Financial markets

• Who Pays? CCP Resource Provision in the Post-Pittsburgh World

  Staff Discussion Paper 2017-17 Jorge Cruz Lopez, Mark Manning

  At the Pittsburgh Summit in 2009, G20 countries announced their commitment to clear all standardized over-the-counter (OTC) derivatives through central counterparties (CCPs). Since then, CCPs have become increasingly important and there has been an extensive program of regulatory enhancements to both them and OTC derivatives markets.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): G, G0, G01, G2, G28

• Which Model to Forecast the Target Rate?

  Staff Working Paper 2017-60 Bruno Feunou, Jean-Sébastien Fontaine, Jianjian Jin

  Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Interest rates JEL Code(s): E, E4, E43

• Variance Premium, Downside Risk and Expected Stock Returns

  Staff Working Paper 2017-58 Bruno Feunou, Ricardo Lopez Aliouchkin, Roméo Tedongap, Lai Xi

  We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large cross-section of firms.

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

• Credit Crunches from Occasionally Binding Bank Borrowing Constraints

  Staff Working Paper 2017-57 Tom D. Holden, Paul Levine, Jonathan Swarbrick

  We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings.

  Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Credit and credit aggregates, Economic models, Financial markets JEL Code(s): E, E2, E22, E3, E32, E5, E51, G, G2

• What Drives Episodes of Settlement Fails in the Government of Canada Bond Market?

  Staff Working Paper 2017-54 Jean-Sébastien Fontaine, James Pinnington, Adrian Walton

  We study settlement fails for trades in the Government of Canada bond market. We find that settlement fails do not occur independently. Using a novel and comprehensive dataset, we examine three drivers of fails.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Market structure and pricing, Payment clearing and settlement systems JEL Code(s): E, E4, G, G1, G2, G21, L, L1

• Do Liquidity Proxies Measure Liquidity in Canadian Bond Markets?

  Staff Analytical Note 2017-23 Jean-Sébastien Fontaine, Jeffrey Gao, Jabir Sandhu, Kobe Wu

  This analytical note evaluates the reliability of proxies for measuring liquidity in Canadian bond markets. We find that price-impact and bid-ask proxies paint a similar picture of evolving liquidity conditions to that obtained from richer measures of liquidity for benchmark Government of Canada bonds.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Debt management, Financial markets JEL Code(s): G, G1, G12, G14, G2, G23, G3, G32

• On the Tail Risk Premium in the Oil Market

  Staff Working Paper 2017-46 Reinhard Ellwanger

  This paper shows that changes in market participants’ fear of rare events implied by crude oil options contribute to oil price volatility and oil return predictability. Using 25 years of historical data, we document economically large tail risk premia that vary substantially over time and significantly forecast crude oil futures and spot returns.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods, Financial markets JEL Code(s): C, C5, C53, C58, D, D8, D84, E, E4, E44, G, G1, G12, G13, Q, Q4, Q43
• November 16, 2017

  An Initial Assessment of Changes to the Bank of Canada’s Framework for Market Operations

  Bank of Canada Review - Autumn 2017 Kaetlynd McRae, Sean Durr, David Manzo

  The Bank of Canada made changes to several of the tools that make up its framework for operations and liquidity provision. These changes came about after a comprehensive re-view of the framework and are designed to help the Bank better achieve its objectives of reinforcing the target for the overnight rate and supporting the well-functioning of Cana-dian financial markets under normal market conditions.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Monetary policy framework, Monetary policy implementation, Monetary policy transmission, Payment clearing and settlement systems JEL Code(s): E, E4, E42, E44, E5, E52, E58, G, G0, G01, G1, G18

• Measuring Limits of Arbitrage in Fixed-Income Markets

  Staff Working Paper 2017-44 Jean-Sébastien Fontaine, Guillaume Nolin

  We use relative value to measure limits to arbitrage in fixed-income markets. Relative value captures apparent deviations from no-arbitrage relationships. It is simple, intuitive and can be computed model-free for any bond.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, International financial markets JEL Code(s): G, G1, G12

• Do Canadian Broker-Dealers Act as Agents or Principals in Bond Trading?

  Staff Analytical Note 2017-11 Daniel Hyun, Jesse Johal, Corey Garriott

  Technology, risk tolerance and regulation may influence dealers to reduce their trading as principals (using their own balance sheets for sales and purchases of securities) in favour of agency trading (matching client trades).

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial markets, Financial system regulation and policies, Market structure and pricing, Recent economic and financial developments JEL Code(s): G, G1, G14, G2, G20, L, L1