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Re-hypotecation of securities

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  • Jean-Marc Bottazzi

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Jaime Luque

    ()
    (Universidad Carlos III de Madrid [Madrid] - Universidad Carlos III de Madrid)

  • Mário Páscoa

    ()
    (NOVA - School of Business and Economics - School of Business and Economics)

Abstract

By introducing repro markets we understand how agents need to borrow issued securities before shorting them : (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium : the repro rate becomes special, the security price higher than expected discounted cash-flows. Existence of equilibrium is granted under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00476004.

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Date of creation: Mar 2010
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Handle: RePEc:hal:cesptp:halshs-00476004

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Keywords: Re-hypothecation; repro; box; leverage; repo collateral multiplier; short sale; issuing; collateral; pledge; specialness; equilibrium security pricing.;

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