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

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  • HAJIME TOMURA

Abstract

This paper presents a three‐period model featuring a short‐term investor in the over‐the‐counter bond market. A short‐term investor stores cash because of a need to pay cash at some future date. If a short‐term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex‐ante, this hold‐up problem explains the use of a repo by a short‐term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.

Suggested Citation

  • Hajime Tomura, 2016. "Investment Horizon and Repo in the Over‐the‐Counter Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 145-164, February.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:1:p:145-164
    DOI: 10.1111/jmcb.12293
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    References listed on IDEAS

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    Cited by:

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