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Using data collected by the Federal Reserve, authors Tobias Adrian and Michael J. Fleming analyze the financing activities of primary dealers and find that dealer borrowing involving fixed-income securities has grown only modestly in recent years. Moreover, this increase is not clearly associated with greater risk taking.
Adrian and Fleming's finding differs from that of some market analysts, who claim that dealer leverage has risen considerably. The authors argue that those analysts come to their conclusion because they have limited their analysis to repo financing data, when the authors believe that all financing data should be examined.
Adrian and Fleming also relate the financing activities of primary dealers to financial market conditions and find evidence to support the idea that dealer leverage varies with movements in interest rates and interest rate volatility. In particular, financing tends to decline both before and after increases in interest rates and volatility.