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A theory of repurchase agreements, collateral re-use, and repo intermediation

Author

Listed:
  • Piero Gottardi

    (University of Venice)

  • Vincent Maurin

    (Stockholm School of Economics)

  • Cyril Monnet

    (University of Bern)

Abstract

We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier†effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders. (Copyright: Elsevier)

Suggested Citation

  • Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
  • Handle: RePEc:red:issued:18-284
    DOI: 10.1016/j.red.2019.04.009
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    as


    Cited by:

    1. Makoto Watanabe & Vyacheslav Arbuzov & Yu Awaya & Hiroki Fukai, "undated". "Endogenous Repo Cycles," Tinbergen Institute Discussion Papers 19-019/VII, Tinbergen Institute.
    2. Kee-Youn Kang, 2019. "Central Bank purchases of private assets: An evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 326-346, January.
    3. Cyril Monnet & Borghan N. Narajabad, 2017. "Why Rent When You Can Buy?," Finance and Economics Discussion Series 2017-094, Board of Governors of the Federal Reserve System (US).
    4. repec:red:issued:19-0 is not listed on IDEAS
    5. Ozdenoren, Emre & Yuan, Kathy & Zhang, Shengxing, 2018. "Dynamic Liquidity-Based Security Design," CEPR Discussion Papers 13069, C.E.P.R. Discussion Papers.
    6. repec:eee:jfinec:v:133:y:2019:i:1:p:42-63 is not listed on IDEAS
    7. Michele Loberto, 2019. "Safety traps, liquidity and information-sensitive assets," Temi di discussione (Economic working papers) 1216, Bank of Italy, Economic Research and International Relations Area.
    8. repec:red:issued:18-282 is not listed on IDEAS
    9. Viktoria Baklanova & Cecilia Caglio & Marco Cipriani & Adam Copeland, 2019. "The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 228-249, July.

    More about this item

    Keywords

    Repos; Default; Collateral re-use; Intermediation; Collateral multiplier;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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