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(In)efficient repo markets

Author

Listed:
  • Tobias Dieler

    (University of Bristol - Department of Finance and Accounting)

  • Loriano Mancini

    (USI Lugano - Institute of Finance; Swiss Finance Institute)

  • Norman Schürhoff

    (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

Abstract

Repo markets trade off the efficient allocation of liquidity in the financial sector with resilience to funding shocks. The repo trading and clearing mechanisms are crucial determinants of the allocation-resilience tradeoff. The two common mechanisms, anonymous central-counterparty (CCP) and non-anonymous over-the-counter (OTC) markets, are inefficient and their welfare rankings depend on funding tightness. CCP (OTC) markets inefficiently liquidate high (low) quality assets for large (small) funding shocks. Two innovations to repo market design contribute to maximize welfare: a liquidity-contingent trading mechanism and a two-tiered guarantee fund.

Suggested Citation

  • Tobias Dieler & Loriano Mancini & Norman Schürhoff, 2021. "(In)efficient repo markets," Swiss Finance Institute Research Paper Series 21-10, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2110
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    References listed on IDEAS

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    Cited by:

    1. Han, Song & Nikolaou, Kleopatra & Tase, Manjola, 2022. "Trading relationships in secured markets: Evidence from triparty repos," Journal of Banking & Finance, Elsevier, vol. 139(C).

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    More about this item

    Keywords

    repo market; funding run; financial stability; asymmetric information; central clearing; novation; guarantee fund; collateral;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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