G1 - General Financial Markets

• A Simple Method for Extracting the Probability of Default from American Put Option Prices

  Staff Working Paper 2020-15 Bo Young Chang, Greg Orosi

  A put option is a financial contract that gives the holder the right to sell an asset at a specific price by (or at) a specific date. A put option can therefore provide its holder insurance against a large drop in the stock price. This makes the prices of put options an ideal source of information for a market-based measure of the probability of a firm’s default.

  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

• Learning, Equilibrium Trend, Cycle, and Spread in Bond Yields

  Staff Working Paper 2020-14 Guihai Zhao

  This equilibrium model explains the trend in long-term yields and business-cycle movements in short-term yields and yield spreads. The less-frequent inverted yield curves (and less-frequent recessions) after the 1990s are due to recent secular stagnation and procyclical inflation expectations.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Interest rates JEL Code(s): E, E4, E43, G, G0, G00, G1, G12

• Interest Rate Uncertainty as a Policy Tool

  Staff Working Paper 2020-13 Fabio Ghironi, Galip Kemal Ozhan

  We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI).

  Content Type(s): Staff research, Staff working papers Topic(s): International financial markets, Monetary policy and uncertainty, Monetary policy framework JEL Code(s): E, E3, E32, F, F2, F21, F3, F32, G, G1, G15

• Optimal Taxation in Asset Markets with Adverse Selection

  Staff Working Paper 2020-11 Mohammad Davoodalhosseini

  What is the optimal tax schedule in over-the-counter markets, e.g., those for corporate bonds? I find that an optimal tax schedule is often non-monotonic. For example, trading of some high-price assets should be subsidized, and trading of some low-price assets should be taxed.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial markets, Financial system regulation and policies, Market structure and pricing JEL Code(s): D, D8, D82, D83, E, E2, E24, G, G1, G10, J, J3, J31, J6, J64