Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171961
Authors: 
Cimon, David A.
Garriott, Corey
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper 2017-7
Abstract: 
We present a model of market makers subject to recent banking regulations: liquidity and capital constraints in the style of Basel III and a position limit in the style of the Volcker Rule. Regulation causes market makers to reduce their intermediation by refusing principal positions. However, it can improve the bid-ask spread because it induces new market makers to enter. Since market makers intermediate less, asset prices exhibit a liquidity premium. Costs of regulation can be assessed by measuring principal positions and asset prices but not by measuring bid-ask spreads.
Subjects: 
Financial markets
Market structure and pricing
Financial system regulation and policies
JEL: 
G14
G20
L10
Document Type: 
Working Paper

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