Central bank liquidity facilities and market making

David Cimon and Adrian Walton

Journal of Banking & Finance, 2024, vol. 162, issue C

Abstract: Central banks have used asset purchase programs to keep markets operational in times of crisis. We model how central bank asset purchases alleviate dealers' balance-sheet constraints, preventing markets from becoming one sided, improving price efficiency and reducing dealer risk positions. Central banks can fully alleviate dealers' balance-sheet constraints by purchasing assets at their fair value; an action which maximizes welfare when dealers are competitive. However, when there is imperfect competition amongst dealers, a central bank which bears costs from intervening may only purchase assets at a discount. We offer additional analysis on the role of lending programs when dealers have leverage constraints, dealers who are unable to net out all balance sheet costs, and cross-asset impacts from interventions.

Keywords: Asset purchases; Fixed income markets; Market making; Agency trading; Liquidity (search for similar items in EconPapers)
JEL-codes: G10 G20 L10 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Central Bank Liquidity Facilities and Market Making (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:162:y:2024:i:c:s0378426624000724

DOI: 10.1016/j.jbankfin.2024.107152

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