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Optimal interventions on strategic fails in repo markets

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  • Fukai, Hiroki

Abstract

A search theoretic model of repurchase agreements is constructed wherein the sellers' incentives to fail to deliver securities are explicitly incorporated. In equilibrium, too many sellers choose to fail relative to the social optimum. Two types of interventions are studied: a fails charge and an interest reset. These interventions improve efficiency by lowering the fraction of sellers who fail and making it easier for buyers to find their counterparties. In extensions of the model, the two types of optimal interventions are differently affected by fundamental variables. Thus, a policymaker needs to carefully distinguish between the workings of the two.

Suggested Citation

  • Fukai, Hiroki, 2021. "Optimal interventions on strategic fails in repo markets," MPRA Paper 106090, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106090
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    File URL: https://mpra.ub.uni-muenchen.de/106090/1/MPRA_paper_106090.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    fails charge; over-the-counter market; repo interest; repo market;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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