Staff Discussion Papers

This series provides a venue for academic-style papers by the OFR research staff that contribute to our understanding of financial markets, financial data, and financial institution risks topics that are the building blocks of financial stability analysis. These papers may be preliminary versions of work for the OFR Working Paper Series, or for submission to external academic or policy publications in economics or finance. The views and opinions expressed in the Staff Discussion Papers Series are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury.

| By Liju Fan and Mark D. Flood

An Ontology of Ownership and Control Relations of Bank Holding Companies

This paper outlines an approach to capturing information in the National Information Center database about bank holding companies and their subsidiaries, and their ownership and control relationships. We propose a detailed ontology that non-experts can use to analyze bank holding companies more effectively.

| By Phillip Monin and Richard Bookstaber

Information Flows, the Accuracy of Opinions, and Crashes in a Dynamic Network

This paper develops a model showing how information spreads in networks. People with more accurate information tend to remain in the network longer. The authors show that highly connected networks where most individuals have accurate information can collapse into ones with few connections and broadly inaccurate information. The model helps explain how financial markets can fail in their information processing role.

| By Benjamin S. Kay

The Effects of Housing Adjustment Costs on Consumption Dynamics

This paper examines how household consumption responds to infrequent and costly adjustment of housing when housing is a complement to other forms of consumption.

| By Benjamin S. Kay and Cindy M. Vojtech

Corporate Governance Responses to Director Rule Changes

This paper explains the governance changes induced by the director rules under the Sarbanes-Oxley Act and stock exchange rule changes. The paper uses the law change as a natural experiment to test how firms adjust the choice and magnitude of governance tools given a “floor level” of monitoring from independent directors.

| By Victoria Lemieux, Payam S. Rahmdel, Rick Walker, B.L. William Wong, and Mark Flood

Clustering Techniques and Their Effect on Portfolio Formation and Risk Analysis

Risk can be distributed in complex and unexpected ways across financial markets. Grouping financial assets into broad portfolios is a common practice, but this aggregation tends to hide important nuances of the overall risk profile. For example, large long and short positions may individually be important, but cancel out in the aggregate. This paper introduces the “RiskMapper,” an interactive, visual tool for exploring the benefits of different approaches for aggregating and disaggregating financial portfolios. It describes early-stage research into the strengths, weaknesses, and ramifications of different rules, risk measures, and visualization approaches.

| By Rui Albuquerque, Tarun Ramadorai, and Sumudu W. Watugala

Trade Credit and Cross-country Predictable Firm Returns

This paper investigates whether trade credit links between firms are an important factor in predicting returns in international equity markets. We find that the propagation of shocks across borders from customers to suppliers via this mechanism is stronger when the availability of credit is lacking, such as during financial crises.

| By Bryan Ball, Mark D. Flood, H.V. Jagadish, Joe Langsam, Louiqa Raschid, and Peratham Wiriyathammabhum

A Flexible and Extensible Contract Aggregation Framework for Financial Data Stream Analytics

Supervisors who are focused on financial stability need to understand risks and vulnerabilities emerging across the diverse financial system. This paper describes a framework for organizing databases that would use financial contracts as the “common denominator” to enable the integration and aggregation of financial data from a wide range of sources. A database organized this way could allow researchers greater flexibility in uncovering and aggregating information about financial products with common attributes that could pose financial stability concerns, such as high leverage or short maturities.

| By Mark E. Paddrik, Richard Haynes, Andrew E. Todd, Peter A. Beling, and William T. Scherer

The Role of Visual Analysis in the Regulation of Electronic Order Book Markets

This paper describes how regulators can use visualization techniques to make sense of the growing and complex financial data that they need to monitor. These techniques could be used to analyze financial stability risks such as excessive market concentration and interconnectivity.

| By Phillip Monin and Thaleia Zariphopoulou

On the Optimal Wealth Process in a Log-normal Market: Applications to Risk Management

This paper presents a model that ties investors’ risk preferences, which are key determinants of the allocation of credit and risk in the financial system, to the measures used in risk management of their investments. Such models provide a direct link between risk management and the dynamics of the financial system.