The stock market volume decreases in anticipation of FOMC announcements and increases afterward. I find, in the cross-section, that stocks with higher market risk exposure experience greater volume changes. I also find that volume dynamics around FOMC announcements are unlikely to be attributable to changes in volatility. Instead, they are linked to discretionary liquidity trading resulting from the presence of private information. I set up a model that guides my investigation of the information environment in the stock market around FOMC announcements. Consistent with the model’s implication, volume dynamics are accompanied by changes in the information environment. I find that information asymmetry increases ahead of FOMC announcements, but only for high-beta stocks.
{"title":"Volume Dynamics around FOMC Announcements","authors":"Xingyu (Sonya) Zhu","doi":"10.2139/ssrn.3730543","DOIUrl":"https://doi.org/10.2139/ssrn.3730543","url":null,"abstract":"The stock market volume decreases in anticipation of FOMC announcements and increases afterward. I find, in the cross-section, that stocks with higher market risk exposure experience greater volume changes. I also find that volume dynamics around FOMC announcements are unlikely to be attributable to changes in volatility. Instead, they are linked to discretionary liquidity trading resulting from the presence of private information. I set up a model that guides my investigation of the information environment in the stock market around FOMC announcements. Consistent with the model’s implication, volume dynamics are accompanied by changes in the information environment. I find that information asymmetry increases ahead of FOMC announcements, but only for high-beta stocks.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124445021","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Central bank communication could be interpreted in two ways, either as central bank's commitment to a future action, known as Odyssean guidance, or its forecast of future economic conditions, known as Delphic guidance. The empirical literature has identified the Delphic and Odyssean components of forward guidance policies. I show that another unconventional policy tool, large-scale asset purchases, can also be empirically decomposed into Delphic and Odyssean components, and these two components have opposing impacts on macroeconomic expectations in the US along with other advanced and emerging market economies. Finally, I estimate the asset price responses to Delphic and Odyssean policies.
{"title":"Unconventional Monetary Policy Surprises: Delphic or Odyssean?","authors":"Derin Aksit","doi":"10.2139/ssrn.3602291","DOIUrl":"https://doi.org/10.2139/ssrn.3602291","url":null,"abstract":"Central bank communication could be interpreted in two ways, either as central bank's commitment to a future action, known as Odyssean guidance, or its forecast of future economic conditions, known as Delphic guidance. The empirical literature has identified the Delphic and Odyssean components of forward guidance policies. I show that another unconventional policy tool, large-scale asset purchases, can also be empirically decomposed into Delphic and Odyssean components, and these two components have opposing impacts on macroeconomic expectations in the US along with other advanced and emerging market economies. Finally, I estimate the asset price responses to Delphic and Odyssean policies.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126069639","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the evolution of money, the advent of cryptocurrencies would have been an inevitable and a natural phenomenon, but the farfetched implications of the 2008 global credit mayhem only accelerated their arrival. Facebook’s claim of the Libra Blockchain as a decentralized network is far from reality, in fact, it is a lie because Libra is designed to be launched in 2020 as a permissioned (centralized) system where billions of transactions will be governed by the 28 heavyweight validator-firms (nodes), each of which is a member of the Libra Association. Facebook has stated that the number of validators will reach 100, when this occurs, each validator including Facebook will have an equal share (i.e. 1%) of voting rights. This is an improvement over the Board of Governors of the Federal Reserve System, not all of the twelve Federal Reserve Banks have voting rights; besides the Fed Chairman and president of the Bank of New York (Vice-Chairman), four of the remaining eleven Reserve Bank presidents serve one-year terms on a rotating basis. Contrary to the huge hype filled with hopes, Bitcoin (as well as other existing 2,300 digital coins) on account of extreme volatility has failed to become a simple global crypto-currency for everyday life, enabling people to transfer money to individuals or businesses anywhere in the world and purchase desired products and services online within seconds without going through unnecessary hassle (i.e. limited or no access) and financial burden of high transactional costs. Facebook’s Libra seems to possess all necessary elements to become a viable alternative to the U.S. dollar only if major central banks (particularly the Fed and ECB) and governments allow it.
