G12 - Asset Pricing; Trading volume; Bond Interest Rates

• Do Survey Expectations of Stock Returns Reflect Risk Adjustments?

  Staff Working Paper 2019-11 Klaus Adam, Dmitry Matveev, Stefan Nagel

  Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the literature on asset pricing are consistent with the survey evidence.

  Content Type(s): Staff Research, Staff Working Papers Topic(s): Asset Pricing, Economic models, Financial markets JEL Code(s): G, G1, G10, G12

• Price Caps in Canadian Bond Borrowing Markets

  Staff Analytical Note 2019-2 Léanne Berger-Soucy, Jean-Sébastien Fontaine, Adrian Walton

  Price controls, or caps, can lead to shortages, as 1970’s gasoline price controls illustrate. One million trades show that the market for borrowing bonds in Canada has an implicit price cap: traders are willing to pay no more than the overnight interest rate to borrow a bond. This suggests the probability of a shortage increases when interest rates are very low.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets JEL Code(s): G, G1, G10, G12

• The Secular Decline of Forecasted Interest Rates

  Staff Analytical Note 2019-1 Bruno Feunou, Jean-Sébastien Fontaine

  Canadian interest rates show a secular decline since the 1980s. Long-term survey-based forecasts of interest rates also declined, but less so and were more gradual. Our model-based estimates show an endpoint shifting over time in three phases: a decline between 1990 and 1995, a period of stability between 1996 and 2007, and a further decline since 2008. The current endpoint estimate remains clouded with uncertainty; this is an active area of research.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Financial markets, Interest rates JEL Code(s): E, E4, E43, G, G1, G12

• Alternative Futures for Government of Canada Debt Management

  Staff Discussion Paper 2018-15 Corey Garriott, Sophie Lefebvre, Guillaume Nolin, Francisco Rivadeneyra, Adrian Walton

  This paper presents four blue-sky ideas for lowering the cost of the Government of Canada’s debt without increasing the debt’s risk profile. We argue that each idea would improve the secondary-market liquidity of government debt, thereby increasing the demand for government bonds and thus lowering their cost at issuance.

  Content Type(s): Staff Research, Staff Discussion Papers Topic(s): Debt Management, Financial markets, Market structure and pricing JEL Code(s): G, G1, G12, G2, G24, H, H6, H63

• The Impact of Surprising Monetary Policy Announcements on Exchange Rate Volatility

  Staff Analytical Note 2018-39 Adam Albogatchiev, Jean-Sébastien Fontaine, Jabir Sandhu, Reginald Xie

  We identify a few Bank of Canada press releases that had the largest immediate impact on the exchange rate market. We find that volatility increases after these releases, but the effect is short-lived and mostly dissipates after the first hour, on average. Beyond the first hour, the size of the effect is similar to what we observe for other economic releases, such as those for inflation or economic growth data.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Exchange rates, Financial markets, Monetary Policy JEL Code(s): E, E4, E44, F, F3, F31, G, G1, G10, G12, G14, G15

• Markets Look Beyond the Headline

  Staff Analytical Note 2018-37 Bruno Feunou, James Kyeong, Raisa Leiderman

  Many reports and analyses interpret the release of new economic data based on the headline surprise—for instance, total inflation, real GDP growth and the unemployment rate. However, we find that headline news alone cannot adequately explain the responses of market prices to new information. Rather, market prices react more strongly, on average, to non-headline news such as the composition of GDP growth, quality of jobs created and revisions to past data. Thus, tracking the impact of non-headline information released on the news day is crucial in analyzing how markets interpret and react to new economic data.

  Content Type(s): Staff Research, Staff Analytical Notes Topic(s): Asset Pricing, Exchange rates, Interest rates JEL Code(s): E, E4, E43, G, G1, G12, G14

• 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