IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v133y2019i1p42-63.html
   My bibliography  Save this article

Liquidity windfalls: The consequences of repo rehypothecation

Author

Listed:
  • Infante, Sebastian

Abstract

This paper presents a model of repo intermediation in which dealers intermediate secured financing between lenders and borrowers using the same collateral. Lenders are insulated from dealers through their repo’s collateral, but borrowers are exposed to dealers through the loss of their collateral. This makes lenders’ repo terms insensitive to dealers’ default, while borrowers’ repo terms are not. The model shows that when repos serve to intermediate collateral, haircuts are negative. This paper explains the difference in haircuts between the bilateral and tri-party repo market and the different run dynamics observed across these markets during the financial crisis.

Suggested Citation

  • Infante, Sebastian, 2019. "Liquidity windfalls: The consequences of repo rehypothecation," Journal of Financial Economics, Elsevier, vol. 133(1), pages 42-63.
    • Handle: RePEc:eee:jfinec:v:133:y:2019:i:1:p:42-63
    DOI: 10.1016/j.jfineco.2019.02.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X19300261
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2019.02.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mitchell, Mark & Pulvino, Todd, 2012. "Arbitrage crashes and the speed of capital," Journal of Financial Economics, Elsevier, vol. 104(3), pages 469-490.
    2. Andolfatto, David & Martin, Fernando M. & Zhang, Shengxing, 2017. "Rehypothecation and liquidity," European Economic Review, Elsevier, vol. 100(C), pages 488-505.
    3. Ana Fostel & John Geanakoplos, 2012. "Leverage and Default in Binomial Economies: A Complete Characterization," Cowles Foundation Discussion Papers 1877RRR, Cowles Foundation for Research in Economics, Yale University, revised Mar 2015.
    4. Viktoria Baklanova & Adam Copeland & Rebecca McCaughrin, 2015. "Reference Guide to U.S. Repo and Securities Lending Markets," Working Papers 15-17, Office of Financial Research, US Department of the Treasury.
    5. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
    6. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 909, European Central Bank.
    7. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    8. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148, National Bureau of Economic Research, Inc.
    9. Ana Fostel & John Geanakoplos, 2015. "Leverage and Default in Binomial Economies: A Complete Characterization," Econometrica, Econometric Society, vol. 83, pages 2191-2229, November.
    10. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    11. Duffie, Darrell, 1996. "Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    12. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2014. "Sizing Up Repo," Journal of Finance, American Finance Association, vol. 69(6), pages 2381-2417, December.
    13. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
    14. Ana Fostel & John Geanakoplos, 2012. "Leverage and Default in Binomial Economies: A Complete Characterization," Cowles Foundation Discussion Papers 1877R3, Cowles Foundation for Research in Economics, Yale University, revised Mar 2015.
    15. Darrell Duffie, 2013. "Replumbing Our Financial System: Uneven Progress," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 251-280, January.
    16. Wells, Wyatt, 2000. "Certificates and Computers: The Remaking of Wall Street, 1967 to 1971," Business History Review, Cambridge University Press, vol. 74(2), pages 193-235, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chang, Jin-Wook, 2021. "Contagion in Debt and Collateral Markets," MPRA Paper 111131, University Library of Munich, Germany.
    2. Miguel Fernandes & Mario Pascoa, 2024. "Repo, Sponsored Repo and Macro-prudential Regulation," School of Economics Discussion Papers 0224, School of Economics, University of Surrey.
    3. Gottardi, Piero & Maurin, Vincent & Monnet, Cyril, 2021. "Financial Fragility with Collateral Circulation," CEPR Discussion Papers 15757, C.E.P.R. Discussion Papers.
    4. Lewis, Brittany Almquist, 2023. "Creditor rights, collateral reuse, and credit supply," Journal of Financial Economics, Elsevier, vol. 149(3), pages 451-472.
    5. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2023. "Fragility of Secured Credit Chains," Diskussionsschriften dp2304, Universitaet Bern, Departement Volkswirtschaft.
    6. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.
    7. Huh, Yesol & Infante, Sebastian, 2021. "Bond market intermediation and the Role of Repo," Journal of Banking & Finance, Elsevier, vol. 122(C).
    8. Maurin, Vincent, 2022. "Asset scarcity and collateral rehypothecation," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    9. Lewis, Kurt F. & Longstaff, Francis A. & Petrasek, Lubomir, 2021. "Asset mispricing," Journal of Financial Economics, Elsevier, vol. 141(3), pages 981-1006.
    10. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-intermediated arbitrage," Staff Reports 858, Federal Reserve Bank of New York.
