Economic Policy Review Executive Summary

Trading Activity and Price Transparency in the Inflation Swap Market

Recapping an article from the May 2013 issue of
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the Economic Policy Review, Volume 19, Number 1 View full article PDF

13 pages / 368 kb

Authors: Michael J. Fleming and John R. Sporn

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Index of executive summaries
  • The subject of liquidity and price transparency in derivatives markets has grown in importance in recent years in light of regulatory efforts under way to improve market transparency.

  • The Dodd-Frank Act, for example, calls for rules that provide for the public availability of over-the-counter derivatives transaction data in real time.

  • Despite the need for greater clarity on how derivatives markets such as the inflation swap market operate, a lack of transaction data has been an obstacle.

  • Fleming and Sporn attempt to overcome that obstacle by using a novel transaction data set to examine trading activity and price transparency in the burgeoning U.S. inflation swap market.

  • They observe that the market appears reasonably liquid and transparent, in spite of its over-the-counter nature and modest level of trading activity.

  • Specifically, transaction prices are found to be typically close to widely available end-of-day quoted prices and realized bid-ask spreads are shown to be modest, even though the authors’ reasonably comprehensive 2010data contain just over an average of two trades per day.

  • Fleming and Sporn also identify concentrations of activity in tenors of ten years and trade sizes of $25million and among certain market participants, as well as various attributes that can explain trade sizes and price deviations.

  • The 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.



About the Authors

MichaelJ.Fleming is a vice president in the Federal Reserve Bank of NewYork’s Research and Statistics Group; JohnR.Sporn is a senior analyst in the Bank’s Markets Group.

Disclaimer

The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.