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The realized forward term premium in the repo market

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  • Kopchak, Seth J.

Abstract

Repurchase agreements for general-collateral government debt measure the short-term cost of riskless borrowing, thus avoiding issues relating to specialness of Treasury offerings or irregular term-to-maturity in the Treasury bill market. The spread between reverse and repo rates has previously been ignored by researchers who find that the pure expectation hypothesis either holds at this extremely short end of the term structure or that observed deviations from the expectations hypothesis are not economically significant. This paper shows that the time-varying realized forward premium at the short-end of the yield curve is consistently positive when accounting for the spread between repurchase and reverse repurchase agreement rates.

Suggested Citation

  • Kopchak, Seth J., 2013. "The realized forward term premium in the repo market," Journal of Financial Markets, Elsevier, vol. 16(2), pages 253-278.
    • Handle: RePEc:eee:finmar:v:16:y:2013:i:2:p:253-278
    DOI: 10.1016/j.finmar.2012.08.001
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    More about this item

    Keywords

    Expectations hypothesis; State space; Repurchase agreement market;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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