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Funding constraints and liquidity in two-tiered OTC markets

Evangelos Benos and Filip Žikeš

Journal of Financial Markets, 2018, vol. 39, issue C, 24-43

Abstract: Using primary dealer transactional data from the government bond (gilt) market in the United Kingdom, 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 dealers' inability to accommodate client trade requests due to their individual balance sheet constraints.

Keywords: Gilt market; Liquidity; Inter-dealer trading (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:finmar:v:39:y:2018:i:c:p:24-43