Staff Discussion Paper 2011-4 Alexandre Lazarow

  Since the financial crisis, attention has focused on central counterparties (CCPs) as a solution to systemic risk for a variety of financial markets, ranging from repurchase agreements and options to swaps.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial markets, Financial stability, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): G, G0, G01, G1, G14, G18, G2, G28, G3, G38

• Real-Financial Linkages in the Canadian Economy: An Input-Output Approach

  Staff Working Paper 2011-14 Danny Leung, Oana Secrieru

  The purpose of this paper is twofold. First, we provide a detailed social accounting matrix (SAM), which incorporates the income and financial flows into the standard input-output matrix, for the Canadian economy for 2004.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial markets, Sectoral balance sheet JEL Code(s): C, C6, C67, D, D5, D57
• May 19, 2011

  Understanding and Measuring Liquidity Risk: A Selection of Recent Research

  Bank of Canada Review - Spring 2011 Céline Gauthier, Hajime Tomura

  During the recent financial crisis, one of the forces set in motion by the initial losses on subprime-mortgage loans was a significant decline in the market liquidity of assets and in the ability of financial institutions to obtain funding in wholesale markets. In this article, the authors summarize recent research that clarifies the role of liquidity in destabilizing the financial system and examine the implications of this research for the recently announced financial system reforms, including Basel III.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Financial system regulation and policies
• May 19, 2011

  Unconventional Monetary Policy: The International Experience with Central Bank Asset Purchases

  Bank of Canada Review - Spring 2011 Sharon Kozicki, Lena Suchanek, Eric Santor

  As part of their policy response to the financial crisis of 2007–09, central banks introduced numerous unprecedented monetary policy measures to provide monetary easing. This article defines and documents these measures, focusing on central bank asset purchases and their impact on central bank balance sheets. It then discusses the challenges of identifying the effects of these measures and explores possible exit strategies. The potential costs of these policies are also analyzed, as well as the broader implications for monetary policy frameworks.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Financial markets, International topics, Monetary policy framework
• May 19, 2011

  Lessons from the Use of Extraordinary Central Bank Liquidity Facilities

  Bank of Canada Review - Spring 2011 Stéphane Lavoie, Alex Sebastian, Virginie Traclet

  The recent crisis was characterized by widespread deterioration in funding conditions, as well as impairment of the mechanism through which liquidity is normally redistributed within the financial system. Central banks responded with extraordinary measures. This article examines the provision of liquidity by central banks during the crisis as they adapted their existing facilities and introduced new ones, while encouraging a return to private markets and mitigating moral hazard. A review of this experience illustrates the importance of clear principles for intervention, a flexible operating framework, and clear communication and co-operation by central banks. By exposing the degree of interdependence of financial institutions and markets, the crisis highlighted the need for reforms aimed at improving the infrastructure supporting core funding markets and the liquidity of individual institutions.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Lender of last resort