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Working Paper Archives

Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

Finance

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks.

The Persistence of Financial Distress

Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble.

Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock

Bank lending booms and asset price booms are often intertwined. Although a fundamental shock might trigger an asset boom, aggressive lending can push asset prices higher, leading to more lending, and so on. Such a dynamic seems to have characterized the agricultural land boom surrounding World War I.

Financing Ventures

The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups.

Unconventional monetary Policy and Long Yields During QE1: Learning from the Shorts

In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after FOMC announcements not fully anticipated in spot bond markets.

Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book

An extensive empirical literature documents a generally negative correlation, named the “leverage effect,” between asset returns and changes of volatility.

Systematic Cojumps, Market Component Portfolios and Scheduled Macroeconomic Announcements

This study provides evidence of common bivariate jumps (i.e., systematic cojumps) between the market index and style-sorted portfolios.

Chinese Foreign Exchange Reserves, Policy Choices and the U.S. Economy

China is both a major trading partner of the United States and the largest official holder of U.S. assets in the world.

A Survey of the Empirical Literature on U.S. Unconventional Monetary Policy

This paper reviews and critically evaluates the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. In order to understand how such policies could work, we also briefly review the literature on the theory of such policies.

Near-Money Premiums, Monetary Policy, and the Integration of Money Markets:Lessons from Deregulation

The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets.

Effects of Credit Supply on Unemployment and Inequality

The Great Recession, which was preceded by the financial crisis, resulted in higher unemployment and inequality.

Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Contagion Risk?

As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the nineteenth century to facilitate interregional payments and flows of liquidity and credit.

Revisiting the Behavior of Small and Large Firms during the 2008 Financial Crisis

Gertler and Gilchrist (1994) provide seminal evidence for the prevailing view that adverse shocks are propagated via credit constraints: small firms are affected more during tight credit periods than large firms.

International R&D Spillovers and Asset Prices

We provide new empirical evidence of a relationship between asset prices and trade- Induced international R&D spillovers; in particular, we find that pairs of countries that share more research and development exhibit more highly correlated stock market returns and less volatile exchange rates.

Interlocked Executives and Insider Board Members: An Empirical Analysis

This paper asked the question of whether the behavior and compensation of interlocked executives and non-independent board of directors are consistent with the hypothesis of governance problem or whether this problem is mitigated by implicit and market incentives.

Why Are Exchange Rates So Smooth? A Household Finance Explanation

Empirical moments of asset prices and exchange rates imply that pricing kernels have to be almost perfectly correlated across countries.

Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation

This paper investigates the effects of the Sarbanes-Oxley Act (SOX) on CEO compensation, using panel data constructed for the S&P 1500 firms on CEO compensation, financial returns, and reported accounting income.

Student Loans and Repayment: Theory, Evidence and Policy

Rising costs of and returns to college have led to sizeable increases in the demand for student loans in many countries. In the U.S., student loan default rates have also risen for recent cohorts as labor market uncertainty and debt levels have increased.

The Role of Jumps in Volatility Spillovers in Foreign Exchange Markets: Meteor Shower and Heat Waves Revisited

This paper extends the previous literature on geographic (heat waves) and intertemporal (meteor showers) foreign exchange volatility transmission to characterize the role of jumps and cross-rate propagation.

Can Risk Explain the Profitability of Technical Trading in Currency Markets?

Academic studies show that technical trading rules would have earned substantial excess returns over long periods in foreign exchange markets. However, the approach to risk adjustment has typically been rather cursory.

Wage Dynamics and Labor Market Transitions: A Reassessment through Total Income and “Usual” Wages

We present a simple on-the-job search model in which workers can receive shocks to their employer-specific productivity match.

Sovereign Default and Maturity Choice

This study develops a novel model of endogenous sovereign debt maturity choice that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle.

The Cost of Business Cycles with Heterogeneous Trading Technologies

This paper investigates the welfare cost of business cycles in an economy where households have heterogeneous trading technologies.

Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies in an Endowment Economy

This paper analyzes and computes the equilibria of economies with large numbers of heterogeneous agents who have different asset trading technologies, preferences and beliefs.

Risk Aversion at the Country Level

In this paper the authors estimate the coefficient of relative risk aversion for 75 countries using data on self-reports of personal well-being from the Gallup World Poll.

How Persistent Are Unconventional Monetary Policy Effects?

Event studies show that the Federal Reserve’s announcements of forward guidance and large-scale asset purchases had large and desired effects on asset prices but these studies do not tell us how long such effects last.

Labor Market Upheaval, Default Regulations, and Consumer Debt

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment.

The Macroeconomics of Microfinance

We provide a quantitative evaluation of the aggregate and distributional impact of microfinance or credit programs targeted toward small businesses.

Understanding the Accumulation of Bank and Thrift Reserves during the U.S. Financial Crisis

The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the 2007-09 financial crisis.

Which continuous-time model is most appropriate for exchange rates?

This paper evaluates the most appropriate ways to model diffusion and jump features of high-frequency exchange rates in the presence of intraday periodicity in volatility. We show that periodic volatility distorts the size and power of conventional tests of Brownian motion, jumps and (in)finite activity.


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