When David becomes Goliath: Repo dealer-driven bond mispricing

This paper studies the impact of funding market frictions on bond prices and market-wide liquidity. Using proprietary transaction-level data on all gilt-backed repo and reverse-repo trades, we demonstrate how the market power of individual dealers and their linkages generate frictions. Specifically, we show that frictions related to market power account for between 0.5 and 1.3 percentage points of bond yield deviation, while the transmission of heterogeneously persistent shocks between dealers accounts for between 2 and 4 percentage points of yield deviation.