Repos in Over-the-Counter Markets
AbstractThis paper presents a dynamic matching model featuring dealers and short-term investors in an over-the-counter bond market. The model illustrates that bilateral bar- gaining in an over-the-counter market results in an endogenous bond-liquidation cost for short-term investors. This cost makes short-term investors need repurchase agree- ments to buy long-term bonds. The cost also explains the existence of a margin specific to repurchase agreements held by short-term investors, if repurchase agreements must be renegotiation-proof. Without repurchase agreements, short-term investors do not buy long-term bonds. In this case, the bond yield rises unless dealers have enough capital to buy and hold bonds.
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Bibliographic InfoPaper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 005.
Length: 34 pages
Date of creation: Feb 2013
Date of revision:
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Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
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More information through EDIRC
Repo; Over-the-counter market; Securities broker-dealer; Short-term in-vestor; Margin.;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
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