On the Existence and Fragility of Repo Markets
AbstractThis paper presents a model of an over-the-counter bond market in which bond dealers and cash investors arrange repurchase agreements (repos) endogenously. If cash investors buy bonds to store their cash, then they suffer an endogenous bond-liquidation cost because they must sell their bonds before the scheduled times of their cash payments. This cost provides incentive for both dealers and cash investors to arrange repos with endogenous margins. As part of multiple equilibria, the bond-liquidation cost also gives rise to another equilibrium in which cash investors stop transacting with dealers all at once. Credit market interventions block this equilibrium.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 12-17.
Length: 50 pages
Date of creation: 2012
Date of revision:
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Financial markets; Financial stability; Payment; clearing; and settlement systems;
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-2012-07-01 (All new papers)
- NEP-BAN-2012-07-01 (Banking)
- NEP-DGE-2012-07-01 (Dynamic General Equilibrium)
- NEP-FMK-2012-07-01 (Financial Markets)
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