{"title":"Facebook’s Project Libra: Will Libra Sputter Out or Spur Central Banks to Introduce Their Own Unique Cryptocurrency Projects?","authors":"John Taskinsoy","doi":"10.2139/ssrn.3423453","DOIUrl":"https://doi.org/10.2139/ssrn.3423453","url":null,"abstract":"In the evolution of money, the advent of cryptocurrencies would have been an inevitable and a natural phenomenon, but the farfetched implications of the 2008 global credit mayhem only accelerated their arrival. Facebook’s claim of the Libra Blockchain as a decentralized network is far from reality, in fact, it is a lie because Libra is designed to be launched in 2020 as a permissioned (centralized) system where billions of transactions will be governed by the 28 heavyweight validator-firms (nodes), each of which is a member of the Libra Association. Facebook has stated that the number of validators will reach 100, when this occurs, each validator including Facebook will have an equal share (i.e. 1%) of voting rights. This is an improvement over the Board of Governors of the Federal Reserve System, not all of the twelve Federal Reserve Banks have voting rights; besides the Fed Chairman and president of the Bank of New York (Vice-Chairman), four of the remaining eleven Reserve Bank presidents serve one-year terms on a rotating basis. Contrary to the huge hype filled with hopes, Bitcoin (as well as other existing 2,300 digital coins) on account of extreme volatility has failed to become a simple global crypto-currency for everyday life, enabling people to transfer money to individuals or businesses anywhere in the world and purchase desired products and services online within seconds without going through unnecessary hassle (i.e. limited or no access) and financial burden of high transactional costs. Facebook’s Libra seems to possess all necessary elements to become a viable alternative to the U.S. dollar only if major central banks (particularly the Fed and ECB) and governments allow it.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127311738","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Exploiting heterogeneity in U.S. firms' exposure to an unconventional monetary policy shock that reduced debt financing costs, I identify the impact of financing conditions on firms' toxic emissions. I find robust evidence that lower financing costs reduce toxic emissions and boost investments in emission reduction activities, especially capital-intensive pollution control activities. The effect is stronger for firms in noncompliance with environmental regulation. Examining the ability of regaining regulatory compliance by implementing pollution control activities I find that only capital-intensive activities help firms regaining compliance. These findings underscore the impact of firms' financing conditions for emissions and the environment.
{"title":"Financing Conditions and Toxic Emissions","authors":"M. Goetz","doi":"10.2139/ssrn.3411137","DOIUrl":"https://doi.org/10.2139/ssrn.3411137","url":null,"abstract":"Exploiting heterogeneity in U.S. firms' exposure to an unconventional monetary policy shock that reduced debt financing costs, I identify the impact of financing conditions on firms' toxic emissions. I find robust evidence that lower financing costs reduce toxic emissions and boost investments in emission reduction activities, especially capital-intensive pollution control activities. The effect is stronger for firms in noncompliance with environmental regulation. Examining the ability of regaining regulatory compliance by implementing pollution control activities I find that only capital-intensive activities help firms regaining compliance. These findings underscore the impact of firms' financing conditions for emissions and the environment.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126697655","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A Revised Basel Framework for Coop Banking Institutions Operating in North America","authors":"Mourad Mazouni","doi":"10.2139/ssrn.3057211","DOIUrl":"https://doi.org/10.2139/ssrn.3057211","url":null,"abstract":"","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"58 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115150815","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There has been much debate within the FOMC committee on when to raise the target rate from the 0 to 25 basis points range (zero lower bound) and the information conveyed to the financial community. This paper uses a recursive vector autoregressive model to examine the impact of an increase in effective federal funds rate (and shadow rate), from the zero lower bound, on corporate and municipal bond credit default swap (CDS) spreads. Our simulation indicates that on average, a 25 basis point increase in effective federal funds rate (shadow rate) results in a decrease of 59% (24%) in CDS spreads, thereby conveying good news about the economy. This reaction, however, is observed only for investment grade bonds. There are no significant changes in the CDS spreads on below investment grade bonds and buy and hold abnormal stock returns following a rate increase. Further, given that the Federal Reserve is targeting a 2% annual inflation rate, if the current annualized rate is 1.5%, we estimate that a 25 basis point increase in effective rate (shadow rate) would result in an annual inflation rate of 2.2% (1.9%) annual inflation rate. We interpret the rate increase as a weak but positive signal of economic recovery.
{"title":"The Information Content of an Increase in Federal Funds Rate from a Zero Lower Bound Environment","authors":"Violeta Díaz, H. Sankaran, S. Iyer","doi":"10.2139/ssrn.2688778","DOIUrl":"https://doi.org/10.2139/ssrn.2688778","url":null,"abstract":"There has been much debate within the FOMC committee on when to raise the target rate from the 0 to 25 basis points range (zero lower bound) and the information conveyed to the financial community. This paper uses a recursive vector autoregressive model to examine the impact of an increase in effective federal funds rate (and shadow rate), from the zero lower bound, on corporate and municipal bond credit default swap (CDS) spreads. Our simulation indicates that on average, a 25 basis point increase in effective federal funds rate (shadow rate) results in a decrease of 59% (24%) in CDS spreads, thereby conveying good news about the economy. This reaction, however, is observed only for investment grade bonds. There are no significant changes in the CDS spreads on below investment grade bonds and buy and hold abnormal stock returns following a rate increase. Further, given that the Federal Reserve is targeting a 2% annual inflation rate, if the current annualized rate is 1.5%, we estimate that a 25 basis point increase in effective rate (shadow rate) would result in an annual inflation rate of 2.2% (1.9%) annual inflation rate. We interpret the rate increase as a weak but positive signal of economic recovery.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-11-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125486955","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we study the sensitivity of insurance companies’ stock returns with respect to expected and unexpected changes in the Federal funds target rate over the period 1988-2007. We confirm Bernanke and Kuttner (2005) that, as stocks in general, insurance stock returns are only sensitive to the unexpected changes in the Federal funds target rate, but not to the expected ones. However, market-adjusted stock returns do only show a reaction for the non-life insurers. For life insurers, there does not seem to be an industry specific effect on their market value. This can be explained by the business models life and nonlife insurers adopt.
