G1 - General Financial Markets

• Small‐Sample Tests for Stock Return Predictability with Possibly Non‐Stationary Regressors and GARCH‐Type Effects

  Staff Working Paper 2017-10 Sermin Gungor, Richard Luger

  We develop a simulation-based procedure to test for stock return predictability with multiple regressors. The process governing the regressors is left completely free and the test procedure remains valid in small samples even in the presence of non-normalities and GARCH-type effects in the stock returns.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods, Financial markets JEL Code(s): C, C1, C12, C3, C32, G, G1, G14

• Banking Regulation and Market Making

  Staff Working Paper 2017-7 David 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. We show that while asset prices exhibit greater price impact, bid-ask spreads do not change and trading volumes may even increase.

  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

• Repo Market Functioning when the Interest Rate Is Low or Negative

  Staff Discussion Paper 2017-3 Jean-Sébastien Fontaine, James Hately, Adrian Walton

  This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial markets, Interest rates, Market structure and pricing JEL Code(s): D, D4, G, G1, G10, G12

• 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

• 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

• Bank Screening Heterogeneity

  Staff Working Paper 2016-56 Thibaut Duprey

  Production efficiency and financial stability do not necessarily go hand in hand. With heterogeneity in banks’ abilities to screen borrowers, the market for loans becomes segmented and a self-competition mechanism arises. When heterogeneity increases, the intensive and extensive margins have opposite effects.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial stability, Financial system regulation and policies JEL Code(s): G, G1, G14, G2, G21, L, L1, L13

• Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations

  Staff Working Paper 2016-47 Simona Cociuba, Malik Shukayev, Alexander Ueberfeldt

  We develop a model in which a financial intermediary’s investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance and characterize the policy tools that implement efficient risk taking.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial system regulation and policies, Monetary policy framework JEL Code(s): E, E4, E44, E5, E52, G, G1, G11, G18

• Using Speed and Credit Limits to Address the Procyclicality of Initial Margin at Central Counterparties

  Staff Discussion Paper 2016-18 Nikil Chande, Nicholas Labelle

  This paper proposes a practical approach to address the procyclicality of initial margin at central counterparties (CCPs) that can work even in periods of extreme stress. The approach allows CCPs to limit the speed of margin increases resulting from spikes in market volatility.

  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, G1, G18