Work

Repurchase Options in the Market for Lemons

Year: 2025

Type: article

Abstract: We study repurchase options (repo contracts) in a competitive asset market with adverse selection. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trades. In equilibrium, a single repo contract pools all assets. The embedded repurchase option mitigates adverse selection by improving the volume of trades relative to outright sales. However, liquidity provision can be inefficiently low as lenders compete to attract high-quality assets via high haircuts and low rates. The equilibrium has a closed form and aligns well with empirical patterns across Mortgage-Backed Securities repos.

Source: The Review of Economic Studies

DOI: 10.1093/restud/rdaf082

Authors: Saki Bigio, Liyan Shi

Institutions: National Bureau of Economic Research, University of California, Los Angeles, Carnegie Mellon University

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $6,530

OpenAlex ID: W3140028335

FWCI:

Cites: 50

Cited by:

Related to: 20