Funding constraints and liquidity in two-tiered OTC markets

Benos, Evangelos; �ike�, Filip

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.

• Journal Article Type: Article
• Acceptance Date: Jan 17, 2018
• Online Publication Date: Feb 22, 2018
• Publication Date: 2018-06
• Deposit Date: Apr 23, 2020
• Publicly Available Date: Apr 24, 2020
• Journal: Journal of Financial Markets
• Print ISSN: 1386-4181
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 39
• Pages: 24-43
• DOI: https://doi.org/10.1016/j.finmar.2018.01.002
• Keywords: gilt market, liquidity, inter-dealer trading
• Public URL: https://nottingham-repository.worktribe.com/output/4329773
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1386418117303014