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Repo dealer-driven bond mispricing

Author

Listed:
  • Carlos Cañón Salazar

    (Bank of England)

  • Eddie Gerba

    (Bank of England)

  • Jozef Barunik

    (Charles University)

Abstract

This paper uses proprietary data sets from the UK bond and repo markets to analyse the effect of funding market frictions on bond prices and market-wide liquidity. Starting with the structure of the repo market, we demonstrate how individual dealer market power and dealer linkages generate frictions. Specifically, we demonstrate that frictions related to market power account for between 0.5 and 1.3 percentage points of bond price deviations, whereas the transmission of heterogeneously persistent shocks between dealers accounts for between 2 and 4 percentage points of price deviations.

Suggested Citation

  • Carlos Cañón Salazar & Eddie Gerba & Jozef Barunik, 2025. "Repo dealer-driven bond mispricing," Bank of England Staff Working Paper series 1145, Bank of England.
    • Handle: RePEc:boe:boeewp:023267
    as

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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/repo-dealer-driven-bond-mispricing.pdf
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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