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Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices.

In the interest of better understanding the impact of the Bank of Canada's policy actions on bond and bill yields, Andreou assesses the impact of policy-rate announcements on short and long bonds over the period 1996 to 2004. To aid the analysis, policy actions are decomposed into expected and surprise components. He also examines whether the introduction of fixed announcement dates (FADs) has affected these results, including markets' perceptions. The main finding is that unexpected policy actions by the Bank have a significant effect on market rates at the shorter end of the yield curve, with the effect dissipating as the maturity increases. A second finding, that the impact on longer-term interest rates of a surprise action by the Bank has diminished since the introduction of the FADs, suggests that the Bank's long-term policy goals are well understood and credible.

Forecasts of the price of crude oil play a significant role in the conduct of monetary policy, especially for commodity producers such as Canada. This article presents a range of recently developed forecasting models that, when pooled together, can generate, on average, more accurate forecasts of the price of oil than the oil futures curve. It also illustrates how policy-makers can evaluate the risks associated with the baseline oil price forecast and how they can determine the causes of past oil price fluctuations.

We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions.

Following the seminal contribution of Kiyotaki and Moore (1997), the role of collateral constraints for business cycle fluctuations has been highlighted by several authors and collateralized debt is becoming a popular feature of business cycle models.

Over the past 10 years, financial firms have increased the size of their positions in the oil futures market. At the same time, oil prices have increased dramatically.

This section of the Financial System Review examines the recent performance of the Canadian financial system and the factors, both domestic and international, that are influencing it.

The initiatives reviewed by the author were undertaken to ensure a liquid and well-functioning market for Government of Canada securities in light of the significant shift in the government's financial position. They include changes made in 1998 by the Bank of Canada and the government to the rules governing auctions and to the Bank's surveillance of the auction process, changes to the treasury bill and bond programs, and implementation of a pilot buyback program for Government of Canada marketable bonds. In addition, the Investment Dealers Association of Canada adopted a code of conduct for the secondary market. These initiatives were well received by the market and appear to have had a positive impact. The Bank and the government are, however, continuing their search for ways to maintain and enhance the efficiency of this market.

Deputy Governor Lawrence Schembri discusses the international evidence of underlying determinants of long-term movements in house prices.

This paper explores the extent to which factors other than commodity and energy prices may have contributed to the Canadian dollar's depreciation since the early 1970s. The variables considered include among others budgetary conditions and productivity.