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Repo rates and the collateral spread: Evidence

Author

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  • Nyborg, Kjell
  • Roesler, Cornelia

Abstract

The spread between unsecured and repo rates (collateral spread) fluctuates substantially and is negative on a significant portion of days. Recent theoretical work argues that collateral spreads are determined by a constrained-arbitrage relation between the unsecured rate, the repo rates, and the expected rate of return of the underlying security. Negative collateral spreads arise in equilibrium if unsecured markets are sufficiently tight, unsecured rates spike down, or security markets are sufficiently depressed in terms of prices, liquidity, and volatility. The objective of this paper is to examine the determinants of collateral spreads by testing the constrained-arbitrage theory. The findings are supportive.

Suggested Citation

  • Nyborg, Kjell & Roesler, Cornelia, 2019. "Repo rates and the collateral spread: Evidence," CEPR Discussion Papers 13547, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13547
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    Citations

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    Cited by:

    1. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2022. "Monetary policy transmission in segmented markets," Working Paper Series 2706, European Central Bank.
    2. Pelizzon, Loriana & Riedel, Max & Simon, Zorka & Subrahmanyam, Marti G., 2020. "Collateral eligibility of corporate debt in the Eurosystem," SAFE Working Paper Series 275, Leibniz Institute for Financial Research SAFE.
    3. Klingler, Sven & Syrstad, Olav, 2021. "Life after LIBOR," Journal of Financial Economics, Elsevier, vol. 141(2), pages 783-801.

    More about this item

    Keywords

    Collateral spread; Liquidity; Unsecured rate; Repo rate; General collateral; Eurex repo;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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