Micro Liquidity: Market Liquidity and Intra-day jumps

We (with Sheheryar Malik) proposed a novel framework for detection of market liquidity strains, based on examining the nature of discontinuities, or jumps, in high-frequency, intraday asset price evolution. Motivated by lack of (i) methodologically comparable, and (ii) consistently available, liquidity metrics spanning advanced and emerging market economies, we established the framework’s feasibility for daily monitoring of liquidity conditions, over a diverse range of jurisdictions.

• Box in the GFSR Oct 2018: We highlighted that 'jumpiness' of US equity market (proxied by the proportion of daily price variation explained by jumps) is currently at a historical low, notwithstanding a number of flash crash events in recent years. However, on select stress events like VIX tantrum - liquidity deteriorates rapidly.

• Special feature in the GFSR Apr 2019: We provided evidence of liquidity strains developing ahead of potential ‘flash’ events; demonstrating merits of extracting information at high-frequency for purposes of liquidity monitoring. Furthermore, liquidity strains have been found to be higher in emerging markets vs AEs; and higher in the sovereign bond markets vs the equity markets. Event study found out interesting trends ahead of Brexit deadline and the yen flash crash.

Working paper is in progress, and available upon request

Macro Liquidity: Pledged Collateral

Researched into the pledged collateral on two dimensions

• How global banks are dealing with pledged collateral, and whether the declining financial leverage narrative holds true. We found an evidence to the contrary, concluding that while on-balance sheet assets are declining for the banks, there was a rather sharp rise in the off-balance sheet assets. A preview of the analysis was also published in the Financial Times. This also extends our continued work on the global bank business models.

• Impact of pledged collateral on monetary policy transmission: We concluded that there is a feedback loop in MP transmission as well, and activity at the long end (through the collateral) impacts the short-end rates as well. Interestingly, this transmission has declined sharply since GFC - driven by regulations and QE. The work was published as a working paper at the IMF, a guest post at Risk.net and presented at the Central Bank Research Association at the SIPA, Columbia University, and the Federal Reserve Bank of New York.

Financial Leverage and the role of ETFs

• Analysis in the global funds during GFSR Apr 2018, highlighted that the use of embedded leverage through derivatives is increasing as fund managers seek to enhance low yields. The average derivatives leverage has risen to almost 300% of the net asset values.
• ETFs invested in less liquid bond markets are receiving strong inflows, and becoming a significant part of the overall market especially in US HY. Although ETFs can provide additional liquidity to the less liquid bond markets, their investor base is significantly more flight prone and their greater sensitivity to underlying indices increases contagion risks.