Paper: arXiv 2603.10690
Authors: Carlos Canon, Eddie Gerba, Jozef Barunik
Abstract
This paper studies the impact of funding market frictions on bond prices and market-wide liquidity. Using proprietary transaction-level data on all gilt-backed repo and reverse-repo trades, we demonstrate how the market power of individual dealers and their linkages generate frictions. Specifically, we show that frictions related to market power account for between 0.5 and 1.3 percentage points of bond yield deviation, while the transmission of heterogeneously persistent shocks between dealers accounts for between 2 and 4 percentage points of yield deviation.
Complexity vs Empirical Score
- Math Complexity: 6.5/10
- Empirical Rigor: 8.5/10
- Quadrant: Holy Grail — high math complexity, high empirical rigor
Why this score: The paper uses a sophisticated theoretical and structural framework (Lerner indices, Gabaix-Koijen granular IVs, time-varying VARs with persistence-based variance decompositions) combined with highly rigorous empirical analysis on proprietary transaction-level data. It offers novel insights into how repo dealer market power and network shock transmissions drive sovereign bond mispricing, though reproducibility is hindered by the use of confidential Bank of England datasets.
Research Flowchart
flowchart TD
A[Research Goal: Impact of Repo Dealer Frictions on Bond Prices & Liquidity] --> B[Data: Proprietary Gilt-Backed Repo & Reverse-Repo Transactions]
B --> C[Methodology: Analyze Dealer Market Power & Linkages]
C --> D[Computational Models: Estimate Yield Deviations & Shock Transmissions]
D --> E[Finding 1: Market Power Frictions Cause 0.5% - 1.3% Yield Deviation]
D --> F[Finding 2: Persistent Shock Transmission Causes 2.0% - 4.0% Yield Deviation]