Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297436 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2023-51
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We examine how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We introduce a model in which capital-constrained intermediaries buy or trade an asset in an imperfectly competitive market, and we show that weaker capital constraints lead to both higher prices and intermediary markups. In exchange markets, this results in reduced market liquidity, while in primary markets it leads to higher auction revenues at an implicit cost of larger price distortion. Using data from Canadian Treasury auctions, we demonstrate how our framework can quantify these effects by linking asset demand to individual intermediaries' balance sheet information.
Subjects: 
Financial institutions
Market structure and pricing
JEL: 
G12
G18
G20
D40
D44
L10
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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