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Data Exploration
1. Central banks occasionally engage in “liquidity swaps” with each other. Plot and
about this data series. (LO4)
Answer: The data plot is:
These liquidity swaps occur when foreign banks need additional U.S. dollars to fund
their dollar-denominated activities. The Fed exchanges dollars with the foreign
dollars are returned to the Fed (with interest) at the initial exchange rate (so there is
no currency risk to the Fed).
The data plot shows that these swaps occurred first in the financial crisis of
2007-2009. In that period, foreign commercial banks needed dollars for transactions
central banks occurred in 2012 at an acute stage of the sovereign and banking crisis in
the euro area (see Chapter 16). In both cases, once the function of private markets
improved, central bank liquidity swaps virtually disappeared.
2. Define the swap rate and then plot the five-year swap rate (FRED code: MSWP5).
parties. (LO4)
Answer: In an interest rate swap, the fixed-rate payer pays the swap rate, tied to a
The data plot is:
As an example of an interest rate swap, consider a commercial bank (Bank A) that has
payment stream. Bank B will then have fixed income from its mortgages and fixed
expenses on the CDs, stabilizing profits. Bank A will have variable interest income
3. Risk-averse investors care greatly about asset price volatility. Using the FRED
and the percent change from a year ago of the Wilshire 5000 stock market index
(FRED code:WILL5000PR). Interpret the graph (LO3)
Answer: The VIX infers stock market participants’ collective expectation of stock
price volatility from options prices. Because the price of an option increases as the
related to the performance of the equity market index: expected volatility is low when
the stock market rises (and vice versa). The VIX spike in 2008 followed the collapse
of Lehman.
The data plot is:
4. Is the VIX volatility index (FRED code: VIXCSL) an indicator of broader financial
market volatility? Using weekly data ending on Fridays, plot from 1994 the VIX, with
stress index and comment on how closely related it is to the VIX. (LO3)
Answer: The St. Louis Fed’s financial stress index is based on eighteen data series,
including seven interest rates, six yield spreads, volatility indexes of stocks and bonds
very low volatility that tempted investors and users of funds to take greater risk The
VIX has become a major focus of attention because it is, arguably, the single most
important (and timely) indicator of financial stress.
* indicates more difficult problems
