A Note on Central Counterparties in Repo Markets
AbstractThe author introduces a central counterparty (CCP) into a model of a repo market. Without the CCP, there exist multiple equilibria in the model. In one of the equilibria, a repo market emerges as bond dealers and cash investors choose to arrange repos in an over-the-counter bond market. In another equilibrium, the repo market collapses due to aggregate cash shortage for dealers. Introducing a CCP into the repo market blocks the latter equilibrium. This stabilizing effect of a CCP is robust to idiosyncratic default risk of dealers and asymmetric information about the risk.
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Bibliographic InfoPaper provided by Bank of Canada in its series Discussion Papers with number 12-4.
Length: 23 pages
Date of creation: 2012
Date of revision:
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Payment; clearing; and settlement systems; Financial markets; Financial stability;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-BAN-2012-03-21 (Banking)
- NEP-FMK-2012-03-21 (Financial Markets)
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