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Central bank liquidity facilities and market making

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  • Cimon, David A.
  • Walton, Adrian

Abstract

Central banks have used asset purchase programs to keep markets operational in times of crisis. We model how central bank asset purchases alleviate dealers' balance-sheet constraints, preventing markets from becoming one sided, improving price efficiency and reducing dealer risk positions. Central banks can fully alleviate dealers' balance-sheet constraints by purchasing assets at their fair value; an action which maximizes welfare when dealers are competitive. However, when there is imperfect competition amongst dealers, a central bank which bears costs from intervening may only purchase assets at a discount. We offer additional analysis on the role of lending programs when dealers have leverage constraints, dealers who are unable to net out all balance sheet costs, and cross-asset impacts from interventions.

Suggested Citation

  • Cimon, David A. & Walton, Adrian, 2024. "Central bank liquidity facilities and market making," Journal of Banking & Finance, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jbfina:v:162:y:2024:i:c:s0378426624000724
    DOI: 10.1016/j.jbankfin.2024.107152
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    Cited by:

    1. Grahame Johnson, 2023. "A Review of the Bank of Canada’s Market Operations related to COVID-19," Discussion Papers 2023-6, Bank of Canada.

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    More about this item

    Keywords

    Asset purchases; Fixed income markets; Market making; Agency trading; Liquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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