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Dealers, information and liquidity provision in safe assets

Author

Listed:
  • Robert Czech

    (Bank of England)

  • Win Monroe

    (Imperial College Business School)

Abstract

In this paper, we empirically study the role of information in safe asset liquidity crises, using the 2022 UK LDI crisis as a laboratory. Contrary to traditional adverse selection models, which predict higher liquidity costs due to the presence of informed traders, we find that dealers initially reduce liquidity costs for informed investors, and subsequently raise costs and reduce liquidity for the broader market. We interpret this as evidence of dealers seeking to learn from informed investors and then restricting liquidity as they process this information. We also document that dealers exploit their informational advantage in anonymous interdealer markets and that similar dynamics are present in other crises. These patterns reverse when central bank interventions restore market liquidity, thereby mitigating the effects of dealers’ information chasing and their liquidity reallocation.

Suggested Citation

  • Robert Czech & Win Monroe, 2025. "Dealers, information and liquidity provision in safe assets," Bank of England working papers 1113, Bank of England.
    • Handle: RePEc:boe:boeewp:1113
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    References listed on IDEAS

    as
    1. Tarun Ramadorai, 2008. "What determines transaction costs in foreign exchange markets?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 14-25.
    2. Yiming Ma & Kairong Xiao & Yao Zeng, 2022. "Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4674-4711.
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    Cited by:

    1. Comerton-Forde, Carole & Ford, Billy & Foucault, Thierry & Jurkatis, Simon, 2025. "Investors as a Liquidity Backstop in Corporate Bond Markets," HEC Research Papers Series 1564, HEC Paris.

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    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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