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A Note on Central Counterparties in Repo Markets

Author

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  • Hajime Tomura

Abstract

The author introduces a central counterparty (CCP) into a model of a repo market. Without the CCP, there exist multiple equilibria in the model. In one of the equilibria, a repo market emerges as bond dealers and cash investors choose to arrange repos in an over-the-counter bond market. In another equilibrium, the repo market collapses due to aggregate cash shortage for dealers. Introducing a CCP into the repo market blocks the latter equilibrium. This stabilizing effect of a CCP is robust to idiosyncratic default risk of dealers and asymmetric information about the risk.

Suggested Citation

  • Hajime Tomura, 2012. "A Note on Central Counterparties in Repo Markets," Discussion Papers 12-4, Bank of Canada.
  • Handle: RePEc:bca:bocadp:12-4
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    References listed on IDEAS

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    1. Dennis, Richard & Ravenna, Federico, 2008. "Learning and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, pages 1964-1994.
    2. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    3. Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, pages 4-20.
    4. Ferstl, Robert & Hayden, Josef, 2010. "Zero-Coupon Yield Curve Estimation with the Package termstrc," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 36(i01).
    5. Kamhon Kan, 1998. "Credit spreads on government bonds," Applied Financial Economics, Taylor & Francis Journals, pages 301-313.
    6. Manfred Gilli & Stefan Große & Enrico Schumann, 2010. "Calibrating the Nelson–Siegel–Svensson model," Working Papers 031, COMISEF.
    7. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," FRB Atlanta Working Paper 97-10, Federal Reserve Bank of Atlanta.
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    More about this item

    Keywords

    Payment; clearing; and settlement systems; Financial markets; Financial stability;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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