Financial markets

• Modelling Financial Instability: A Survey of the Literature

  Staff Working Paper 2002-12 Alexandra Lai

  The magnitude and frequency of recent financial crises underscore the importance of understanding financial instability for the purpose of crisis prevention and crisis management.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial markets, Financial services JEL Code(s): G, G2, G20, G21, G28

• Risk, Entropy, and the Transformation of Distributions

  Staff Working Paper 2002-11 Mark Reesor, Don McLeish

  The exponential family, relative entropy, and distortion are methods of transforming probability distributions. We establish a link between those methods, focusing on the relation between relative entropy and distortion.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets, Market structure and pricing JEL Code(s): C, C0, C1, D, D8, G, G0

• The Microstructure of Multiple-Dealer Equity and Government Securities Markets: How They Differ

  Staff Working Paper 2002-9 Toni Gravelle

  Although dealership government and equity securities have, on the surface, similar market structures, the author demonstrates that some subtle differences exist between them that are likely to significantly affect the way market-makers trade, and as such have an impact on the liquidity that they provide.

  Content Type(s): Staff research, Staff working papers Topic(s): Debt management, Financial markets, Market structure and pricing JEL Code(s): G, G1, G10, G15, G18

• The Effects of Bank Consolidation on Risk Capital Allocation and Market Liquidity

  Staff Working Paper 2002-5 Chris D'Souza, Alexandra Lai

  This paper investigates the effects of financial market consolidation on risk capital allocation in a financial institution and the implications for market liquidity in dealership markets. We show that an increase in financial market consolidation can have ambiguous effects on liquidity in foreign exchange and government securities markets.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial markets JEL Code(s): G, G2, G28, G3, G31, G34

• Asset Allocation Using Extreme Value Theory

  Staff Working Paper 2002-2 Younes Bensalah

  This paper examines asset allocation strategies in an extreme value at risk (VaR) framework in which the risk measure is the p-quantile from the extreme value distribution. The main focus is on the allocation problem faced by an extremely risk-averse institution, such as a central bank.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets JEL Code(s): C, C0, C4, C5, G, G1
• December 17, 2001

  The Canadian Fixed-Income Market: Recent Developments and Outlook

  Bank of Canada Review - Winter 2001–2002 Éric Chouinard, Zahir Lalani

  The Canadian fixed-income market is in the midst of a structural transformation similar to those occurring in other national financial markets around the world. The authors examine recent developments and trends in the market and discuss their possible effects. The simultaneous shrinking of the federal government's financial requirements and steady rise in issues of corporate securities have significantly altered the composition of Canada's fixed-income market. Government of Canada securities constitute a predominant portion of outstanding fixed-income securities and play a pivotal role, serving as benchmarks for the valuation of other traded securities and as a hedging vehicle for market participants trying to control their exposure to risk. The reduced issuance of federal government securities has contributed to a decline in the liquidity of the benchmark market. This raises broader issues regarding the future of the Canadian fixed-income market, since the corporate market is still fairly underdeveloped and illiquid compared with that for Government of Canada issues. There are thus currently few benchmark and hedging alternatives. The federal government is, however, committed to preserving the integrity of the market for benchmark issues and is adopting initiatives to enhance market liquidity and alleviate some of the pressures on the effective supply of these securities. Another evolving trend in the market is the emergence of electronic trading platforms. These platforms have the potential to facilitate the price-discovery mechanism, increase cost efficiency, and improve the liquidity and transparency of the market.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Debt management, Financial markets
• August 16, 2001

  Innovation and Competition in Canadian Equity Markets

  Bank of Canada Review - Summer 2001 Serge Boisvert, Charles Gaa

  Innovations in communications and information technology and the related globalization of financial markets have created the potential for important changes to the structure of Canadian equity markets. Established marketplaces can now compete more effectively on an inter-regional and international basis. At the same time, reduced costs have lowered the barriers to entry faced by new competitors known as alternative trading systems (ATSs). In response to this heightened competition, established Canadian stock exchanges have taken measures to improve market quality. While regulators see innovation as positive for the development of Canadian markets, there is some concern that market liquidity may be fragmented in the short run. The Canadian Securities Administrators have proposed a framework that attempts to address this issue and that would allow ATSs to compete with traditional exchanges for the first time. The authors provide an overview of the Canadian equity market and its structure, focusing on these recent developments.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets

• The Future Prospects for National Financial Markets and Trading Centres

  Staff Working Paper 2001-10 Charles Gaa, Stephen Lumpkin, Robert Ogrodnick, Peter Thurlow

  This paper investigates the effects of the continuation of globalization and technological developments on the future of national-level financial markets and trading centres, particularly in smaller countries such as Canada. We foresee the development of a single global market in the most-liquid assets based on equity-market linkages.

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

• Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency

  Staff Working Paper 2001-5 Toni Gravelle, Richhild Moessner

  In this study we statistically quantify the reactions of Canadian and U.S. interest rates to macroeconomic announcements released in Canada and in the United States. We find that Canadian interest rates react very little to Canadian macroeconomic news and are significantly affected by U.S. macroeconomic news, which indicates that international influences on the Canadian fixed-income markets are important.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Interest rates, Monetary policy implementation JEL Code(s): E, E0, E4, E5
• December 16, 2000

  The Bank of Canada's Management of Foreign Currency Reserves

  Bank of Canada Review - Winter 2000-2001 Jacobo De Leon

  This article describes the Bank's management of the liquid foreign currency portion of the government's official reserves. It broadly outlines the operations of the Exchange Fund Account (EFA), the main account in which Canada's reserves are held. It then briefly reviews the evolution of the objectives and management of the EFA over the past 25 years, particularly in light of the changing level of reserves and developments in financial markets. The EFA is funded by Canada's foreign currency borrowings in capital markets. The article focuses on the comprehensive portfolio framework used to manage the Account, which matches assets and liabilities. Under this framework, funds are invested in assets that match, as closely as possible, the characteristics of foreign currency liabilities issued, helping to immunize the portfolio against currency and interest rate risks.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Interest rates