In a recent staff working paper, the Bank of England (BoE) uses proprietary data sets from the UK bond and repo markets to analyze the effect of funding market frictions on bond prices and market-wide liquidity.
Starting with the structure of the repo market, researchers demonstrate how individual dealer market power and dealer linkages generate frictions. Specifically, they demonstrate that frictions related to market power account for between 0.5% and 1.3% points of bond price deviations, whereas the transmission of heterogeneously persistent shocks between dealers accounts for between 2% and 4% points of price deviations.