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

Author

Listed:
  • Fritsche, Jan Philipp
  • Grill, Michael
  • Lambert, Claudia

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

Suggested Citation

  • Fritsche, Jan Philipp & Grill, Michael & Lambert, Claudia, 2020. "Bond market liquidity and swap market efficiency – what role does the repo market play?," Economic Bulletin Boxes, European Central Bank, vol. 1.
    • Handle: RePEc:ecb:ecbbox:2020:0001:5
    Note: 1280809
    as

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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/focus/2020/html/ecb.ebbox202001_05~37e169eb0f.en.html
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    Citations

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    Cited by:

    1. Baltzer, Markus & Schlepper, Kathi & Speck, Christian, 2022. "The Eurosystem's asset purchase programmes, securities lending and Bund specialness," Discussion Papers 39/2022, Deutsche Bundesbank.
    2. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2023. "Window dressing of regulatory metrics: evidence from repo markets," Working Paper Series 2771, European Central Bank.

    More about this item

    Keywords

    bank regulation; capital ratios; funding liquidity; limits to arbitrage; market liquidity; natural experiment; negative swap spreads;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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