Financial markets

Refet Gürkaynak, Burçin Kısacıkoğlu, Jonathan Wright, 12 December 2018

News affects the yield curve, but OLS regressions based on observed news have been able to explain only 40% of the movement, at best. This column proposes a method for estimating unobserved news as well. The results suggest that news explains more or less all of the yield curve changes in event windows, and that more should be done to understand the economics behind this relationship. 

Jiangze Bian, Zhiguo He, Kelly Shue, Hao Zhou, 09 December 2018

Excessive leverage and subsequent deleveraging-induced fire sales have been major contributors in past financial crises. This column explores the behaviour of two types of margin investors– brokerage-financed and shadow-financed – during a tumultuous period for the Chinese stock market. Results show that for accounts with exposure to fire sale risk, shadow-financed accounts account for a much higher proportion of the total stock market capitalisation than brokerage-financed accounts.

David Jacks, Martin Stuermer, 07 December 2018

There is a lack of consensus on the importance of various drivers of long-run commodity prices. This column analyses a new dataset of prices and production for 15 commodities, including metals, agricultural goods, and soft commodities, between 1870 and 2015. Demand shocks due to rapid industrialisation and urbanisation have driven a substantial amount of variation in commodity price booms. While demand shocks have gained importance over time, commodity supply shocks have become less relevant. 

João Granja, Christian Leuz, Raghuram Rajan, 04 December 2018

Risk taking was pervasive during the Global Crisis even in the most unlikely areas, such as stretching to lend at a distance. Using US data, this column examines the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple and policy-relevant measure, the average physical distance of borrowers from banks’ branches. It finds that distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. A sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. 

Martin Eichenbaum, Sérgio Rebelo, Arlene Wong, 02 December 2018

Mortgage rate systems vary in practice across countries, and understanding the impact of these differences is critical to the design of optimal monetary policy. This column focuses on the US, where most mortgages have a fixed interest rate and no prepayment penalties, and demonstrates that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. As refinancing costs decline, the effects of monetary policy become less state dependent.

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