Financial markets

• What Fed Funds Futures Tell Us About Monetary Policy Uncertainty

  Staff Working Paper 2016-61 Jean-Sébastien Fontaine

  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.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Interest rates JEL Code(s): E, E4, E43, E44, E47, G, G1, G12, G13

• 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
• December 15, 2016

  Toward More Resilient Markets: Over-the-Counter Derivatives Reform in Canada

  Financial System Review - December 2016 Michael Mueller, André Usche

  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.

  Content Type(s): Publications, Financial System Review articles Topic(s): Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): G, G0, G01, G1, G15, G2, G28
• December 15, 2016

  Monitoring Shadow Banking in Canada: A Hybrid Approach

  Financial System Review - December 2016 Bo Young Chang, Gitanjali Kumar, André Usche, Michael Januska

  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.

  Content Type(s): Publications, Financial System Review articles Topic(s): Financial institutions, Financial markets, Financial stability JEL Code(s): G, G0, G01, G2, G23

• 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