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.
Related research
Demand-Driven Risk Premia in Foreign Exchange and Bond Markets
An update on the Canadian money market mutual fund sector
BoC–BoE Sovereign Default Database: What’s new in 2025?
The increasing role of hedge funds in Government of Canada bond auctions
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.