We analyze the role of hedge fund, swap dealer, and arbitrageur activity in the crude oil market. The contribution of our work is to examine the role of institutional traders in switching between ...high-volatility and low-volatility regimes. Using confidential position data on institutional investors, we first analyze the linkages between trader positions and fundamentals. We find that these institutional position changes reflect fundamental economic factors. Subsequently, we adopt a Markov regime-switching model with time-varying probabilities and find that institutional position changes contribute incrementally to the probability of regime changes.
We explore whether central bank intervention improves liquidity in the interbank market during the current subprime crisis with unique trade and quote data from the e-MID, the only regulated ...electronic interbank market in the world. Central bank intervention consistently creates greater uncertainty in the interbank market. Prior to the crisis, the cover-to-bid ratio effectively conveys good and bad news from the central bank, but this link is broken during the crisis, suggesting that standard (and special) interventions that do not specifically target interbank asymmetric information fail to improve market liquidity. Our results suggest that the central bank should release stress tests for individual banks, provide interbank loan guarantees, or engage in direct asset purchases rather than simply providing more capital when counterparty risk poses systemic risk to the interbank market.
Interconnectedness in the interbank market Brunetti, Celso; Harris, Jeffrey H.; Mankad, Shawn ...
Journal of financial economics,
08/2019, Letnik:
133, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We study the behavior of the interbank market around the 2008 financial crisis. Using network analysis, we study two network structures, correlation networks based on publicly traded bank returns and ...physical networks based on interbank lending transactions, among these public and also private banks. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness, while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems, while correlation networks forecast financial crises.
Commodity index trading and hedging costs Brunetti, Celso; Reiffen, David
Journal of financial markets (Amsterdam, Netherlands),
11/2014, Letnik:
21
Journal Article
Recenzirano
Trading by commodity index traders (CITs) has become an important aspect of financial markets over the past 10 years. We develop an equilibrium model of trader behavior that relates uninformed CIT ...trading to futures prices. A key implication of the model is that CIT trading reduces the cost of hedging. We test the model using a unique non-public dataset that allows us to precisely identify trader positions. We find evidence, consistent with the model, that index traders have become an important supply of price risk insurance.
Counterparty Risk in Over-the-Counter Markets Frei, Christoph; Capponi, Agostino; Brunetti, Celso
Journal of financial and quantitative analysis,
05/2022, Letnik:
57, Številka:
3
Journal Article
Recenzirano
We study trading and risk management decisions of banks in over-the-counter markets, accounting for 2 types of risk: payoff risk from loans and counterparty risk from trading activities. Our model ...provides empirically supported predictions on the structure of the interbank credit default swap (CDS) market: i) banks with high default probabilities either buy or sell CDS contracts; ii) because of the counterparty risk friction, payoff risk is only partially shared; and iii) safe banks act as intermediaries and help diversify counterparty risk. Banks manage their default probabilities to become creditworthy counterparties, but they do so in a socially inefficient way.
We study the motivations of interbank market traders around the 2007–09 subprime crisis with a new statistic, Trading Urgency, that reveals the underlying urgency to borrow overnight funds. We find ...that Trading Urgency leads sovereign CDS spreads and reacts to non-standard central bank interventions introduced during the crisis. Our results shed light on the channels that give rise to the sovereign-bank nexus by mapping the linkages between the interbank market and sovereigns.
•We study traders’ motivations in the interbank market around the 2007–09 crisis.•We create a statistic called Trading Urgency to measure the urgency to borrow.•Trading Urgency in the interbank market lead sovereign CDS spreads.•Trading Urgency react to non-standard central bank interventions.
Speculators, Prices, and Market Volatility Brunetti, Celso; Büyükşahin, Bahattin; Harris, Jeffrey H.
Journal of financial and quantitative analysis,
10/2016, Letnik:
51, Številka:
5
Journal Article
Recenzirano
Odprti dostop
We use data from 2005–2009 that uniquely identify categories of traders to test how speculators such as hedge funds and swap dealers relate to volatility and price changes. In examining various ...subperiods where price trends are strong, we find little evidence that speculators destabilize financial markets. To the contrary, hedge fund position changes are negatively related to volatility in corn, crude oil, and natural gas futures markets. Additionally, swap dealer activity is largely unrelated to contemporaneous volatility. Our evidence is consistent with the hypothesis that hedge funds provide valuable liquidity and largely serve to stabilize futures markets.
Sidedness in the interbank market Brunetti, Celso; Harris, Jeffrey H.; Mankad, Shawn
Journal of financial markets (Amsterdam, Netherlands),
June 2022, 2022-06-00, Letnik:
59
Journal Article
Recenzirano
We study the motivations of traders in the interbank market around the 2007–2009 subprime crisis. We extend the market sidedness of Sarkar and Schwartz (2009) to a panel setting to study the ...dispersion of beliefs for banks domiciled in different European countries. We find that country-level sidedness reveals information from the interbank market: sidedness leads sovereign credit default swap (CDS) spreads and reacts to central bank interventions introduced during the crisis. Our results map the linkages between the interbank market and sovereigns, as well as provide insight on the channels that give rise to the sovereign-bank nexus.
•We study the motivations of traders in the interbank market around the 2007-09 subprime crisis using Sidedness of Sarkar and Schwartz (2009).•We estimate Sidedness within a panel setting using a regression-based formulation.•We show Sidedness from a European interbank market Granger causes (sometimes with feedback) sovereign CDS spreads.•Sidedness reacts to central bank interventions introduced during the crisis.
Using a dataset that uniquely identifies counterparties to each S&P500 eMini transaction, we classify each market participant as high or low frequency, and each transaction, by the speed of the ...traders involved. We investigate empirically the comparative influence of high and low frequency traders on the price process, and conversely the influence of the price process on the trading of high and low frequency traders. We find that high frequency traders have a particularly high success rate on each transaction, measured by the likelihood that the following price change will go in their direction as well as by the amount of time they have to wait to realize their gain, when trading against low frequency traders. Contrary to common wisdom, we find that high frequency traders’ activity does not induce volatility or jumps. In fact, it is their absence that is problematic: volatility and jumps are more prevalent in periods when they trade less intensely. Conversely, we find that spikes in volatility and jumps cause high frequency traders to trade less intensely, decreasing their provision of liquidity. Finally, looking at the market microstructure noise component to the price model, we find that higher level of noise generates trading opportunities for high frequency traders and lead them to increase their trading activity.
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