The New Risk Management;
Recent Developments in Wholesale Payments Systems;
Using Federal Funds Futures Rates to Predict Federal Reserve Actions
ST. LOUIS, Feb., 23 /PRNewswire/ -- The latest edition of Review, the
Federal Reserve Bank of St. Louis' bi-monthly journal of economic and business
issues, features the following articles:
-- "The New Risk Management: The Good, the Bad, and The Ugly." The
financial practice of hedging has come under fire recently due to some widely
publicized losses at firms such as Barings, Daiwa Bank and Sumitomo.
Financial economists Philip H. Dybvig of the John M. Olin School of Business
at Washington University and William J. Marshall of NISA Investment Advisors
lay out the policy choices facing firms when they use this tool of risk
management. They conclude that firms need to have clearer reasons for
hedging, a better understanding of the different financial instruments
available to them, and more effective systems to monitor their traders and
account for the profits and losses from hedging.
-- "Recent Developments in Wholesale Payments Systems." In recent years,
central banks have sought to increase the safety and reliability of their
wholesale payments and settlement systems. Economist William R. Emmons
describes the two approaches that have been pursued. One has been to
strengthen net settlement, which accumulates a record of financial obligations
among participants over a pre-specified period of time, at the end of which
the net amount of funds, securities or other financial obligations owed by
each participant is transferred. The other is the addition of new or improved
gross settlement systems, which involve real-time payment.
-- "Using Federal Funds Futures Rates to Predict Federal Reserve Actions."
Market watchers believe that the Federal Reserve's adjustments to its target
for the federal funds rate have significant implications for other short-term
interest rates. As a result, they expend considerable resources to forecast
the timing and magnitude of the Fed's next move. But, as economists John C.
Robertson and Daniel L. Thornton explain, analysts cannot identify Fed policy
from the behavior of the federal funds futures rate without making additional
- and arbitrary - assumptions. Robertson and Thornton investigated the
predictive accuracy of the federal funds futures rate using a particular
identifying rule for the period of October 1988 through August 1997. They
found that this rule correctly predicts a target change only about one-third
of the time.
Subscriptions to Review are free and can be obtained by calling
314-444-8809. The publication is also available on the Bank's
website: http://www.stls.frb.org.
SOURCE Federal Reserve Bank of St. Louis
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Related links:
http://www.stls.frb.org
CONTACT:
Charles B. Henderson, 314-444-8311, for
Federal Reserve Bank of St. Louis
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