We investigate 1-year interest rate swaps on USD, EUR, JPY and GBP between 2005 and 2020 utilising a quantile connectedness model. This approach allows for a nuanced investigation of connectedness ...and adds to understanding the monetary policy transmission mechanism within a highly integrated international financial system. Substantial interest rate changes (in either direction) matter for connectedness in financial markets. The results also indicate which currency drives developments depending on the direction of the change in interest rates. The full implementation and replication code — based on R, is available at: https://github.com/GabauerDavid/ConnectednessApproach.
•We study connectedness in IRS markets and include a magnitude dimension.•Large positive or negative interest rate changes increase connectedness.•Substantial variations are observed across major markets and over time.•The results have implications for the monetary transmission mechanism.
•USD/JPY and USD/NOK FX swap bid-ask spreads are investigated.•Both markets appear highly competitive in line with market microstructure theory.•Results using a screening methodology, however, ...suggest anti-competitive behaviour.•Conventions seem central to the bid-ask spread determination process.•This has implications for market participants, policymakers and compliance managers.
Following a series of manipulation scandals in the global foreign exchange and money markets, recent lawsuits, regulatory reform proposals and bank compliance changes have explicitly targeted anti-competitive behaviour. By empirically investigating the determination of bid-ask spreads in foreign exchange swap markets, this paper addresses some contradictions where reciprocality, trust and conventions remain fundamental and logical. By doing so, the paper critically reflects upon the bid-ask spread in traditional market microstructure theory, the definition of the spread as a ‘component of price’ in antitrust law, and the policy implications in light of the recent regulatory investigations into financial benchmarks and OTC markets.
•FX spot markets react very differently to changes in the state of the market.•The perceived information content of new limit order submissions is important.•Order-splitting strategies appear ...successful but could be detrimental to the market.•A ‘liquidity illusion’ seems to exist in the electronic FX spot market.•This has implications for market participants and policymakers.
This paper studies short-term liquidity withdrawal in the FX spot market for eight currency pairs. We include over 3 million limit order submissions, worth more than $5 trillion, and investigate the drivers of two different measures of volume-based liquidity. Overall, we find that market participants react differently to changes in the state of the market for different currency pairs. Moreover, the liquidity withdrawal process also differs depending on the perceived information content of new limit orders submitted. Finally, we document that a ‘liquidity illusion’ might exist in FX spot markets electronic trading platforms where algorithmic and high-frequency trading is prominent.
The Evolution of Monetary Policy Focal Points Stenfors, Alexis; Chatziantoniou, Ioannis; Gabauer, David
Journal of economic issues,
04/2022, Letnik:
56, Številka:
2
Journal Article
Recenzirano
Odprti dostop
With near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of ...Japan (BOJ) in September 2016 to explicitly target the ten-year Japanese government bond (JGB) yield institutionalized this process-by effectively creating a new monetary policy focal point. In this article, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from one to thirty years has affected other benchmark maturities over time. We find that the ten-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the ten-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.
Conventions, or "that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change" (Keynes 1936), play a central role in over-the-counter ...markets. For instance, by allowing expectations about the future to become more harmonized and orderly, they act as stabilizers for the provision of liquidity. Conventions might, of course, change at any time. Nonetheless, by being attached to the daily trading routine and/or integrated within the institutional structure, the confidence in their relevance and validity can be long-lasting. In the foreign exchange market, in particular, where prices are quoted to end-users on demand, market-making banks rely on a convention to quote prices to each other to maintain liquidity. However, the rise of algorithmic and high-frequency trading poses a practical as well as a theoretical challenge to such conventions. By reacting ultra-fast to new information, including to new limit orders submitted by others, markets largely populated with algorithmic traders have become susceptible to a withdrawal of liquidity at an unprecedented speed and scale. Using a high-frequency dataset provided by Electronic Broking Services (EBS), we investigate the process of liquidity withdrawal from the foreign exchange spot market. By doing so, we consider the crowding out of conventions associated with liquidity provision, traditionally upheld through mutual understanding among financial institutions - in other words, reciprocity and trust among humans.
A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations ...of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007-08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the "Japan Premium." Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent "CIP puzzle" but also on the era of the Japan Premium during the 1990s and its aftermath.
This study introduces a novel quantile-on-quantile connectedness approach to explore reversely related and directly related quantile spillovers. To illustrate the benefits of the proposed method, we ...examine the spillovers across the 2-year US Treasury yield (US2Y) and the yield curve spread between the 10-year and 2-year US Treasury yield (US2Y10Y) from 13 July 1998 to 11 July 2023. The empirical results show that the average total connectedness between reversely related quantiles is substantially higher than directly related quantiles. Additionally, the average quantile-based total connectedness is heterogeneous over time and economic events dependent.
•Propose a novel quantile-on-quantile connectedness approach.•Illustrate the interdependencies across the US yield curve.•Differentiate between directly- and reversely-related quantile connectedness measures.
Until the Great Recession, the largely unregulated over-the-counter (OTC) markets had received little attention from compliance officers, regulators, and lawmakers. Perhaps more important than the ...lack of regulatory framework as such, the markets were widely perceived to be sufficiently large, liquid, efficient and competitive to withstand manipulative and collusive attempts by traders and banks. However, the status quo was radically altered in 2012, when it was revealed that major international banks had systematically manipulated the world's most widely used interest rate benchmark. The "LIBOR scandal" was quickly followed by a "Forex scandal" and the discovery of grave misconduct in a range of other OTC benchmarks and markets. At the time of writing, government bonds traded on electronic trading platforms are under particular scrutiny. This paper draws on the concepts of conspiracies, beauty contests, and sabotage to reflect on why it took so long for the scandals to be discovered.
Spoofing and pinging in foreign exchange markets Stenfors, Alexis; Susai, Masayuki
Journal of international financial markets, institutions & money,
January 2021, 2021-01-00, Letnik:
70
Journal Article
Recenzirano
Odprti dostop
•Over 2.3 million limit orders with a total value of more than $3 trillion are studied.•The EUR/USD and USD/JPY markets are extremely sensitive to information-rich orders.•Pinging appears to be ...widespread in the EUR/SEK and USD/RUB markets.
This paper investigates the susceptibility of foreign exchange (FX) spot markets to limit order submission strategies that are either intended to create a false impression of the state of the market (‘spoof orders’) or to extract hidden information from the market (‘ping orders’). Using a complete limit order book dataset from Electronic Broking Services (EBS), our findings suggest that spoofing is more likely to succeed in liquid markets, or on primary electronic trading platforms. Pinging, by contrast, might be more prevalent in illiquid markets, or on secondary electronic trading platforms.
Money market benchmarks are important indicators for economic agents. They are also crucial for central banks in assessing the functioning of the interest rate channel of the monetary transmission ...mechanism. However, whereas the unsecured interbank money market conventionally has been seen as encompassing instruments with maturities up to one year, it appears as if it consists of two markets. The ultra-short-term money market (typically just one day) is large, liquid, and traded regularly. The term money market (one, three or six months), by contrast, is small, illiquid and rarely traded. This article explores the feasibility of creating and maintaining a money market benchmark which does not represent an underlying liquid market. From a sociological perspective, it addresses two critical aspects of financial benchmarks: (1) that they are related to but separate and distinct from the objects determining them and (2) that they are measurements and as such cannot be bought or sold (Stenfors and Lindo
2018
). By doing so, the article also reflects upon the desire by financial regulators following the LIBOR manipulation scandal to replace estimation-based by transaction-based benchmarks, as well as some challenges and contradictions in conventional central banking theory.
PDF
