G - Financial Economics

• When Lower Risk Increases Profit: Competition and Control of a Central Counterparty

  Staff Working Paper 2012-35 Jean-Sébastien Fontaine, Héctor Pérez Saiz, Joshua Slive

  We model the behavior of dealers in Over-the-Counter (OTC) derivatives markets where a small number of dealers trade with a continuum of heterogeneous clients (hedgers). Imperfect competition and (endogenous) default induce a familiar trade-off between competition and risk.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): G, G1, G10, G18

• The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation

  Staff Working Paper 2012-34 Peter Christoffersen, Bruno Feunou, Kris Jacobs, Nour Meddahi

  Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods JEL Code(s): G, G1, G13

• Canadian Bank Balance-Sheet Management: Breakdown by Types of Canadian Financial Institutions

  Staff Discussion Paper 2012-7 David Xiao Chen, H. Evren Damar, Hani Soubra, Yaz Terajima

  The authors document leverage, capital and liquidity ratios of banks in Canada. These ratios are important indicators of different types of risk with respect to a bank’s balance‐sheet management. Particular attention is given to the observations by different types of banks, including small banks that historically received less attention.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial institutions, Financial stability, Financial system regulation and policies JEL Code(s): G, G2, G21, G28

• Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market

  Staff Working Paper 2012-30 Jason Allen, Robert Clark, Jean-François Houde

  This paper measures market power in a decentralized market where contracts are determined through a search and negotiation process. The mortgage industry has many institutional features which suggest competitiveness: homogeneous contracts, negotiable rates, and, for a given consumer, common lending costs across lenders.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial services, Market structure and pricing JEL Code(s): D, D4, G, G2, G21, L, L2, L22

• Efficiency and Bargaining Power in the Interbank Loan Market

  Staff Working Paper 2012-29 Jason Allen, James Chapman, Federico Echenique, Matthew Shum

  Using detailed loan transactions-level data we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Payment clearing and settlement systems JEL Code(s): C, C7, C71, E, E5, E58, G, G2, G21, G28

• Systematic Risk, Debt Maturity and the Term Structure of Credit Spreads

  Staff Working Paper 2012-27 Hui Chen, Yu Xu, Jun Yang

  We build a dynamic capital structure model to study the link between systematic risk exposure and debt maturity, as well as their joint impact on the term structure of credit spreads. Our model allows for time variation and lumpiness in the maturity structure. Relative to short-term debt, long-term debt is less prone to rollover risks, but its illiquidity raises the costs of financing.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Debt management JEL Code(s): G, G3, G32, G33

• Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices

  Staff Working Paper 2012-25 Jonathan Witmer

  Recent reform proposals call for an elimination of the constant net asset value (NAV) or “buck” in money market mutual funds to reduce the occurrence of runs. Outside the United States, there are several countries that have money market mutual funds with and without constant NAVs.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability, Market structure and pricing JEL Code(s): F, F3, F30, G, G0, G01, G1, G18, G2, G20
• August 16, 2012

  Global Risk Premiums and the Transmission of Monetary Policy

  Bank of Canada Review - Summer 2012 Gregory Bauer, Antonio Diez de los Rios

  An important channel in the transmission of monetary policy is the relationship between the short-term policy rate and long-term interest rates. Using a new term-structure model, the authors show that the variation in long-term interest rates over time consists of two components: one representing investor expectations of future policy rates, and another reflecting a term-structure risk premium that compensates investors for holding a risky asset. The time variation in the term-structure risk premium is countercyclical and largely determined by global macroeconomic conditions. As a result, long-term rates are pushed up during recessions and down during times of expansion. This is an important phenomenon that central banks need to take into account when using short-term rates as a policy tool.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Asset pricing, Financial markets, Monetary policy transmission JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15
• August 16, 2012

  An Analysis of Indicators of Balance-Sheet Risks at Canadian Financial Institutions

  Bank of Canada Review - Summer 2012 David Xiao Chen, H. Evren Damar, Hani Soubra, Yaz Terajima

  This article examines four indicators of balance-sheet risks—leverage, capital, asset liquidity and funding—among different types of financial institutions in Canada over the past three decades. It also discusses relevant developments in the banking sector that could have contributed to the observed dynamics. The authors find that the various risk indicators decreased during the period for most of the non-Big Six financial institutions, but remained relatively unchanged for the Big Six banks. In addition, the balance-sheet risk indicators became more heterogeneous across financial institutions. The observed overall decline and increased heterogeneity follow certain regulatory changes, such as the introduction of the liquidity guidelines on funding in 1995 and the implementation of bank-specific leverage requirements in 2000. Given that these regulations required more balance-sheet risk management, they have likely contributed to the increased resilience of the banking sector.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial stability, Financial system regulation and policies JEL Code(s): G, G2, G21, G28

• Why Do Shoppers Use Cash? Evidence from Shopping Diary Data

  Staff Working Paper 2012-24 Naoki Wakamori, Angelika Welte

  Recent studies find that cash remains a dominant payment choice for small-value transactions despite the prevalence of alternative means of payment such as debit and credit cards. For policy makers an important question is whether consumers truly prefer using cash or merchants restrict card usage.

  Content Type(s): Staff research, Staff working papers Topic(s): Bank notes, Econometric and statistical methods, Financial services JEL Code(s): C, C2, D, D1, G, G2