Staff Working Paper No. 1,145
By Carlos Cañón Salazar, Eddie Gerba and Jozef Barunik
This paper uses proprietary data sets from the UK bond and repo markets to analyse the effect of funding market frictions on bond prices and market-wide liquidity. Starting with the structure of the repo market, we demonstrate how individual dealer market power and dealer linkages generate frictions. Specifically, we demonstrate that frictions related to market power account for between 0.5 and 1.3 percentage points of bond price deviations, whereas the transmission of heterogeneously persistent shocks between dealers accounts for between 2 and 4 percentage points of price deviations.
Repo dealer-driven bond mispricing