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Explaining repo specialness

Author

Listed:
  • Alfonso Dufour
  • Miriam Marra
  • Ivan Sangiorgi
  • Frank S. Skinner

Abstract

We study the dynamics of specialness for 1‐day repo contracts on Italian government bonds over a 10‐year sample period. As predicted by Duffie's (1996) model, our results show that collateral supply is a significant factor for specialness. However, we enrich that finding by also showing a clear impact from repo liquidity, collateral riskiness, information uncertainty, and short‐selling proxies, revealing the importance of speculative bond demand for specialness. During crisis periods, bond fire sales and European Central Bank interventions also have a large impact on repo specialness. We identify recurrent patterns for specialness around bond auctions. Specialness increases steadily from the auction announcement date until a few days before the auction settlement date, which is consistent with overbidding behaviour and a short selling of treasuries (via reverse repos) from primary dealers ahead of auctions.

Suggested Citation

  • Alfonso Dufour & Miriam Marra & Ivan Sangiorgi & Frank S. Skinner, 2020. "Explaining repo specialness," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(2), pages 172-196, April.
    • Handle: RePEc:wly:ijfiec:v:25:y:2020:i:2:p:172-196
    DOI: 10.1002/ijfe.1746
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