Work

A theory of repurchase agreements, collateral re-use, and repo intermediation

Year: 2019

Type: article

Abstract: We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier” effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.

Source: ARCA (Università Ca' Foscari Venezia)

DOI: 10.1016/j.red.2019.04.009

Authors: Gottardi P., Maurin V., Monnet C.

Institutions: University of Essex, Stockholm School of Economics, University of Bern

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3125865900

FWCI: 9.059

Cites: 44

Cited by: 58

Related to: 10