Financial markets

• Market Timing of Long-Term Debt Issuance

  Staff Discussion Paper 2009-14 Jonathan Witmer

  The literature on market timing of long-term debt issuance yields mixed evidence that managers can successfully time their debt-maturity issuance. The early results that are indicative of debt-maturity timing are not robust to accounting for structural breaks or to other measures of debt maturity from firm-level data that account for call and put provisions in […]

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial markets, International topics JEL Code(s): G, G3, G30, G38

• Real Time Detection of Structural Breaks in GARCH Models

  Staff Working Paper 2009-31 Zhongfang He, John M. Maheu

  A sequential Monte Carlo method for estimating GARCH models subject to an unknown number of structural breaks is proposed. Particle filtering techniques allow for fast and efficient updates of posterior quantities and forecasts in real time.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets JEL Code(s): C, C1, C11, C15, C2, C22, C5, C53
• November 11, 2009

  The Evolution of Capital Flows to Emerging-Market Economies

  Bank of Canada Review - Winter 2009-2010 Lena Suchanek, Garima Vasishtha

  Many emerging-market economies (EMEs) have significantly improved their macroeconomic fundamentals and undergone structural reforms since the Asian crisis. These developments have enhanced the composition of capital flows to EMEs through an improved debt structure, a larger share of capital flows as foreign direct investment, and greater access to international debt markets for corporations in EMEs. Structural changes in the global financial landscape have also increased capital flows, bringing economic and financial benefits to EMEs. During the recent financial crisis, however, the opening up of capital accounts and increased financial and trade linkages left many countries vulnerable to external disruptions. Countries with sound fundamentals have weathered the crisis relatively well. Policy-makers in EMEs need to implement policies that support capital flows and ensure that controls imposed to deal with detrimental outflows during periods of stress or rapid inflows are only temporary.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Development economics, Financial markets, Financial system regulation and policies

• Measures of Aggregate Credit Conditions and Their Potential Use by Central Banks

  Staff Discussion Paper 2009-12 Alejandro García, Andrei Prokopiw

  Understanding the nature of credit risk has important implications for financial stability. Since authorities – notably, central banks – focus on risks that have systemic implications, it is crucial to develop ways to measure these risks.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Credit and credit aggregates, Financial markets, Financial stability JEL Code(s): G, G1, G10, G12, G13

• Bond Liquidity Premia

  Staff Working Paper 2009-28 Jean-Sébastien Fontaine, René Garcia

  Recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries. In the US, the repo market is the key funding market. Then, the premium of on-the-run U.S. Treasury bonds should share a common component with risk premia in other markets.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): E, E4, E43, H, H1, H12
• September 11, 2009

  Bank of Canada Liquidity Actions in Response to the Financial Market Turmoil

  Bank of Canada Review - Autumn 2009 Lorie Zorn, Carolyn A. Wilkins, Walter Engert

  In response to the financial crisis of 2007-09, the Bank of Canada intervened repeatedly to stabilize the financial system and limit the repercussions of the crisis on the Canadian economy. This article reviews the extraordinary liquidity measures taken by the Bank during this period and the principles that guided the Bank's interventions. A preliminary assessment of the term liquidity facilities provided by the Bank suggests that they were an important source of liquidity support for some financial institutions and, on a broader basis, served to reduce uncertainty among market participants about the availability of liquidity, as well as helping to promote a return to well-functioning money markets.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial markets, Financial stability
• September 11, 2009

  Understanding Corporate Bond Spreads Using Credit Default Swaps

  Bank of Canada Review - Autumn 2009 Alejandro García, Jun Yang

  Corporate bond spreads worldwide have widened markedly since the beginning of the credit crisis in 2007. This article examines default and liquidity risk–the main components of the corporate bond spread–for Canadian firms that issue bonds in the U.S. market, focusing in particular on their evolution during the credit crisis. They find that, during this period, the liquidity component increased more for speculative-grade bonds than it did for investment-grade bonds, consistent with a "flight-to-quality" phenomenon. An important implication of their results for policy-makers seeking to address problems in credit markets is that the liquidity risk in corporate spreads for investment and speculative bonds behaves differently than the default risk, especially during crisis episodes.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Econometric and statistical methods, Financial markets, Financial stability
• September 11, 2009

  Agency Conflicts in the Process of Securitization

  Bank of Canada Review - Autumn 2009 Teodora Paligorova

  Recent evidence finds a positive association between the prevalence of loans of inferior quality and the growth in securitized products. Some attribute this development to the lack of incentives for originators to screen and monitor the performance of securitized loans; others stress that certain factors, such as balance-sheet management, also contributed to the problem, making it difficult to pin down the reason for the proliferation of such loans during the period of high securitization growth. The author reviews the conflicts of interest between participants in the securitization process that contributed to the ongoing financial turmoil and highlights the most recent policy measures and potential solutions for ameliorating these agency issues.

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

• Short Changed? The Market's Reaction to the Short Sale Ban of 2008

  Staff Working Paper 2009-23 Louis Gagnon, Jonathan Witmer

  Do short sales restrictions have an impact on security prices? We address this question in the context of a natural experiment surrounding the short sale ban of 2008 using a comprehensive sample of Canadian stocks cross-listed in the U.S.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, International topics JEL Code(s): F, F3, F30, G, G0, G01, G1, G18, G2, G20

• The Equity Premium and the Volatility Spread: The Role of Risk-Neutral Skewness

  Staff Working Paper 2009-20 Bruno Feunou, Jean-Sébastien Fontaine, Roméo Tedongap

  We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk premium and of skewness.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets JEL Code(s): G, G1, G12, G13