Liquidation Mechanisms and Price Impacts in DeFi
This paper theoretically and empirically examines the price impacts of liquidations in DeFi and how different liquidation mechanisms affect the price impacts.
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
Estimating Discrete Choice Demand Models with Sparse Market-Product Shocks
Staff working paper 2025-10
Zhentong Lu,
Kenichi Shimizu
We propose a novel approach to estimating consumer demand for differentiated products. We eliminate the need for instrumental variables by assuming demand shocks are sparse. Our empirical applications reveal strong evidence of sparsity in real-world datasets.
Content Type(s):
Staff research,
Staff working papers
JEL Code(s):
C,
C1,
C3,
D,
D1,
L,
L0,
L00
Research Theme(s):
Financial markets and funds management,
Market structure,
Models and tools,
Econometric, statistical and computational methods
Risk-Free Uncollateralized Lending in Decentralized Markets: An Introduction to Flash Loans
Staff discussion paper 2025-6
Jack Mandin
A flash loan is a special type of uncollateralized loan with zero default risk. I document the use for flash loans across major blockchains that are Ethereum-Virtual-Machine-compatible. Flash loans expand access to liquidity, and highly sophisticated actors use them for many practical applications.
Content Type(s):
Staff research,
Staff discussion papers
JEL Code(s):
G,
G0,
G1,
G2
Research Theme(s):
Financial markets and funds management,
Market functioning,
Money and payments,
Digital assets and fintech
Will Asset Managers Dash for Cash? Implications for Central Banks
Staff discussion paper 2025-5
David Cimon,
Jean-Philippe Dion,
Jean-Sébastien Fontaine,
Jabir Sandhu
We consider ways central banks could adapt in the event of an increased risk of a dash for cash from asset managers. We explore ideas such as new facilities that ease asset managers’ ability to convert existing assets to cash or new assets with liquidity that central banks would guarantee.
Content Type(s):
Staff research,
Staff discussion papers
JEL Code(s):
E,
E5,
E58,
G,
G0,
G00,
G01,
G1,
G2
Research Theme(s):
Financial markets and funds management,
Market functioning,
Financial system,
Financial institutions and intermediation,
Financial stability and systemic risk,
Monetary policy,
Monetary policy tools and implementation
Is anyone surprised? The high-frequency impact of US and domestic macroeconomic data announcements on Canadian asset prices
Staff analytical note 2025-10
Blake DeBruin Martos,
Rodrigo Sekkel,
Henry Stern,
Xu Zhang
Using almost two decades of detailed high-frequency data, we show how Canadian interest rates, the CAD/USD spot exchange rate, and stock market returns react to both US and domestic macro announcements. We find that Canadian macroeconomic announcements invoke greater responses in short-term yields, whereas US macroeconomic announcements play an increasingly important role in the yield movements of longer-term assets.
Content Type(s):
Staff research,
Staff analytical notes
JEL Code(s):
G,
G1,
G14,
G15
Research Theme(s):
Financial markets and funds management,
International markets and currencies,
Market functioning,
Monetary policy,
Real economy and forecasting
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.