G1 - General Financial Markets

• 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

• Extreme Downside Risk in Asset Returns

  Staff Working Paper 2019-46 Lerby Ergun

  Financial markets can experience sudden and extreme downward movements. Investors are highly concerned about the performance of their assets in such scenarios. Some assets perform badly in a downturn in the market; others have milder reactions.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods JEL Code(s): C, C1, C14, G, G1, G11, G12

• Interconnected Banks and Systemically Important Exposures

  Staff Working Paper 2019-44 Alan Roncoroni, Stefano Battiston, Marco D’Errico, Grzegorz Halaj, Christoffer Kok

  How do banks' interconnections in the euro area contribute to the vulnerability of the banking system? We study both the direct interconnections (banks lend to each other) and the indirect interconnections (banks are exposed to similar sectors of the economy). These complex linkages make the banking system more vulnerable to contagion risks.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial stability JEL Code(s): C, C6, C63, G, G1, G15, G2, G21

• Borrowing Costs for Government of Canada Treasury Bills

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

  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

• The BoC-BoE Sovereign Default Database: What’s New in 2019?

  Staff Working Paper 2019-39 David Beers, Patrisha de Leon-Manlagnit

  Until recently, few efforts have been made to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada (BoC) developed a comprehensive database of sovereign defaults that is posted on its website and updated in partnership with the Bank of England (BoE).

  Content Type(s): Staff research, Staff working papers Topic(s): Debt management, Development economics, Financial stability, International financial markets JEL Code(s): F, F3, F34, G, G1, G10, G14, G15

• 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

• Relative Value of Government of Canada Bonds

  Staff Analytical Note 2019-23 Jean-Sébastien Fontaine, Jabir Sandhu, Adrian Walton

  Government of Canada bonds in circulation that promise very similar payoffs can have different prices. We study the reason for these differences. Bonds that trade more often and earn high rental income in the repurchase agreement (repo) market tend to have higher prices. Bonds with longer tenors and times to maturity tend to have lower prices. This contrast between cheap and expensive bonds is important because trading volume and rental income can change rapidly, unlike tenor and time to maturity, which are stable.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets JEL Code(s): G, G1, G10, G11, G12, G2, G23, G3, G32

• Canadian Securities Lending Market Ecology

  Staff Discussion Paper 2019-5 Jesse Johal, Joanna Roberts, John Sim

  This is the fourth of the Financial Markets Department’s descriptions of Canadian financial industrial organization. The paper discusses the organization of the securities lending market in Canada. We outline key characteristics of securities lending contracts, participants in the securities lending market, the market infrastructures that support securities lending activities, and aggregated statistics describing the Canadian market.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial institutions, Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): G, G1, G18, G2, G21, G23

• Systemic Risk and Collateral Adequacy

  Staff Working Paper 2019-23 Radoslav Raykov

  Many derivatives markets use collateral requirements calculated with industry-standard but dated methods that are not designed with systemic risk in mind. This paper explores whether the conservative nature of conventional collateral requirements outweighs their lack of consideration of systemic risk.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial markets JEL Code(s): G, G1, G10, G2, G20