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An examination of the Vancouver money market Blakey, Kenneth Clifford

Abstract

This study, an examination of the Vancouver money market, addresses itself to the four objectives of providing a description of the overall setting in which the Vancouver money market exists, describing the Vancouver money market, indicating the major peculiarities and imperfections which exist in that market, and providing, where possible, explanations for those peculiarities and imperfections. Achievement of the first of the above mentioned objectives involves the development of models explaining the behaviour of the three money market participants, the investor, the borrower, and the investment dealer. The basic premise underlying these models is that each participant attempts to maximize his wealth subject to certain constraints. Also involved in outlining the overall setting is a discussion of the market's role of equating the supply of and demand for short-term capital, a brief sketch of its history, and example of the mechanisms involved in its actual workings. The securities which comprise the market's stock in trade are discussed in abstract terms with particular emphasis being placed on their liquidity characteristics and in more concrete terms where the fourteen main instruments of the market are briefly described. The three remaining objectives are achieved by drawing heavily upon information about the local market obtained during interviews with fifteen participants in the Vancouver money market and interpreting this information with reference to the behavioural models which were developed. While the market has recently experienced rapid growth, it continues to be dwarfed by the Toronto-Montreal market. It is concluded that there are four main peculiarities or imperfections in the local market. The low level of dealer inventories of money market instruments, which benefits local borrowers but hinders the achievement of the investors' goals, results from the investment strategy of dealers and such exogenous factors as the centralized cash management by chartered banks and the limited number of local sources of non-bank financing for inventories. Lack of local dealer autonomy results from centralized decision making by investment dealers and the low level of local inventories. This lack of local autonomy and the time zone differential between the Vancouver market and the Eastern market reduce the liquidity of instruments in the Vancouver market while the attractiveness of the locally-issued security is enhanced by its ready availability. Finally, the lack of participant sophistication, which is an attribute of the local market, is regarded as being caused by lack of information and the responsibility for the persistance of this trait and for its future eradication is seen as resting upon the investment dealer.

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