Nathan Foley-Fisher: Research webpage

Federal Reserve Board of Governors

Division of Research and Statistics

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FRB webpage



The views expressed on this site are mine and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any person associated with the Federal Reserve System.

E-mail: nathan.c.foley-fisher [at]

CV: March 2019


This paper studies how over-the-counter (OTC) market liquidity was adversely affected by the collapse of securities lending during the 2007-2008 financial crisis. We combine micro-data on corporate bond OTC market trades with securities lending transactions, in which insurance companies are major counterparties. We exploit cross-sectional differences in the corporate bonds held and lent by insurance companies to estimate the causal effect of securities lending on corporate bond market liquidity. We show that the run on insurers' securities lending programs in 2008 caused a long-lasting reduction in corporate bond market liquidity, even after controlling for the interaction between funding liquidity and market liquidity.

This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market.

We study the daily yields on Irish land bonds listed on the Dublin Stock Exchange during the years 1920-1938. We exploit Irish events during the period and structural differences in land bonds to tease out a measure of investors’ credibility in a UK sovereign guarantee. Using Ireland’s default on intergovernmental payments in 1932, we find a premium of about 43 basis points associated with uncertainty about the UK government guarantee. We discuss the economic and political forces behind the Irish and UK governments’ decisions pertaining to the default. Our finding has implications for modern-day proposals to issue jointly- guaranteed sovereign debt.

Land reform and its financial arrangements are central elements of modern Irish history. Yet to date, the financial mechanisms underpinning Irish land reform have been overlooked. The paper outlines the mechanisms of land reform in Ireland and the importance of land bonds to the process. Advances worth over £127 million were made to tenant farmers to purchase their holdings. These schemes enabled the transfer of over three quarters of land on the island of Ireland. The paper introduces a new database on Irish land bonds listed on the Dublin Stock Exchange from 1891 to 1938. It illustrates the nature of these bonds and presents data on their size, liquidity and market returns. The paper finds a high level of state banking in Ireland: large issues of land bonds were held by state-owned savings banks.

US real interest rates and default risk in emerging economies (with B. Guimaraes) Journal of Money, Credit and Banking, 2013

We empirically analyse the appropriateness of indexing emerging market sovereign debt to US real interest rates. We find that policy-induced exogenous increases in US rates raise default risk in emerging market economies, as hypothesised in the theoretical literature. However, we also find evidence that omitted variables which simultaneously increase US real interest rates and reduce the risk of default dominate the hypothesised relationship. We can only conclude that it's not a good idea to index emerging market bonds to US real interest rates.

Working papers:

Who Limits Arbitrage? (with B. Narajabad and S. Verani) March 2019, preliminary and incomplete

This paper proposes and tests a theory of endogenous limits of arbitrage. We incorporate short-sale restrictions and an imperfectly competitive securities lending market into a model of securities traders with private information. The cost of short selling a security is an equilibrium outcome of the demand for short positions and the willingness of buy-and-hold institutional investors to supply their securities to short sellers. Securities lenders with greater risk tolerance are more willing to lend their securities, lowering the cost of taking short positions, which increases price informativeness in the spot trading market. We provide compelling evidence that the corporate bonds held by more risk tolerant insurance companies with securities lending programs tend to have greater spot market trade volume and more price informativeness. Controlling for each individual bond's demand, we identify the mechanism proposed by the model. Insurance companies with more risky cash collateral reinvestment portfolios are more willing to lend corporate bonds that are otherwise costly for short sellers to borrow. Our results suggest a new connection between liability-driven investment and asset pricing.

Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry (with B. Narajabad and S. Verani) October 2018, Revise and Resubmit (2nd round) at The Journal of Political Economy

Is liquidity creation in shadow banking vulnerable to self-fulfilling runs? Investors typically decide to withdraw simultaneously, making it challenging to identify self-fulfilling runs. In this paper, we exploit the contractual structure of funding agreement-backed securities offered by U.S. life insurers to institutional investors. The contracts allow us to obtain variation in investors’ expectations about other investors’ actions that is plausibly orthogonal to changes in fundamentals. We find that a run on U.S. life insurers during the summer of 2007 was partly due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.

The existing literature implicitly or explicitly assumes that securities lenders primarily respond to demand from borrowers and reinvest their cash collateral through short-term markets. Using a new dataset that matches every US life insurers’ bond portfolio as well as their lending and reinvestment decisions to the universe of securities lending transactions, we offer compelling evidence for an alternative strategy, in which securities lending programs are used to finance a portfolio of long-dated assets. We discuss how the liquidity and maturity mismatch associated with using securities lending as a source of wholesale funding could potentially impair the functioning of securities market.

The Timing of Default Over Electoral Terms May 2012, International Finance Discussion Paper No. 2012-1047

This paper studies the timing of default decisions during and over the terms of elected politicians, as an empirical investigation of the postulated theory in the sovereign debt literature that the political costs of sovereign default are a reason why sovereign debt may be repaid. I find no robust patterns in the timing of default decisions over terms of office. There is some tentative evidence that elected leaders that default are also those more likely to be re-elected. Using a simple career concerns model of political leadership, I demonstrate how both of these features can emerge when politicians care about re-election.

I study the relationship between government bond spreads and credit default swap (CDS) premia during the recent financial crisis, and document a violation of an arbitrage condition occurring at different times in different European countries. I investigate whether current understanding of this arbitrage condition can justify the violation. To explain the phenomenon, I construct a model where investors have entrenched heterogeneous beliefs on the probability a government is going to default, and there is a constraint on the issuance of CDS. In non-crisis times, this constraint plays no role and the arbitrage condition is not violated. However, when a crisis increases the fraction of investors holding relatively pessimistic default beliefs, the latent friction in the CDS market has an effect on trading patterns. The marginal trader in the CDS market changes, and short selling bonds becomes costly, resulting in the emergence of an apparent arbitrage opportunity. I show that the model requires only a quantitatively small divergence in opinions to generate the arbitrage violations observed during the crisis.

This paper provides a model based evaluation of the appropriateness of debt relief received by Heavily Indebted Poor Countries under the HIPC Initiative. I derive a normative benchmark for the optimal change in debt in response to terms of trade shocks in a small, natural resource endowed economy whose size in international markets implies exogenous terms of trade. Applying the benchmark to historical terms of trade data indicate that shocks since 1980 can explain, on average, 35% of actual debt relief. The findings suggest that debt contracts should be indexed to the terms of trade.