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This note presents measures of liquidity used by the Bank of Canada to monitor market conditions and discusses recent trends in Government of Canada (GoC) fixed-income market liquidity. Our results indicate that the Bank’s measures have improved since the financial crisis. Furthermore, GoC market liquidity deteriorated following several stressful events: the euro crisis in 2011, the taper tantrum in 2013 and the oil price shock in 2015. In all three cases, the deterioration remained within historical norms and liquidity returned to normal levels afterwards.

Constrained efficient allocation (CE) is characterized in a model of adverse selection and directed search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment.

Following the financial crisis, there has been increased regulatory focus on the management of liquidity in mutual funds and, specifically, whether funds hold enough liquidity to guard against the potential for investor runs.

We model how securities dealers respond to regulations on leverage, position and liquidity such as those imposed by the Basel III framework. We show that while asset prices exhibit greater price impact, bid-ask spreads do not change and trading volumes may even increase.

Many decentralized markets are able to attain a stable outcome despite the absence of a central authority (Roth and Vande Vate, 1990). A stable matching, however, need not be efficient if preferences are weak. This raises the question whether a decentralized market with weak preferences can attain Pareto efficiency in the absence of a central matchmaker.

This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively.

This paper presents a model of strategic buyer-seller networks with information exchange between sellers. Prior to engaging in bargaining with buyers, sellers can share access to buyers for a negotiated transfer. We study how this information exchange affects overall market prices, volumes and welfare, given different initial market conditions and information sharing rules.

We document the outcome of an options decimalization pilot on Canada’s derivatives exchange. Decimalization improves measures of liquidity and price efficiency. The impact differs by the moneyness of an option and is greatest for out-of-the-money options.

In order to understand what drives aggregate fluctuations, many macroeconomic models point to aggregate shocks and discount the contribution of firm-specific shocks. Recent research from other developed countries, however, has found that aggregate fluctuations are in part driven by idiosyncratic shocks to large firms.

The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues.