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Regulating the Repo Market: Implications for Leverage Dynamics and Bubbles

Author

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  • Jean-Marc Bottazzi

    (Capula and Paris School of Economics)

  • Jaime Luque

    (University of Wisconsin - Madison)

  • Mario Pascoa

    (University of Surrey)

Abstract

We examine the impact of regulation on repo, leverage, Ponzi schemes and bub- bles. Repo Ponzi schemes can be done by creditors who collect haircut and then reuse the collateral that was pledged to them. In bilateral repo, only dealers have such hair- cut bene t and regulation consists in limiting dealers' positions. In exchanges, the segregation of the haircut avoids Ponzi schemes. However, as we illustrate, both cases allow for bubbles when agents are not uniformly impatient. We also show that all agents may be worse o if repo markets were absent and that bubbles are robust to the endogenous issuance of the securities.

Suggested Citation

  • Jean-Marc Bottazzi & Jaime Luque & Mario Pascoa, 2017. "Regulating the Repo Market: Implications for Leverage Dynamics and Bubbles," School of Economics Discussion Papers 0417, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0417
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    File URL: https://repec.som.surrey.ac.uk/2017/DP04-17.pdf
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    Cited by:

    1. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.

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