Repo market frictions and intermediation in electronic bond markets

Siri Valseth ()
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Siri Valseth: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway

No 2023/1, UiS Working Papers in Economics and Finance from University of Stavanger

Abstract: This paper studies the drivers of primary dealers’repo activity and the e¤ect of repo market frictions on bond market liquidity. It separates the two tiers of the bond market, the electronic limit order book (LOB) and the over-the-counter (OTC) market. The results, based on dealer-specific repo quantities and cash market trades in Norwegian government bonds, show that the passive order flow in the LOB is an important driver of repo activity. Liquidity in both tiers deteriorate with higher repo specialness, which represents the cost of "borrowing" bonds. This suggests that primary dealers enter the repo market to borrow bonds when their inventories are depleted via executed ask limit orders. Intermediaries in electronic bond markets thus face an additional risk related to the level of repo specialness.

Keywords: Electronic bond trading; primary dealers; repo market frictions; safe asset scarcity. (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 G20 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2023-02-10
New Economics Papers: this item is included in nep-fmk
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