This series allows members of the OFR staff and their coauthors to disseminate preliminary research findings in a format intended to generate discussion and critical comments.
Papers in the series are works in progress and subject to revision. Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury.
March 26, 2015
This paper shows that the fundamental legal structure of a well-written financial contract follows a logic that can be formalized mathematically as a "deterministic finite automaton." This allows, for example, automated reasoning to determine whether a contract is internally coherent and complete. The paper illustrates the process by representing a simple loan agreement as an automaton.
March 10, 2015
This paper presents a model of market liquidity in which those who need to sell come into the market with a greater need for immediacy than those who are willing to buy. This is a critical market dynamic behind the illiquidity that arises during market dislocations and crises, when some are in forced-selling mode while others are hesitant to come in and take the other side of the trade.
March 03, 2015
This paper examines the results of four rounds of stress testing of the largest U.S. bank holding companies, starting in 2009. The data reveal a growing correlation in results from one year to the next, highlighting whether the stress tests in their current form may be losing some of their information value over time. The authors discuss the implications of these patterns and recommend greater diversity in the stress scenarios analyzed.
Process Systems Engineering as a Modeling Paradigm for Analyzing Systemic Risk in Financial Networks
February 11, 2015
This paper demonstrates the value of signed directional graphs, a modeling methodology used for risk detection in process engineering, in tracing the path of potential instabilities and feedback loops within the financial system. This approach expands the usefulness of network models of the financial system by including critical information on the direction of influence and the points of control between the various nodes of the network.
December 22, 2014
Revised February 12, 2015
This paper uses proprietary credit default swap (CDS) data for 2010 to 2014 to show that capital fluctuations for sellers of CDS protection are an important determinant of CDS spread movements.
November 25, 2014
This paper uses an agent-based model of the limit order book to explore how the levels of information available to participants, exchanges, and regulators can be used for insights on the stability and resiliency of a market.
November 13, 2014
This paper discusses optimal strategies for financial institutions in selling large blocks of securities and in hedging the resulting market risk.
October 23, 2014
This paper proposes a new model of volatility featuring a "leverage multiplier" by which financial leverage amplifies equity volatility. The model estimates daily asset returns and asset volatility.
August 19, 2014
This paper investigates the design of risk weights used in setting minimum levels of regulatory capital for banks and presents a formula for regulators to set those weights by analyzing bank portfolios.
July 29, 2014
Revised September 10, 2014
This paper develops an agent-based model that uses a map of funding and collateral flows to analyze the financial system’s vulnerability to fire sales and runs.
July 02, 2014
This paper presents an accounting framework for measuring the sources and uses of short-term funding in the global financial system and introduces a dynamic map of global funding flows.
May 29, 2014
This paper features a funding map to illustrate the flow of funding from its initial providers through the bank/dealers to the end-users. In addition to showing the plumbing of the system, the paper also shows the processes for transforming funding liquidity, credit quality, and tenor. The paper then applies the funding map to track risk through various types of financial institutions, and to identify gaps in data needed for financial stability monitoring.
May 09, 2014
Revised October 07, 2014
This paper provides an overview of visual analytics - the science of analytical reasoning enhanced by interactive visualizations produced by data analytics software - and discusses potential benefits in monitoring financial stability.
April 16, 2014
This paper explores the relationship between the quality of corporate credit ratings and competition in lending between the public bond market and banks. It finds that the quality of credit ratings plays a role in financial stability because the behavior of rating agencies can reduce the impact of macroeconomic shocks.
December 05, 2013
The U.S. mortgage finance system is a critical part of our nation’s financial system, representing 70 percent of U.S. household liabilities. The establishment of a single, cradle‐to‐grave, universal mortgage identifier that cannot be linked to individuals using publicly‐available data would significantly benefit regulators and researchers.
Cryptography and the Economics of Supervisory Information: Balancing Transparency and Confidentiality
September 04, 2013
This paper explores tradeoffs between transparency and confidentiality in financial regulation and discusses new techniques from the fields of secure computation and statistical data privacy that can facilitate the secure sharing of financial information.
July 18, 2013
Stress testing of large bank holding companies in the United States - a valuable exercise used to determine regulatory capital and liquidity planning at these institutions - should be adapted to be made more useful for financial stability monitoring.
June 21, 2013
This paper estimates how much interconnections among financial institutions - potential channels for contagion and amplification of shocks to the financial system - can increase expected losses from a wide range of shocks.
May 15, 2013
This paper presents a survey and historical narrative of policies to smooth the credit cycle in light of their potential future application as "macroprudential" policies to reduce the build-up of risks in U.S. financial markets.
April 09, 2013
This paper develops a method for selecting and analyzing stress-testing scenarios for financial risk assessment.
March 13, 2013
This paper uses a flexible framework to analyze two important phenomena influencing the hedge fund industry - contagion and time variation in risk-adjusted return.
February 07, 2013
This paper offers a technique for selecting multidimensional shock scenarios for use in financial stress testing. The technique uses a grid search of sparse, well distributed stress-test scenarios that are considered a middle ground between traditional stress testing and reverse stress testing.
January 23, 2013
This paper develops a capital structure model of a bank to analyze the incentives created by contingent convertibles (CoCos) and bail-in debt, which convert to equity when a bank approaches insolvency. These two forms of contingent capital have been proposed as potential mechanisms to enhance financial stability.
December 21, 2012
This paper discusses the concepts and research related to agent-based models and explores how the dynamics of a flock of birds in flight, a group of drivers in a traffic jam, or a panicked crowd of stampeding people might inform our analysis of threats to financial stability.
March 26, 2012
This paper assesses risk management practices and how risk management can be improved. The paper approaches risk management from three perspectives: (1) risk measurement by individual firms, (2) governance and incentives, and (3) systemic concerns. The paper evaluates each approach separately and also discusses the importance of considering them as interrelated.
January 05, 2012
The paper focuses on quantitative tools to assess threats to financial stability. It gives a broad overview of the state of the art in measuring systemic risk by focusing on a key set of 31 specific measurements outlined elsewhere in peer-reviewed articles or working papers.