PrefBlog

The Bank of Canada has released a working paper by Hajime Tomura, Heterogeneous Beliefs and Housing-Market Boom-Bust Cycles in a Small Open Economy:

This paper introduces heterogeneous beliefs among households in a small open economy model for the Canadian economy. The model suggests that simultaneous boom-bust cycles in house prices, output, investment, consumption and hours worked emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. With sticky prices and a standard monetary policy rule, the model shows that the nominal policy interest rate and the CPI inflation rate decline during housing booms and rise as house prices fall. These results replicate the stylized features of housing-market boom-bust cycles in industrialized countries. Policy experiments demonstrate that stronger policy responses to inflation amplify housing-market boom-bust cycles. Also, higher loan-to-value ratios amplify housing-market boom-bust cycles by encouraging speculative housing investments by mortgage borrowers during housing booms and increasing liquidation of housing collateral during housing busts.

OSFI has released a new Corporate Brochure. The Bank for International Settlements has released Principles for sound stress testing practices and supervision.

DBRS has downgraded ABN AMRO:

ABN AMRO Bank’s outstanding trust preferred securities have been downgraded from BBB to BB. The trend on these securities is Negative. Considering the significant cyclical and company-specific headwinds that RBS faces, DBRS sees an elevated risk of nonpayment of preferred dividends (which DBRS defines as a default on these instruments) which would likely entail a nonpayment of dividends on these securities.

Volume continued at its elevated levels but the market’s ascent was checked; PerpetualDiscounts only just barely managed to squeak out a gain, while FixedResets were slightly negative. But how ’bout them Floaters, eh? Up 17.2% on the month-to-date.

This entry was posted on Thursday, May 21st, 2009 at 7:05 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.