Financial markets

Fiorella De Fiore, Marie Hoerova, Harald Uhlig, 25 May 2019

Money markets are an important source of short-term funding for banks, which rely heavily on them to cover their liquidity needs. But as this column shows, when money markets do not function smoothly, banks may have to deleverage or increase their holdings of liquid assets, leading to a decline in lending and output. This decline can be mitigated by central banks if they increase the size of their balance sheets.

Mitu Gulati, Ugo Panizza, Mark Weidemaier, Grace Willingham, 18 May 2019

One way for a government to reassure investors of its willingness to repay is to give them a priority claim to state assets. It remains to be seen, however, whether such commitments are viewed as credible by market participants. This column investigates how markets responded to two such commitments. A commitment by the government of Spain did not affect yield spreads, while one by the government of Puerto Rico did. This may be because, as a sub sovereign, Puerto Rico faced higher constraints on its ability to renege. 

Wilko Bolt, Maarten R C van Oordt, 14 May 2019

What drives the volatility of Bitcoin? This column explains a theoretical framework to link exchange rates to currency creation, speculative behaviour, and real growth in goods and services transactions. It suggests that the exchange rate will be less sensitive to speculators' beliefs when a virtual currency becomes more established as a means of payment. 

Alex Chinco, Vyacheslav Fos, 14 May 2019

Noise makes financial markets possible. The column investigates an overlooked source of noise, namely, that in modern markets it is computationally infeasible to predict how even simple, rational trading rules interact to create net demand for a stock. For example, empirical data suggest that we can predict whether a stock will be affected by an exchange-traded fund portfolio rebalancing cascade, but not how.

Wolfram Schlenker, Charles Taylor, 02 May 2019

Understanding beliefs about climate change is important, but most of the measures used in the literature are unreliable. Instead, this column uses prices of financial products whose payouts are tied to future weather outcomes in the US. These market expectations correlate well with climate model outputs between 2002 and 2018 and observed weather data across eight US cities, and show significant warming trends. When money is at stake, agents are accurately anticipating warming trends in line with the scientific consensus of climate models.

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