Financial markets

Financial markets are where savers and borrowers exchange funds. Their well-functioning is critical. This is why we study their structure, participants, regulations and how they are affected by key external changes.

Financial markets consist of markets for money, bonds, equities, derivatives and foreign currencies. It is mainly through these markets that the Bank of Canada’s key policy rate influences interest rates and exchange rates for the Canadian dollar. This, in turn, helps us achieve our monetary policy objectives. As the fiscal agent for the Government of Canada, we are also involved in financial markets through auctions of government securities.

Our research increases our understanding of the structure and functioning of Canadian financial markets and helps us identify ways to support their development and stability.

Examples of areas we are exploring:

  • the ability of and risks to markets absorbing higher levels of government debt
  • what motivates international investors, such as US hedge funds, to participate in the Government of Canada bond market
  • the risks to financial stability from new non-bank players entering the business of intermediating markets
  • important things to consider when designing central bank programs that supply liquidity to market participants
  • the impacts on market structure from things like artificial intelligence and tokenized assets

Government debt market

In recent years, governments around the world, including in Canada and the United States, have issued more debt to support their economies. This large supply of government securities may lead to funding challenges and could distort asset markets. Our research aims to understand the capacity of markets to absorb this debt and its effect on market functioning, financial stability and the transmission of monetary policy.

Market structure and regulation

Another key part of our research is understanding how financial markets adapt to the evolving financial environment and how regulation safeguards stability and market functioning. In many countries, including Canada, fixed-income markets are still primarily over the counter and rely heavily on bank-owned dealers. This reliance can create challenges for dealers managing their balance sheets and, in times of stress, may limit funding to the broader economy. At the same time hedge funds and high-frequency, or principal, trading firms are among the new players acting as intermediaries as these markets digitalize. This change brings both benefits and new risks, which we strive to better understand.

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BoC–BoE Sovereign Default Database: Appendix and References

Technical report No. 125 David Beers, Obiageri Ndukwe, Joe Berry
Since 2014, the Bank of Canada (BoC) has maintained a comprehensive database of sovereign defaults to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. The database is posted on the BoC’s website and is updated annually in partnership with the Bank of England (BoE).

BoC–BoE Sovereign Default Database: Methodology and Assumptions

Technical report No. 124 David Beers, Obiageri Ndukwe, Joe Berry
The Bank of Canada (BoC), in partnership with the Bank of England (BoE), developed a comprehensive database of sovereign defaults in 2014. The database is posted on the Bank of Canada’s website and updated annually. The BoC–BoE database draws on datasets published by various public and private sector sources. It combines elements of these, together with new information, to develop comprehensive estimates of stocks of government obligations in default.

It takes a panel to predict the future: What the stock market says about future economic growth in Canada

Staff analytical note 2023-9 Greg Adams, Jean-Sébastien Fontaine
Valuation ratios in the Canadian stock market can help reveal investors’ expectations about future economic growth because the impact of economic growth on valuation ratios can vary across industries. We find that this variation helps produce accurate forecasts of future growth of real gross domestic product in Canada. The forecasts from our model declined by just over 3 percentage points between January 2022 and February 2023—a period when the Bank of Canada rapidly increased the overnight rate. As well, we find that interest-rate-sensitive industries had an outsized contribution to this expected slowdown in growth. 

Estimating the Slope of the Demand Function at Auctions for Government of Canada Bonds

Staff discussion paper 2023-12 Bo Young Chang
We use bid data from Government of Canada bond auctions between 1999 and 2021 to gauge the yield sensitivity of these bonds to the issuance amount. Our new metric estimates the demand function of the bidders at each auction and offers insights into the relationship between supply and yield of government bonds.

Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?

Staff discussion paper 2023-10 Toni Gravelle, Ron Morrow, Jonathan Witmer
At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework.
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Disclaimer

Bank of Canada staff produce research and analysis to support the work of the Bank and to advance knowledge in the fields of economics and finance. The research is non-partisan and evidence based. All research is produced independently from the Bank’s Governing Council. The views expressed in each paper or article are solely those of the authors and may differ from official Bank of Canada views.

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