Research

WORKING PAPERS  

Cross-Asset Tandem Trading and Extraordinary Volatility with Robert Garrison, Pankaj Jain   Under Submission

Cross-asset order flow provides an incremental and novel nonlinear price discovery channel. Structural vector autoregressions of synchronized intraday message data reveal distinct patterns in the comovement of order flow and its influence on returns and volatility. While cross-market order flow usually reconciles prices through small-stakes arbitrage in periods of low volatility and comovement during medium volatility associated with information arrival, it can exacerbate price dislocation from fundamental values during extraordinary volatility. While applying market-wide circuit breakers (MWCB) mitigates the extreme negative spillovers by jointly halting markets, we identify room for further harmonization during the MWCB market reopening process.

Intermediation Networks and Derivative Market Liquidity: Evidence from CDS Markets with Stathis Tompaidis   Under Submission

In over-the-counter markets, dealers facilitate trade by providing liquidity and acting as intermediaries. We present a model that links the relationships of these intermediaries to market liquidity, and we empirically test the model using supervisory data from the U.S. single-name credit default swap market. We find that the density of the intermediation network has a significant influence on the liquidity provided by dealers, on both the individual and collective level, as seen through trade volumes and inventory management. Further, we find that network density impacts the cost of trade, as measured by execution costs and bid-ask spreads, differentially in the dealer-to-client and interdealer segments.

Assessing the Safety of Central Counterparties with H. Peyton Young

A proposed framework for empirically assessing a central counterparty’s capacity to cope with severe financial stress. Using public disclosures data for global central counterparties (CCPs), we show how to estimate the probability that a CCP could cover any specified fraction of payment defaults by its members. This framework supplements conventional standards of risk management such as Cover 2 and provides a comparative and comprehensive approach to assessing risk protection across CCPs that is not predicated on a specific number of member defaults. We apply the approach to a wide range of CCPs in different geographical jurisdictions and asset classes and find that there are substantial differences in protection coverage. In particular, large European CCPs appear to be significantly safer than their counterparts in Asia-Pacific and North America. These differences are also reflected in supervisory data that provide CCP members' risk assessments of the CCPs to which they belong. 

 An Agent-based Model for Crisis Liquidity Dynamics with Richard Bookstaber

Financial crises are often characterized by sharp reductions in liquidity followed by cascades of falling prices. Researchers are making progress in work to understand the levels of liquidity on a daily basis, but understanding the vulnerability of liquidity to market shocks remains a challenge. We develop an agent-based model with the objective of evaluating the market dynamics that lead the market supply of liquidity to recede during periods of crisis. The model uses a limit-order-book framework to examine the interaction of three types of traditional market agents: liquidity demanders, liquidity suppliers, and market makers. The paper highlights the implications of changes in market makers' ability to provide intermediation services and the heterogeneous decision cycles of liquidity demanders versus liquidity suppliers for crisis-induced illiquidity.

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JOURNAL PUBLICATIONS

RESEARCH PROJECTS UNDERWAY 

The Anatomy of U.S. Overnight Triparty Repo Markets with Carlos Ramirez

Using a comprehensive supervisory dataset, we establish novel stylized facts about how the U.S. overnight triparty repo market operates. Besides uncovering these facts, we show that overnight triparty repo pricing depends on a delicate interplay between the number of counterparties participants use to secure their repo transactions, the identity of such counterparties, and the diversification of trading activity among them. Importantly, such interplay can be materially reshaped in times of stress. We also show that changes in architectural features of the trading network among market participants are associated with changes in average rates and trading volume.

Repo Market Intermediation: Explaing Dealer Collateral and Cash Flow Management across U.S. Repo Markets with Robert Mann

The U.S. repurchase agreement (repo) market, comprised of four major segments, centers around dealers who intermediate cash and securities across them. In this brief, we examine how dealers' intermediation supports the short-term funding of financial institutions by providing one of the first comprehensive examinations of the U.S. repo market. Notably, repo dealers operate similarly to traditional banks in that they intermediate cash between lenders (e.g., money funds) and borrowers (e.g., hedge funds). We document that 65 percent of reverse repo collateral received matches contra repo transactions using the same collateral, of which over 90 percent of outstanding volumes are U.S. Treasuries. The ability to provision this service relies on dealers' management of counterparty, collateral, and maturity risk. Of these risks, we find that collateral risk and the ease of rehypothecating are the primary drivers of the net interest margin dealers earn, while differences in maturity and counterparty risk are sizable, they are less economically material. 

POLICY NOTES & CONFERENCE PROCEEDINGS