G12 - Asset Pricing; Trading volume; Bond Interest Rates

• Have Liquidity and Trading Activity in the Canadian Corporate Bond Market Deteriorated?

  Staff Analytical Note 2018-31 Chen Fan, Sermin Gungor, Guillaume Nolin, Jun Yang

  Since 2010, the liquidity of corporate bonds has improved on average, while their trading activity has remained stable. We find that the liquidity and trading activity of riskier bonds or bonds issued by firms in different sectors have been stable. However, the liquidity and trading activity of bonds issued by banks have improved. We observe short-lived episodes of deterioration in liquidity and trading activity.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets JEL Code(s): G, G1, G12, G14

• Have Liquidity and Trading Activity in the Canadian Provincial Bond Market Deteriorated?

  Staff Analytical Note 2018-30 Chen Fan, Sermin Gungor, Guillaume Nolin, Jun Yang

  In recent years, the liquidity in the secondary market for Canadian provincial bonds was a concern for many market participants. We find that a proxy for the bid-ask spread has deteriorated modestly since 2010. However, a proxy for price impact as well as measures of trade size, the number of trades and turnover have been stable or improved since 2010. This holds for bonds issued by different provinces and for bonds of different ages and sizes. Alberta bonds provide an interesting case study: After the fall in oil prices in 2014–15, the province increased its borrowing in the bond market and its credit rating was downgraded. Yet trading activity for Alberta bonds increased significantly. Overall, we interpret the evidence as a sign of resilience in the provincial bond market.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets JEL Code(s): G, G1, G12, G14

• The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market

  Staff Working Paper 2018-35 Jeffrey Gao, Jianjian Jin, Jacob Thompson

  This paper finds that Government of Canada benchmark bonds tend to be more illiquid over the subsequent month when there is a large increase in government debt supply. The result is both statistically and economically significant, stronger for the long-term than the short-term sector, and is robust when other macro factors are controlled for.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Asset Pricing, Debt Management, Financial markets JEL Code(s): D, D5, D53, G, G1, G12, G18, G2, G3, G32

• Assessing the Impact of Demand Shocks on the US Term Premium

  Staff Discussion Paper 2018-7 Russell Barnett, Konrad Zmitrowicz

  During and after the Great Recession of 2008–09, conventional monetary policy in the United States and many other advanced economies was constrained by the effective lower bound (ELB) on nominal interest rates. Several central banks implemented large-scale asset purchase (LSAP) programs, more commonly known as quantitative easing or QE, to provide additional monetary stimulus.

  Content Type(s): Staff Research, Staff Discussion Papers Topic(s): Financial markets, Interest rates, Monetary policy framework, Monetary policy implementation, Transmission of monetary policy JEL Code(s): E, E4, E43, E5, E52, E58, E6, E61, E65, G, G1, G12

• Ambiguity, Nominal Bond Yields and Real Bond Yields

  Staff Working Paper 2018-24 Guihai Zhao

  Equilibrium bond-pricing models rely on inflation being bad news for future growth to generate upward-sloping nominal yield curves. We develop a model that can generate upward-sloping nominal and real yield curves by instead using ambiguity about inflation and growth.

  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

• Is the Excess Bond Premium a Leading Indicator of Canadian Economic Activity?

  Staff Analytical Note 2018-4 Maxime Leboeuf, Daniel Hyun

  This note investigates whether Canadian corporate spreads and the excess bond premium (EBP) lead Canadian economic activity. Indeed, we find that corporate spreads precede changes in real gross domestic product (GDP) in Canada over the subsequent year. The EBP accounts for most of this property. Further, an unanticipated increase in the Canadian EBP forecasts a deterioration of domestic macroeconomic conditions: a 10-basis-point increase results in a fall in both GDP and consumer price index (CPI) of 0.4 per cent and 0.1 per cent, respectively, over three years.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Business fluctuations and cycles, Financial markets JEL Code(s): E, E3, E32, E4, E44, G, G1, G12

• Government of Canada Securities in the Cash, Repo and Securities Lending Markets

  Staff Discussion Paper 2018-4 Narayan Bulusu, Sermin Gungor

  This paper documents the properties of Government of Canada securities in cash, repo and securities lending transactions over their life cycle. By tracking every security from issuance to maturity, we are able to highlight inter-linkages between the markets for cash and for specific securities.

  Content Type(s): Staff Research, Staff Discussion Papers Topic(s): Financial markets, Wholesale funding JEL Code(s): G, G1, G12, G2, G21, G23

• 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

• Risk-Neutral Moment-Based Estimation of Affine Option Pricing Models

  Staff Working Paper 2017-55 Bruno Feunou, Cédric Okou

  This paper provides a novel methodology for estimating option pricing models based on risk-neutral moments. We synthesize the distribution extracted from a panel of option prices and exploit linear relationships between risk-neutral cumulants and latent factors within the continuous time affine stochastic volatility framework.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Asset Pricing, Econometric and statistical methods JEL Code(s): G, G1, G12

• 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