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On the Existence and Fragility of Repo Markets

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  • Hajime Tomura

Abstract

This paper presents a model of an over-the-counter bond market in which bond dealers and cash investors arrange repurchase agreements (repos) endogenously. If cash investors buy bonds to store their cash, then they suffer an endogenous bond-liquidation cost because they must sell their bonds before the scheduled times of their cash payments. This cost provides incentive for both dealers and cash investors to arrange repos with endogenous margins. As part of multiple equilibria, the bond-liquidation cost also gives rise to another equilibrium in which cash investors stop transacting with dealers all at once. Credit market interventions block this equilibrium.

Suggested Citation

  • Hajime Tomura, 2012. "On the Existence and Fragility of Repo Markets," Staff Working Papers 12-17, Bank of Canada.
    • Handle: RePEc:bca:bocawp:12-17
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial markets; Financial stability; Payment clearing and settlement systems;
    All these keywords.

    JEL classification:

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

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