Bond market liquidity and swap market efficiency – what role does the repo market play?

Jan Philipp Fritsche, Michael Grill and Claudia Lambert

Economic Bulletin Boxes, 2020, vol. 1

Abstract: The analysis provides empirical evidence that repo market liquidity is an important determinant of bond market liquidity and arbitrage opportunities in swap markets. The first part of the analysis is concerned with the role of repo market liquidity in funding bonds used as collateral in repo transactions. It explores whether tense repo markets reduce the liquidity in bond markets. The second part examines how lower liquidity in repo markets hampers arbitrage in swap markets. The results presented show that repo markets support both bond market liquidity and swap market efficiency, highlighting their important role in financial markets. JEL Classification: G21, G28

Keywords: bank regulation; capital ratios; funding liquidity; limits to arbitrage; market liquidity; natural experiment; negative swap spreads (search for similar items in EconPapers)
Date: 2020-02
Note: 1280809
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Citations: View citations in EconPapers (4)

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