{"title":"Did Federal Funds Target Rate Changes Affect the Market Value of Insurance Companies?","authors":"Marc J. K. de Ceuster, Jie Li, Hairui Zhang","doi":"10.2139/ssrn.2179438","DOIUrl":"https://doi.org/10.2139/ssrn.2179438","url":null,"abstract":"In this paper, we study the sensitivity of insurance companies’ stock returns with respect to expected and unexpected changes in the Federal funds target rate over the period 1988-2007. We confirm Bernanke and Kuttner (2005) that, as stocks in general, insurance stock returns are only sensitive to the unexpected changes in the Federal funds target rate, but not to the expected ones. However, market-adjusted stock returns do only show a reaction for the non-life insurers. For life insurers, there does not seem to be an industry specific effect on their market value. This can be explained by the business models life and nonlife insurers adopt.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"126 5","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114017745","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.
{"title":"A Note on Bank Lending in Times of Large Bank Reserves","authors":"Antoine Martin, James McAndrews, David Skeie","doi":"10.2139/ssrn.1856105","DOIUrl":"https://doi.org/10.2139/ssrn.1856105","url":null,"abstract":"The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"99 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115915989","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the factors that affect the covariance between the federal funds rate and stock returns. I estimate a VAR system and implement covariance decomposition analysis. Most of the covariance between the federal funds rate and stock returns is affected by changes in stock market and output. These results conclude that the Fed is actually targeting stock returns directly.
{"title":"Why Does the Fed React to the Stock Market Changes?: A Covariance Decomposition Analysis","authors":"B. Tas","doi":"10.2139/ssrn.1827842","DOIUrl":"https://doi.org/10.2139/ssrn.1827842","url":null,"abstract":"This paper investigates the factors that affect the covariance between the federal funds rate and stock returns. I estimate a VAR system and implement covariance decomposition analysis. Most of the covariance between the federal funds rate and stock returns is affected by changes in stock market and output. These results conclude that the Fed is actually targeting stock returns directly.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"21 4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115643231","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyses the monetary policy interdependence between the European Central Bank (ECB) and the Federal Reserve (Fed) for the period 1999-2006. Two models are specified: a partial Vector Error Correction Model (VECM) and a general VECM. In the partial VECM, we look for a long-run interdependent relationship between the interest rates of the two currency areas and specify the Taylor Rule terms as exogenous variables. In the general VECM, we regard all variables as endogenous, and look for long-run equilibrium relationships among them, which may reveal monetary policy interdependence between the two central banks. Weak exogeneity is checked in both models in order to establish a possible leader-follower relationship. The empirical results of both models indicate interdependence between the ECB and the Fed, but only the general VECM testifies a leader-follower pattern between the two central banks. According to this pattern, the ECB does follow the Fed.
{"title":"US-Euro Area Monetary Policy Interdependence - New Evidence from Taylor Rule Based VECMs","authors":"Yuhua Cui, A. Belke","doi":"10.2139/ssrn.1358340","DOIUrl":"https://doi.org/10.2139/ssrn.1358340","url":null,"abstract":"This paper analyses the monetary policy interdependence between the European Central Bank (ECB) and the Federal Reserve (Fed) for the period 1999-2006. Two models are specified: a partial Vector Error Correction Model (VECM) and a general VECM. In the partial VECM, we look for a long-run interdependent relationship between the interest rates of the two currency areas and specify the Taylor Rule terms as exogenous variables. In the general VECM, we regard all variables as endogenous, and look for long-run equilibrium relationships among them, which may reveal monetary policy interdependence between the two central banks. Weak exogeneity is checked in both models in order to establish a possible leader-follower relationship. The empirical results of both models indicate interdependence between the ECB and the Fed, but only the general VECM testifies a leader-follower pattern between the two central banks. According to this pattern, the ECB does follow the Fed.","PeriodicalId":416708,"journal":{"name":"POL: Federal Reserve Monetary Policy (Topic)","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130333651","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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