Occasional Paper 64: OTC market frictions in stressed markets

Our research shows a substantial link between over-the-counter (OTC) frictions and the decrease in gilt market liquidity during the coronavirus crisis.

Read Occasional Paper 64


This research explores the impact of OTC market frictions on liquidity within the UK gilt market. 

It uses a comprehensive dataset from the Markets in Financial Instruments Directive 2014 (MiFID II) spanning from September 2019 to November 2020. This period includes the critical phase of the COVID-19 pandemic and offers a unique context to analyse the dynamics of inventory, search, and bargaining frictions that are characteristic of OTC markets.

Our findings reveal a substantial statistical correlation between the exacerbation of these prevalent OTC frictions and the observable decrease in market liquidity during the heightened stress of the COVID-19 crisis. 

The study offers:

  • insightful statistics that describe the UK gilt market
  • a deeper understanding of the resilience of financial markets under stress 
  • insights for both policymakers and market participants on market functioning and stability


Jef Van Cappellen, Fabian Garavito, Yordan Georgiev and Andrew Lepone.


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