Financial markets

• Outside Investor Access to Top Management: Market Monitoring versus Stock Price Manipulation

  Staff Working Paper 2020-43 Josef Schroth

  Should managers be paid in stock options if they provide stock-market participants with information about the firm? This paper studies how firm owners trade off the benefit of stock-price incentives and better-informed market participants against the cost of potential stock-price manipulation.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial markets, Recent economic and financial developments JEL Code(s): D, D8, D82, D86, G, G1, G14, G3, G32, G34, M, M1, M12, M4, M41

• Announcing the Bankers’ Acceptance Purchase Facility: a COVID‑19 event study

  Staff Analytical Note 2020-23 Rohan Arora, Sermin Gungor, Kaetlynd McRae, Jonathan Witmer

  The Bank of Canada launched the Bankers’ Acceptance Purchase Facility (BAPF) to ensure that the bankers’ acceptance (BA) market could continue to function well during the financial crisis induced by the COVID‑19 pandemic. We review the impact that the announcement of this facility had on BA yields in the secondary market. We find that BA yield spreads declined by 15 basis points on the day of the announcement and by up to 70 basis points over a longer period. Using an econometric framework, we quantify the effect of the announcement and confirm early assertions presented in the Bank’s 2020 Financial System Review.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G1, G2, G20, G23

• Canadian stock market since COVID‑19: Why a V-shaped price recovery?

  Staff Analytical Note 2020-22 Jean-Sébastien Fontaine, Guillaume Ouellet Leblanc, Ryan Shotlander

  Between February 19 and March 23, 2020, the Canadian stock market plunged due to the severe economic impact of COVID-19. By the end of the summer, the stock market had already recovered a significant portion of its losses, leaving many asking if investors see the economy through rose-coloured glasses. Despite these concerns, we find that current market valuations for companies on the Toronto Stock Exchange align well, on average, with the declines in earning forecasts observed since the start of the year. We also find these market valuations are consistent with the discount rate returning to its pre-pandemic level.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Coronavirus disease (COVID-19), Financial markets JEL Code(s): G, G1, G12, G14

• On Causal Networks of Financial Firms: Structural Identification via Non-parametric Heteroskedasticity

  Staff Working Paper 2020-42 Ruben Hipp

  Various business interactions of banks create a network of hidden relationships, which cannot be directly inferred from the correlation of bank stock returns. Without causality, it remains unclear how policy interventions change the network. Thus, this paper aims to find the causal network as anticipated by investors.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets, Financial stability JEL Code(s): C, C1, C3, C32, C5, C58, L, L1, L14
• August 25, 2020

  Our COVID-19 response: Large-scale asset purchases

  Paul Beaudry

  The Bank of Canada has taken many actions to support Canadians since the COVID-19 pandemic struck. These include large-scale asset purchases—buying a substantial amount of government bonds and other financial assets. Our purchases serve two purposes. They help key financial markets work properly, and they can help increase spending in the economy. This leads to more employment and stronger economic growth.

  Content Type(s): Publications, The Economy, Plain and Simple Topic(s): Coronavirus disease (COVID-19), Debt management, Financial markets, Financial stability, Inflation and prices, Interest rates, Market structure and pricing, Monetary policy, Monetary policy: transmission of

• The Interplay of Financial Education, Financial Literacy, Financial Inclusion and Financial Stability: Any Lessons for the Current Big Tech Era?

  Staff Working Paper 2020-32 Nicole Jonker, Anneke Kosse

  The objective of this paper is twofold. First, we assess whether financial education might be a suitable tool to promote the financial inclusion opportunities that big techs provide. Second, we study how this potential financial inclusion could impact financial stability.

  Content Type(s): Staff research, Staff working papers Topic(s): Development economics, Digital currencies and fintech, Financial markets, Financial services, Financial stability JEL Code(s): D, D1, D14, D9, D91, D92, G, G2, G21, G23, O, O1, O16

• What COVID-19 revealed about the resilience of bond funds

  Staff Analytical Note 2020-18 Guillaume Ouellet Leblanc, Ryan Shotlander

  The liquidity management strategies of fund managers, supported by policy measures, have helped bond funds limit the increase in redemptions caused by COVID 19. This avoided further deterioration in liquidity in bond markets. Nevertheless, these funds were left with lower cash buffers, which could make them more vulnerable to additional large redemptions.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G1, G2, G20, G23

• Is the stock market pricing in a V‑shaped recovery?

  Staff Analytical Note 2020-17 James Kyeong

  Major stock indexes have bounced back from their March 23 trough to about 10 percent below their peaks. However, stocks that are more sensitive to the business cycle have not performed as well during this market rally. This suggests that stock markets are pricing in a slower, shallower economic recovery.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Financial markets JEL Code(s): E, E4, E44, G, G1, G12, G14

• Will exchange-traded funds shape the future of bond dealing?

  Staff Analytical Note 2020-16 Rohan Arora, Jean-Sébastien Fontaine, Corey Garriott, Guillaume Ouellet Leblanc

  Bond dealers have traditionally kept bonds in an inventory until clients buy them. But now, dealers have another way to access bonds for their clients: the exchange-traded fund. We discuss this new way to manage bond dealing and what it might mean for bond markets.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability, Market structure and pricing JEL Code(s): G, G1, G2, G20, G23

• Ten Isn’t Large! Group Size and Coordination in a Large-Scale Experiment

  Staff Working Paper 2020-30 Jasmina Arifovic, Cars Hommes, Anita Kopányi-Peuker, Isabelle Salle

  Economic activities typically involve coordination among a large number of agents. These agents have to anticipate what other agents think before making their own decisions.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): C, C9, C92, D, D8, D83, D9, D90, G, G2, G20