The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
The issues of liquidity and price transparency in derivatives markets have taken on greater import given regulatory efforts under way to improve their transparency. To date, the lack of transaction data has impeded the understanding of how the inflation swap and other derivatives markets operate. This article broadens that understanding by using a novel transaction data set to examine trading activity and price transparency in the quickly growing U.S. inflation swap market. The authors find that the market appears reasonably liquid and transparent, despite its over-the-counter nature and modest level of trading activity. Specifically, they find that transaction prices are typically quite close to widely available end-of-day quoted prices and that realized bid-ask spreads are modest, even though the reasonably comprehensive data set from 2010 contains just over two trades per day on average. The authors also identify concentrations of activity in certain tenors (ten years) and trade sizes ($25 million) and among certain market participants, as well as various attributes that help explain trade sizes and price deviations. Their study can serve as a resource for policymakers considering public reporting and other regulatory initiatives and for market participants and observers more generally interested in the workings of the inflation swap market.