Dealers, information and liquidity provision in safe assets

Robert Czech and Win Monroe ()
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Win Monroe: Imperial College Business School

No 1113, Bank of England working papers from Bank of England

Abstract: In this paper, we empirically study the role of information in safe asset liquidity crises, using the 2022 UK LDI crisis as a laboratory. Contrary to traditional adverse selection models, which predict higher liquidity costs due to the presence of informed traders, we find that dealers initially reduce liquidity costs for informed investors, and subsequently raise costs and reduce liquidity for the broader market. We interpret this as evidence of dealers seeking to learn from informed investors and then restricting liquidity as they process this information. We also document that dealers exploit their informational advantage in anonymous interdealer markets and that similar dynamics are present in other crises. These patterns reverse when central bank interventions restore market liquidity, thereby mitigating the effects of dealers’ information chasing and their liquidity reallocation.

Keywords: D82; E44; G12; G14; G15; G21 (search for similar items in EconPapers)
JEL-codes: D82 E44 G12 G14 G15 G21 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2025-01-24
New Economics Papers: this item is included in nep-mon and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1113

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