Decentralized finance: Innovations and challenges Staff Analytical Note 2023-15 Jonathan Chiu, Hanna Yu Decentralized finance surged in popularity around 2020. We explore its value and limitations and highlight some potential regulatory concerns. Content Type(s): Staff research, Staff analytical notes Topic(s): Digital currencies and fintech, Financial stability, Payment clearing and settlement systems JEL Code(s): G, G1, G2
Estimating the Appropriate Quantity of Settlement Balances in a Floor System Staff Discussion Paper 2023-26 Narayan Bulusu, Matthew McNeely, Kaetlynd McRae, Jonathan Witmer This paper presents two complementary approaches to estimating the appropriate quantity of settlement balances needed to effectively operate monetary policy under a floor system in Canada. Content Type(s): Staff research, Staff discussion papers Topic(s): Financial institutions, Financial markets, Financial system regulation and policies, Monetary policy implementation, Payment clearing and settlement systems JEL Code(s): E, E4, E41, E42, E5, E52, E58, G, G2, G21, G28
Three things we learned about the Lynx payment system Staff Analytical Note 2023-14 Nikil Chande, Zhentong Lu, Hiru Rodrigo, Phoebe Tian Canada transitioned to a new wholesale payment system, Lynx, in August 2021. Lynx is based on a real-time settlement model that eliminates credit risk in the system. This model can require more liquidity; however, Lynx’s design allows Canada’s wholesale payments to settle efficiently. Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial services, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): C, C1, C10, E, E4, E42, G, G2, G28
Intermediary Market Power and Capital Constraints Staff Working Paper 2023-51 Jason Allen, Milena Wittwer We examine how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We introduce a model in which capital-constrained intermediaries buy or trade an asset in an imperfectly competitive market, and we show that weaker capital constraints lead to both higher prices and intermediary markups. Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Market structure and pricing JEL Code(s): D, D4, D40, D44, G, G1, G12, G18, G2, G20, L, L1, L10
Anonymous Credentials: Secret-Free and Quantum-Safe Staff Working Paper 2023-50 Raza Ali Kazmi, Cyrus Minwalla An anonymous credential mechanism is a set of protocols that allows users to obtain credentials from an organization and demonstrate ownership of these credentials without compromising users’ privacy. In this work, we construct the first secret-free and quantum-safe credential mechanism. Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Digital currencies and fintech, Payment clearing and settlement systems JEL Code(s): E, E4, E42, G, G2, G21, O, O3, O31
Forecasting Risks to the Canadian Economic Outlook at a Daily Frequency Staff Discussion Paper 2023-19 Chinara Azizova, Bruno Feunou, James Kyeong This paper quantifies tail risks in the outlooks for Canadian inflation and real GDP growth by estimating their conditional distributions at a daily frequency. We show that the tail risk probabilities derived from the conditional distributions accurately reflect realized outcomes during the sample period from 2002 to 2022. Content Type(s): Staff research, Staff discussion papers Topic(s): Business fluctuations and cycles, Econometric and statistical methods JEL Code(s): C, C3, C32, C5, C58, E, E4, E44, G, G1, G17
Understanding DeFi Through the Lens of a Production-Network Model Staff Working Paper 2023-42 Jonathan Chiu, Thorsten Koeppl, Hanna Yu, Shengxing Zhang We develop a production-network model to capture how decentralized finance (DeFi) has evolved across different sectors of financial services. The model allows us to measure the value added by different DeFi sectors and to study how the connections across the sectors influence token prices. Content Type(s): Staff research, Staff working papers Topic(s): Digital currencies and fintech, Payment clearing and settlement systems JEL Code(s): G, G2
Generalized Autoregressive Gamma Processes Staff Working Paper 2023-40 Bruno Feunou We introduce generalized autoregressive gamma (GARG) processes, a class of autoregressive and moving-average processes in which each conditional moment dynamic is driven by a different and identifiable moving average of the variable of interest. We show that using GARG processes reduces pricing errors by substantially more than using existing autoregressive gamma processes does. Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods JEL Code(s): C, C5, C58, G, G1, G12
Do hedge funds support liquidity in the Government of Canada bond market? Staff Analytical Note 2023-11 Jabir Sandhu, Rishi Vala While Government of Canada bond transactions of hedge funds are typically in the opposite direction to those of other market participants, during the peak period of market turmoil in March 2020, hedge funds sold these bonds, just as other market participants did. This shows that hedge funds can at times contribute to one-sided markets and amplify declines in market liquidity. Content Type(s): Staff research, Staff analytical notes Topic(s): Coronavirus disease (COVID-19), Financial markets, Financial stability, Market structure and pricing JEL Code(s): D, D4, D47, D5, D53, G, G1, G12, G14, G2, G23
BoC–BoE Sovereign Default Database: What’s new in 2023? Staff Analytical Note 2023-10 David Beers, Obiageri Ndukwe, Karim McDaniels, Alex Charron The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default. The 2023 edition includes a new section about the characteristics of sovereign defaults and provides new visuals showing regional debt in default. Content Type(s): Staff research, Staff analytical notes Topic(s): Debt management, Development economics, Financial stability, International financial markets JEL Code(s): F, F3, F34, G, G1, G10, G14, G15