    11. Cecilia R. Caglio & Adam Copeland & Antoine Martin, 2021. "The Value of Internal Sources of Funding Liquidity: U.S. Broker-Dealers and the Financial Crisis," Staff Reports 969, Federal Reserve Bank of New York.
    12. Fukai, Hiroki, 2021. "Optimal interventions on strategic fails in repo markets," MPRA Paper 106090, University Library of Munich, Germany.
    13. Huber, Amy Wang, 2023. "Market power in wholesale funding: A structural perspective from the triparty repo market," Journal of Financial Economics, Elsevier, vol. 149(2), pages 235-259.
    14. Park, Hyejin, 2021. "Collateral reuse, collateral mismatch, and financial crises," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 367-380.
    15. Jun Kyung Auh & Mattia Landoni, 2022. "Loan Terms and Collateral: Evidence from the Bilateral Repo Market," Journal of Finance, American Finance Association, vol. 77(6), pages 2997-3036, December.
    16. Jin-Wook Chang, 2019. "Collateralized Debt Networks with Lender Default," Finance and Economics Discussion Series 2019-083, Board of Governors of the Federal Reserve System (U.S.).
    17. Viktoria Baklanova & Cecilia Caglio & Marco Cipriani & Adam Copeland, 2019. "The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 228-249, July.
    18. Kruttli, Mathias S. & Monin, Phillip J. & Watugala, Sumudu W., 2022. "The life of the counterparty: Shock propagation in hedge fund-prime broker credit networks," Journal of Financial Economics, Elsevier, vol. 146(3), pages 965-988.
    19. Ahn, Jungkyu & Ahn, Yongkil, 2023. "Clogged pipes in the repo market," Finance Research Letters, Elsevier, vol. 57(C).
    20. Sriya Anbil & Alyssa G. Anderson & Zeynep Senyuz, 2021. "Are Repo Markets Fragile? Evidence from September 2019," Finance and Economics Discussion Series 2021-028, Board of Governors of the Federal Reserve System (U.S.).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Viktoria Baklanova & Cecilia Caglio & Marco Cipriani & Adam Copeland, 2019. "The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 228-249, July.
    2. Chang, Jin-Wook, 2021. "Contagion in Debt and Collateral Markets," MPRA Paper 111131, University Library of Munich, Germany.
    3. Julliard, Christian & Pinter, Gabor & Todorov, Karamfil & Yuan, Kathy, 2022. "What drives repo haircuts? Evidence from the UK market," Bank of England working papers 985, Bank of England.
    4. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
    5. Levent Altinoglu & Jin-Wook Chang, 2022. "Information Externalities, Funding Liquidity, and Fire Sales," Finance and Economics Discussion Series 2022-052, Board of Governors of the Federal Reserve System (U.S.).
    6. Bachmann, Manuel, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Paper Series 255, WU Vienna University of Economics and Business.
    7. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    8. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    9. Corradin, Stefano & Maddaloni, Angela, 2020. "The importance of being special: Repo markets during the crisis," Journal of Financial Economics, Elsevier, vol. 137(2), pages 392-429.
    10. Buschmann, Christian & Schmaltz, Christian, 2017. "Sovereign collateral as a Trojan Horse: Why do we need an LCR+," Journal of Financial Stability, Elsevier, vol. 33(C), pages 311-330.
    11. Manuel Bachmann, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Papers wuwp255, Vienna University of Economics and Business, Department of Economics.
    12. Maurin, Vincent, 2022. "Asset scarcity and collateral rehypothecation," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    13. Majid Haghani Rizi & N. Kundan Kishor & Hardik A. Marfatia, 2019. "The dynamic relationship among the money market mutual funds, the commercial paper market, and the repo market," The European Journal of Finance, Taylor & Francis Journals, vol. 25(5), pages 395-414, March.
    14. Viktoria Baklanova & Adam Copeland & Rebecca McCaughrin, 2015. "Reference guide to U.S. repo and securities lending markets," Staff Reports 740, Federal Reserve Bank of New York.
    15. Alyssa G. Anderson & John Kandrac, 2016. "Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility," Finance and Economics Discussion Series 2016-096, Board of Governors of the Federal Reserve System (U.S.).
    16. Lewis, Brittany Almquist, 2023. "Creditor rights, collateral reuse, and credit supply," Journal of Financial Economics, Elsevier, vol. 149(3), pages 451-472.
    17. Luu, Duc Thi & Napoletano, Mauro & Barucca, Paolo & Battiston, Stefano, 2021. "Collateral Unchained: Rehypothecation networks, concentration and systemic effects," Journal of Financial Stability, Elsevier, vol. 52(C).
    18. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    19. Feixue Gong & Gregory Phelan, 2020. "Debt collateralization, capital structure, and maximal leverage," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(2), pages 579-605, September.
    20. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.

    More about this item

    Keywords

    Rehypothecation; Repo; Dealer; Liquidity; Default; Collateral;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:133:y:2019:i:1:p:42-63. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.