Research seminar: Carlos Cañón (Bank of England)

We would like to invite you to a research seminar by Carlos Cañón, Research Economist at the Bank of England

Paper: "I've got the power": Asymmetric Relationships in the Gilt Markets

Authors: Jozef Baruník (Charles University), Carlos Cañón (Bank of England and King's College London), Eddie Gerba (Bank of England and LSE)

Abstract: This paper investigates the role of market power frictions in the mispricing of gilts. It does so from a cross-market osmosis perspective, using measured dealer-level market power on non-dealers, and relationship trading dynamics, between dealers and non-dealers, in the repo market to explain gilt price deviations. We measure these using transaction-level data from the UK repo market. In addition, we use dynamic networks to incorporate the role of the inter-dealer impact. We document that while relational trading drives volume, market power is the main determinant of repo rates.  We also show that non-bank financial institutions are affected differently from banks. In turn, we show that funding-side market power has important implications for mispricing in the bond market, especially for short- and medium-term bonds. This channel is especially strong for operations where repo dealers provide gilts to non-dealers in exchange of liquidity, which we call the funding scarcity channel.

The seminar will take place on Monday, October 30, in Room 206 at 15:30.