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Investment Horizon and Repo in the Over-the-Counter Market

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  • Hajime Tomura

    (Graduate School of Economics and Business Administration,Hokkaido University)

Abstract

This paper presents a three-period model featuring a short-term investor and dealers in an over-the-counter bond market. A short-term investor invests cash in the short term because of a need to pay cash soon. This time constraint lowers the resale price of bonds held by a short-term investor through bilateral bargaining in an over-the-counter market. Ex-ante, this hold-up problem explains the use of a repo by a short-term investor, a positive haircut due to counterparty risk, and the fragility of a repo market. This result holds without any risk to the dividends and principals of underlying bonds or asymmetric information.

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File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp027.pdf
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Bibliographic Info

Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 014.

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Length: 32 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:upd:utppwp:014

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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
Phone: +81-3-3812-2111
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Web page: http://www.e.u-tokyo.ac.jp/
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Related research

Keywords: Repo; Over-the-counter market; Securities broker-dealer; Short-term investor; Haircut.;

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  1. Pierre-Olivier Weill & Dimitri Vayanos, 2005. "A Search-Based Theory of the On-the-Run Phenomenon," 2005 Meeting Papers 701, Society for Economic Dynamics.
  2. John Rust & George Hall, 2001. "Middle Men Versus Market Makers: A Theory of Competitive Exchange," Cowles Foundation Discussion Papers 1299, Cowles Foundation for Research in Economics, Yale University.
  3. Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings 647, Econometric Society.
  4. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
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  6. Daron Acemoglu & Robert Shimer, 1998. "Holdups and Efficiency with Search Frictions," Working papers 98-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
  8. Tobias Adrian & Christopher R. Burke & James J. McAndrews, 2009. "The Federal Reserve's Primary Dealer Credit Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Aug).
  9. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
  11. Jianjun Miao, 2005. "A Search Model of Centralzied and Decentralized Trade," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-144, Boston University - Department of Economics.
  12. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  13. Arvind Krishnamurthy, 2010. "Amplification Mechanisms in Liquidity Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 1-30, July.
  14. Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, 2012. "Repos, fire sales, and bankruptcy policy," Working Paper Series WP-2012-15, Federal Reserve Bank of Chicago.
  15. Ricardo Lagos & Guillaume Rocheteau & Pierre-Olivier Weill, 2009. "Crises and Liquidity in Over-the-Counter Markets," NBER Working Papers 15414, National Bureau of Economic Research, Inc.
  16. Thorsten Koeppl & Jonathan Chiu, 2013. "Trading Dynamics With Adverse Selection and Search," 2013 Meeting Papers 201, Society for Economic Dynamics.
  17. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
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