Funding Constraints and Liquidity in Two-Tiered OTC Markets

42 Pages Posted: 13 Dec 2017 Last revised: 14 Dec 2017

See all articles by Evangelos Benos

Evangelos Benos

Bank of England

Filip Zikes

Board of Governors of the Federal Reserve System

Date Written: December 9, 2017

Abstract

Using primary dealer transactional data from the UK government bond (gilt) market, we identify a new channel through which dealer funding constraints may impair liquidity in two-tiered OTC markets. The key finding is that funding constraints also inhibit dealers' ability to accommodate each others' trade requests in the inter-dealer segment, which limits their collective ability to manage inventories and share risk. As a result, funding constraints end up compromising liquidity above and beyond any direct effects caused by individual dealers' inability to accommodate client trade requests due to their individual balance sheet constraints.

Keywords: gilt market, liquidity, inter-dealer trading

JEL Classification: G10, G12, G14

Suggested Citation

Benos, Evangelos and Zikes, Filip, Funding Constraints and Liquidity in Two-Tiered OTC Markets (December 9, 2017). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3085203

Evangelos Benos (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Filip Zikes

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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