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The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors

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  • D'Amico, Stefania

    (Federal Reserve Bank of Chicago)

  • Fan, Roger

    (Federal Reserve Bank of Chicago)

  • Kitzul, Yuriy

    ()
    (Federal Reserve Board)

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    Abstract

    In the repo market, forward agreements are security-specific (i.e., there are no deliverable substitutes), which makes it an ideal place to measure the value of fluctuations in a security's available supply. In this study, we quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all the outstanding U.S. Treasury securities. Our results indicate the existence of an economically and statistically significant scarcity premium, especially for shorter-term securities. The estimated scarcity effect is quite persistent, seems to be reflected in the Treasury market prices, and could in part explain the flow-effects of the Fed's asset purchase programs. More generally, it provides additional evidence in favor of the scarcity channel of quantitative easing. These findings also suggest that, through the same mechanism, the Fed's reverse repo operations could help alleviate potential shortages of high-quality collateral.

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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2013/wp2013_22.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2013-22.

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    Length: 38 pages
    Date of creation: 29 Nov 2013
    Date of revision:
    Handle: RePEc:fip:fedhwp:wp-2013-22

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    Related research

    Keywords: Collateral; securities; repo market; treasury bonds;

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    References

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    1. D'Amico, Stefania & English, William & López-Salido, J David & Nelson, Edward, 2012. "The Federal Reserve’s Large-Scale Asset Purchase Programs: Rationale and Effects," CEPR Discussion Papers 9145, C.E.P.R. Discussion Papers.
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    3. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2012. "Repo and securities lending," Staff Reports 529, Federal Reserve Bank of New York.
      • Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling National Bureau of Economic Research, Inc.
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    18. Aditya Kaul & Vikas Mehrotra & Randall Morck, 1999. "Demand Curves for Stocks Do Slope Down: New Evidence From An Index Weights Adjustment," Harvard Institute of Economic Research Working Papers 1884, Harvard - Institute of Economic Research.
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