Financial markets

• Canadian stock market since COVID‑19: Why a V-shaped price recovery?

  Staff Analytical Note 2020-22 Jean-Sébastien Fontaine, Guillaume Ouellet Leblanc, Ryan Shotlander

  Between February 19 and March 23, 2020, the Canadian stock market plunged due to the severe economic impact of COVID-19. By the end of the summer, the stock market had already recovered a significant portion of its losses, leaving many asking if investors see the economy through rose-coloured glasses. Despite these concerns, we find that current market valuations for companies on the Toronto Stock Exchange align well, on average, with the declines in earning forecasts observed since the start of the year. We also find these market valuations are consistent with the discount rate returning to its pre-pandemic level.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Coronavirus disease (COVID-19), Financial markets JEL Code(s): G, G1, G12, G14

• On Causal Networks of Financial Firms: Structural Identification via Non-parametric Heteroskedasticity

  Staff Working Paper 2020-42 Ruben Hipp

  Banks’ business interactions create a network of relationships that are hidden in the correlations of bank stock returns. But for policy interventions, we need causality to understand how the network changes. Thus, this paper looks for the causal network anticipated by investors.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets, Financial stability JEL Code(s): C, C1, C3, C32, C5, C58, L, L1, L14
• August 25, 2020

  Our COVID-19 response: Large-scale asset purchases

  Paul Beaudry

  The Bank of Canada has taken many actions to support Canadians since the COVID-19 pandemic struck. These include large-scale asset purchases—buying a substantial amount of government bonds and other financial assets. Our purchases serve two purposes. They help key financial markets work properly, and they can help increase spending in the economy. This leads to more employment and stronger economic growth.

  Content Type(s): Publications, The Economy, Plain and Simple Topic(s): Coronavirus disease (COVID-19), Debt management, Financial markets, Financial stability, Inflation and prices, Interest rates, Market structure and pricing, Monetary policy, Monetary policy transmission

• The Interplay of Financial Education, Financial Literacy, Financial Inclusion and Financial Stability: Any Lessons for the Current Big Tech Era?

  Staff Working Paper 2020-32 Nicole Jonker, Anneke Kosse

  The objective of this paper is twofold. First, we assess whether financial education might be a suitable tool to promote the financial inclusion opportunities that big techs provide. Second, we study how this potential financial inclusion could impact financial stability.

  Content Type(s): Staff research, Staff working papers Topic(s): Development economics, Digital currencies and fintech, Financial markets, Financial services, Financial stability JEL Code(s): D, D1, D14, D9, D91, D92, G, G2, G21, G23, O, O1, O16

• What COVID-19 revealed about the resilience of bond funds

  Staff Analytical Note 2020-18 Guillaume Ouellet Leblanc, Ryan Shotlander

  The liquidity management strategies of fund managers, supported by policy measures, have helped bond funds limit the increase in redemptions caused by COVID 19. This avoided further deterioration in liquidity in bond markets. Nevertheless, these funds were left with lower cash buffers, which could make them more vulnerable to additional large redemptions.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G1, G2, G20, G23

• Is the stock market pricing in a V‑shaped recovery?

  Staff Analytical Note 2020-17 James Kyeong

  Major stock indexes have bounced back from their March 23 trough to about 10 percent below their peaks. However, stocks that are more sensitive to the business cycle have not performed as well during this market rally. This suggests that stock markets are pricing in a slower, shallower economic recovery.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Financial markets JEL Code(s): E, E4, E44, G, G1, G12, G14

• Will exchange-traded funds shape the future of bond dealing?

  Staff Analytical Note 2020-16 Rohan Arora, Jean-Sébastien Fontaine, Corey Garriott, Guillaume Ouellet Leblanc

  Bond dealers have traditionally kept bonds in an inventory until clients buy them. But now, dealers have another way to access bonds for their clients: the exchange-traded fund. We discuss this new way to manage bond dealing and what it might mean for bond markets.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability, Market structure and pricing JEL Code(s): G, G1, G2, G20, G23

• Ten Isn’t Large! Group Size and Coordination in a Large-Scale Experiment

  Staff Working Paper 2020-30 Jasmina Arifovic, Cars Hommes, Anita Kopányi-Peuker, Isabelle Salle

  Economic activities typically involve coordination among a large number of agents. These agents have to anticipate what other agents think before making their own decisions.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): C, C9, C92, D, D8, D83, D9, D90, G, G2, G20

• Maturity Composition and the Demand for Government Debt

  Staff Working Paper 2020-29 Jason Allen, Jakub Kastl, Milena Wittwer

  The main objectives of debt management are to raise stable and low-cost funding to meet the government’s financial needs and to maintain a well-functioning market for government securities.

  Content Type(s): Staff research, Staff working papers Topic(s): Debt management, Financial markets JEL Code(s): C, C1, C14, D, D4, D44, E, E5, E58, G, G1, G12

• COVID-19 and bond market liquidity: alert, isolation and recovery

  Staff Analytical Note 2020-14 Jean-Sébastien Fontaine, Hayden Ford, Adrian Walton

  The disruption due to COVID-19 reverberated through the bond markets in three phases. In the first phase, dealers met the rising demand for liquidity. In the second, dealers reduced the supply of liquidity, and trading conditions worsened significantly. Finally, the market returned to relative stability following several interventions by the Bank of Canada.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Coronavirus disease (COVID-19), Financial markets, Monetary policy JEL Code(s): E, E4