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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Assessing the Impact of Demand Shocks on the US Term Premium

Staff discussion paper 2018-7 Russell Barnett, Konrad Zmitrowicz
During and after the Great Recession of 2008–09, conventional monetary policy in the United States and many other advanced economies was constrained by the effective lower bound (ELB) on nominal interest rates. Several central banks implemented large-scale asset purchase (LSAP) programs, more commonly known as quantitative easing or QE, to provide additional monetary stimulus.

The BoC-BoE Sovereign Default Database Revisited: What’s New in 2018?

Staff working paper 2018-30 David Beers, Jamshid Mavalwalla
Until recently, there have been few efforts to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada’s Credit Rating Assessment Group (CRAG) has developed a comprehensive database of sovereign defaults posted on the Bank of Canada’s website that now is updated in partnership with the Bank of England.

A Primer on the Canadian Bankers’ Acceptance Market

Staff discussion paper 2018-6 Kaetlynd McRae, Danny Auger
This paper discusses how the bankers’ acceptance (BA) market in Canada is organized and its essential link to the Canadian Dollar Offered Rate (CDOR). Globally, BAs are a niche product used only in a limited number of jurisdictions.

Ambiguity, Nominal Bond Yields and Real Bond Yields

Staff working paper 2018-24 Guihai Zhao
Equilibrium bond-pricing models rely on inflation being bad news for future growth to generate upward-sloping nominal yield curves. We develop a model that can generate upward-sloping nominal and real yield curves by instead using ambiguity about inflation and growth.

How do Canadian Corporate Bond Mutual Funds Meet Investor Redemptions?

Staff analytical note 2018-14 Guillaume Ouellet Leblanc, Rohan Arora
When investors redeem their fund shares for cash, fixed-income fund managers can choose whether to draw on their liquid holdings or sell bonds in the secondary market. We analyze the liquidity-management decisions of Canadian corporate bond mutual funds, focusing on the strategies they use to meet investor redemptions.
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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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