Research

WORKING PAPERS  

 Anatomy of the Repo Rate Spikes in September 2019 with R. Jay Kahn, Matthew McCormick, Vy Nguyen, H. Peyton Young

Repurchase agreement (repo) markets represent one of the largest sources of funding and risk transformation in the U.S. financial system. Despite the large volume, repo rates can be quite volatile, and in the extreme, they have exhibited intraday spikes that are 5-10 times the rate on a typical day. This paper uses a unique combination of intraday timing data from the repo market to examine the potential causes of the dramatic spike in repo rates in mid-September 2019. We conclude that the spike resulted from a confluence of factors that, when taken individually, would not have been nearly as disruptive. Our work highlights how a lack of information transmission across repo segments and internal frictions within banks most likely exacerbated the spike. These findings are instructive in the context of repo market liquidity, demonstrating how the segmented structure of the market can contribute to its fragility. 

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

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

This paper presents a model that links over-the-counter intermediary relationships and several aspects of market liquidity. To evaluate these predictions, we empirically examine the U.S. single-name credit default swap market using supervisory data. Our findings demonstrate that the density of the intermediation network has a significant influence on the liquidity provided by dealers, both on an individual and collective basis, as seen through trade volumes and inventory management. Further, we find that network density impacts the cost of trade, measured by execution costs and bid-ask spreads, differentially across 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.

CONFERENCE PROCEEDINGS