Emergency Liquidity Facilities, Signalling and Funding Costs Staff Working Paper 2015-44 Céline Gauthier, Alfred Lehar, Héctor Pérez Saiz, Moez Souissi In the months preceding the failure of Lehman Brothers in September 2008, banks were willing to pay a premium over the Federal Reserve’s discount window (DW) rate to participate in the much less flexible Term Auction Facility (TAF). We empirically test the predictions of a new signalling model that offers a rationale for offering two different liquidity facilities. Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial stability, Lender of last resort JEL Code(s): G, G0, G01, G2, G21, G28
Speculators, Prices and Market Volatility Staff Working Paper 2015-42 Celso Brunetti, Bahattin Buyuksahin, Jeffrey H. Harris We analyze data from 2005 through 2009 that uniquely identify categories of traders to assess how speculators such as hedge funds and swap dealers relate to volatility and price changes. Examining various subperiods where price trends are strong, we find little evidence that speculators destabilize financial markets. Content Type(s): Staff research, Staff working papers Topic(s): International topics, Recent economic and financial developments JEL Code(s): C, C3, G, G1
November 19, 2015 The Effect of Regulatory Changes on Monetary Policy Implementation Frameworks Bank of Canada Review - Autumn 2015 Meyer Aaron, Annick Demers, Sean Durr This article provides an analysis of some recent banking regulatory initiatives that are likely to influence the activities of financial intermediaries and the effectiveness of central bank monetary policy implementation frameworks. Although the effects of individual regulations can be anticipated in most cases, the combined regulatory impact is not yet clear. Central banks should, however, be able to accommodate the effects of the emerging regulatory environment within their existing policy implementation frameworks. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial markets, Financial system regulation and policies, Monetary policy implementation JEL Code(s): E, E5, E52, G, G2, G21, L, L5, L50
November 19, 2015 Recent Enhancements to the Management of Canada’s Foreign Exchange Reserves Bank of Canada Review - Autumn 2015 Mervin Merkowsky, Eric Wolfe As the size and complexity of the foreign exchange reserves have grown over the years, enhancements to the management framework needed to keep pace. This is a common theme for most reserve managers around the world. In Canada, the enhancements focused on governance, portfolio management, risk measurement and risk management. This article briefly describes these enhancements, why they were implemented and some of the lessons learned along the way. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Foreign reserves management, Recent economic and financial developments JEL Code(s): E, E5, E58, F, F3, F31, G, G1
Monetary Policy and Financial Stability: Cross-Country Evidence Staff Working Paper 2015-41 Christian Friedrich, Kristina Hess, Rose Cunningham Central banks may face challenges in achieving their price stability goals when financial stability risks are present. There is, however, considerable heterogeneity among central banks with respect to how they manage these potential trade-offs. Content Type(s): Staff research, Staff working papers Topic(s): Financial stability, International topics, Monetary policy framework JEL Code(s): E, E4, E5, G, G0, G01
Credit Conditions and Consumption, House Prices and Debt: What Makes Canada Different? Staff Working Paper 2015-40 John Muellbauer, Pierre St-Amant, David Williams There is widespread agreement that, in the United States, higher house prices raise consumption via collateral or possibly wealth effects. The presence of similar channels in Canada would have important implications for monetary policy transmission. Content Type(s): Staff research, Staff working papers Topic(s): Credit and credit aggregates, Domestic demand and components, Economic models, Financial institutions, Financial stability, Financial system regulation and policies, Housing, Monetary policy transmission JEL Code(s): E, E0, E02, E2, E21, E4, E44, G, G2, G21, R, R2, R21, R3, R31
Option Valuation with Observable Volatility and Jump Dynamics Staff Working Paper 2015-39 Peter Christoffersen, Bruno Feunou, Yoontae Jeon Under very general conditions, the total quadratic variation of a jump-diffusion process can be decomposed into diffusive volatility and squared jump variation. We use this result to develop a new option valuation model in which the underlying asset price exhibits volatility and jump intensity dynamics. Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing JEL Code(s): G, G1, G12
Domestic and Multilateral Effects of Capital Controls in Emerging Markets Staff Working Paper 2015-37 Gurnain Pasricha, Matteo Falagiarda, Martin Bijsterbosch, Joshua Aizenman Using a novel data set on capital control actions in 17 emerging-market economies (EMEs) over the period 2001–11, we provide new evidence on domestic and multilateral (or spillover) effects of capital controls. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial system regulation and policies, International financial markets, International topics, Monetary policy framework JEL Code(s): F, F3, F32, F4, F41, F42, G, G1, G15
Downside Variance Risk Premium Staff Working Paper 2015-36 Bruno Feunou, Mohammad R. Jahan-Parvar, Cédric Okou We decompose the variance risk premium into upside and downside variance risk premia. These components reflect market compensation for changes in good and bad uncertainties. Their difference is a measure of the skewness risk premium (SRP), which captures asymmetric views on favorable versus undesirable risks. Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing JEL Code(s): G, G1, G12
On the Nexus of Monetary Policy and Financial Stability: Recent Developments and Research Staff Discussion Paper 2015-7 Oleksiy Kryvtsov, Miguel Molico, Ben Tomlin Because financial and macroeconomic conditions are tightly interconnected, financial stability considerations are an important element of any monetary policy framework. Yet, the circumstances under which it would be appropriate for the Bank to use monetary policy to lean against financial risks need to be more fully specified (Côté 2014). Content Type(s): Staff research, Staff discussion papers Topic(s): Financial stability, Monetary policy framework JEL Code(s): E, E0, E4, E44, E5, E52, E58, G, G1, G18