Relationships in the Interbank Market
In the interbank market, banks will sometimes trade below the central bank's deposit rate. We explain this anomaly using a theory based on market frictions and relationship lending.
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
Global Macro Risks in Currency Excess Returns
Staff working paper 2016-32
Kimberly Berg,
Nelson C. Mark
We study a cross section of carry-trade-generated currency excess returns in terms of their exposure to global fundamental macroeconomic risk.
Content Type(s):
Staff research,
Staff working papers
JEL Code(s):
E,
E2,
E21,
E4,
E43,
F,
F3,
F31,
G,
G1,
G12
Research Theme(s):
Financial markets and funds management,
International markets and currencies,
Market functioning,
Models and tools,
Economic models
Clearing and Settlement Systems from Around the World: A Qualitative Analysis
Staff discussion paper 2016-14
Michael Tompkins,
Ariel Olivares
As Canada continues to engage in a dialogue to develop the approach to modernizing its core payment systems, we analyze the core payment systems that exist in countries around the world. We study payment systems in 27 jurisdictions, encompassing a broad range of geographic regions, through three levels of analysis.
Content Type(s):
Staff research,
Staff discussion papers
JEL Code(s):
E,
E4,
E42,
L,
L1,
L14,
L15,
L5,
L52
Research Theme(s):
Financial markets and funds management,
Market structure,
Money and payments,
Payment and financial market infrastructures
Identification and Estimation of Risk Aversion in First-Price Auctions with Unobserved Auction Heterogeneity
Staff working paper 2016-23
Serafin Grundl,
Yu Zhu
This paper shows point identification in first-price auction models with risk aversion and unobserved auction heterogeneity by exploiting multiple bids from each auction and variation in the number of bidders. The required exclusion restriction is shown to be consistent with a large class of entry models.
Content Type(s):
Staff research,
Staff working papers
JEL Code(s):
C,
C1,
C14,
C5,
C57,
D,
D4,
D44,
L,
L0,
L00
Research Theme(s):
Financial markets and funds management,
Market structure,
Models and tools,
Econometric, statistical and computational methods
Retail Order Flow Segmentation
Staff working paper 2016-20
Corey Garriott,
Adrian Walton
In August 2012, the New York Stock Exchange launched the Retail Liquidity Program (RLP), a trading facility that enables participating organizations to quote dark limit orders executable only by retail traders.
Content Type(s):
Staff research,
Staff working papers
JEL Code(s):
G,
G1,
G14,
G2,
G20,
L,
L1,
L10
Research Theme(s):
Financial markets and funds management,
Market functioning,
Market structure
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.