This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which...

Hedge funds are significant players in the U.S. capital markets, but differ from other market participants in important ways such as their use of a wide range of complex trading strategies and instruments, leverage, opacity to outsiders, and their compensation structure. The traditional bulwark...

[...]In this article, we study the influence of market liquidity anddynamic trading strategies on the short-run dynamics of theyield curve. Specifically, we focus on the recent behavior ofintermediate-maturity interest rates for evidence of marketliquidity effects arising from the hedging of...

[...]Our first suggestion is to reduce the fragmentation oftrading in STRIPS by assigning the same CUSIP number to allSTRIPS maturing on a common date—thus making thoseSTRIPS fungible with each other. In addition to enhancing theliquidity of the STRIPS market, this action would ensure...

As derivatives markets have grown, thescope of financial intermediation hasevolved beyond credit intermediation tocover a wide variety of risks. Financialderivatives allow dealers to intermediate the risk managementneeds of their customers by unbundling customerexposures and reallocating them...

[...]Derivatives contracts are especially efficient vehiclesfor unbundling the price risks embodied in assets andliabilities.2 The contracts allow users to trade away therisks they do not wish to be exposed to while retainingother risk exposures. For example, in a financing relationshipbetween a...

[...]This article examines how the nature and characteristics ofhedge funds may generate “market failures” that make CCRMfor exposures to hedge funds intrinsically more difficult tomanage, both for the individual firm and for policymakersconcerned with systemic risk. We put forward no...

[...]This article analyzes empirical evidence on the limits ofarbitrage in the interest rate swap market as well as on howtrading risk can affect market liquidity and amplify shocks inasset prices. We study these issues in terms of the behavior ofthe interest rate swap spread—the spread...