Multilateral Development Bank Credit Rating Methodology: Overcoming the Challenges in Assessing Relative Credit Risk in Highly Rated Institutions Based on Public Data Staff discussion paper 2017-6 David Xiao Chen, Philippe Muller, Hawa Wagué The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of counterparties. Traditionally, foreign exchange reserve managers and other investors have relied on credit rating agencies (CRAs) as the main source for credit assessments. Content Type(s): Staff research, Staff discussion papers JEL Code(s): F, F3, F31, G, G2, G24, G28, G3, G32 Research Theme(s): Financial markets and funds management, Funds management, Financial system, Financial stability and systemic risk
Constrained Efficiency with Adverse Selection and Directed Search Staff working paper 2017-15 Mohammad Davoodalhosseini Constrained efficient allocation (CE) is characterized in a model of adverse selection and directed search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment. Content Type(s): Staff research, Staff working papers JEL Code(s): D, D8, D82, D83, E, E2, E24, G, G1, J, J3, J31, J6, J64 Research Theme(s): Financial markets and funds management, Market structure, Financial system, Financial system regulation and oversight, Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission
Strategic Complementarities and Money Market Fund Liquidity Management Staff working paper 2017-14 Jonathan Witmer Following the financial crisis, there has been increased regulatory focus on the management of liquidity in mutual funds and, specifically, whether funds hold enough liquidity to guard against the potential for investor runs. Content Type(s): Staff research, Staff working papers JEL Code(s): F, F3, F30, G, G0, G01, G1, G18, G2, G20 Research Theme(s): Financial markets and funds management, Market functioning, Market structure, Financial system, Financial institutions and intermediation, Financial stability and systemic risk
Accounting for Real Exchange Rates Using Micro‐Data Staff working paper 2017-12 Mario J. Crucini, Anthony Landry The classical dichotomy predicts that all of the time-series variance in the aggregate real exchange rate is accounted for by non-traded goods in the consumer price index (CPI) basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) claimed the opposite: that traded goods accounted for all of the variance. Content Type(s): Staff research, Staff working papers JEL Code(s): F, F3 Research Theme(s): Financial markets and funds management, International markets and currencies, Structural challenges, International trade, finance and competitiveness
What Explains the Recent Increase in Canadian Corporate Bond Spreads Staff analytical note 2017-2 Maxime Leboeuf, James Pinnington The spread between the yield of a corporate bond and the yield of a similar Government of Canada bond reflects compensation for possible default by the issuing firm and compensation for additional risks beyond default. Content Type(s): Staff research, Staff analytical notes JEL Code(s): G, G1, G12 Research Theme(s): Financial markets and funds management, Market functioning, Financial system, Financial stability and systemic risk
Small‐Sample Tests for Stock Return Predictability with Possibly Non‐Stationary Regressors and GARCH‐Type Effects Staff working paper 2017-10 Sermin Gungor, Richard Luger We develop a simulation-based procedure to test for stock return predictability with multiple regressors. The process governing the regressors is left completely free and the test procedure remains valid in small samples even in the presence of non-normalities and GARCH-type effects in the stock returns. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C1, C12, C3, C32, G, G1, G14 Research Theme(s): Financial markets and funds management, Market functioning, Models and tools, Econometric, statistical and computational methods
The Share of Systematic Variations in the Canadian Dollar—Part II Staff analytical note 2017-1 Jean-Sébastien Fontaine, Guillaume Nolin This analytical note examines how much of the systematic variation in the Canadian dollar is attributable to its sensitivity to commodity prices. We introduce a new “oil” portfolio that captures systematic variations when the exchange rates of commodity exporters and commodity importers move in opposite directions. Content Type(s): Staff research, Staff analytical notes JEL Code(s): F, F3, F31 Research Theme(s): Financial markets and funds management, International markets and currencies
Banking Regulation and Market Making Staff working paper 2017-7 David Cimon, Corey Garriott We model how securities dealers respond to regulations on leverage, position and liquidity such as those imposed by the Basel III framework. We show that while asset prices exhibit greater price impact, bid-ask spreads do not change and trading volumes may even increase. Content Type(s): Staff research, Staff working papers JEL Code(s): G, G1, G14, G2, G20, L, L1, L10 Research Theme(s): Financial markets and funds management, Market functioning, Market structure, Financial system, Financial system regulation and oversight
Stability and Efficiency in Decentralized Two‐Sided Markets with Weak Preferences Staff working paper 2017-4 Radoslav Raykov Many decentralized markets are able to attain a stable outcome despite the absence of a central authority (Roth and Vande Vate, 1990). A stable matching, however, need not be efficient if preferences are weak. This raises the question whether a decentralized market with weak preferences can attain Pareto efficiency in the absence of a central matchmaker. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C7, C78, D, D6, D61 Research Theme(s): Financial markets and funds management, Market structure, Models and tools, Economic models
Repo Market Functioning when the Interest Rate Is Low or Negative Staff discussion paper 2017-3 Jean-Sébastien Fontaine, James Hately, Adrian Walton This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively. Content Type(s): Staff research, Staff discussion papers JEL Code(s): D, D4, G, G1, G10, G12 Research Theme(s): Financial markets and funds management, Market functioning, Market structure