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The risk of fire sales in the tri-party repo market

Author

Listed:
  • Brian Begalle
  • Antoine Martin
  • James J. McAndrews
  • Susan McLaughlin

Abstract

This paper studies the risk of "fire sales" in the tri-party repo market, a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients' assets. We distinguish between fire sales of assets by a dealer who, facing a run that could lead to default, sells securities to generate liquidity, and fire sales of assets by repo investors after a dealer's default has occurred. While fire sales do cause damage no matter how they arise, the tools available to lessen the harm from the two types of fire sales are different. We find that limited tools are available to mitigate the risk of pre-default fire sales and that no established tools currently exist to mitigate the risk of post-default sales.

Suggested Citation

  • Brian Begalle & Antoine Martin & James J. McAndrews & Susan McLaughlin, 2013. "The risk of fire sales in the tri-party repo market," Staff Reports 616, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:616
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    References listed on IDEAS

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    4. Armantier, Olivier & Ghysels, Eric & Sarkar, Asani & Shrader, Jeffrey, 2015. "Discount window stigma during the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 118(2), pages 317-335.
    5. Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, 2015. "Repos, Fire Sales, and Bankruptcy Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 21-31, January.
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    7. Martin, Antoine & Skeie, David & von Thadden, Ernst-Ludwig, 2014. "The fragility of short-term secured funding markets," Journal of Economic Theory, Elsevier, vol. 149(C), pages 15-42.
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    11. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
    12. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
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    Cited by:

    1. Weerachart T. Kilenthong & Robert M. Townsend, 2014. "A Market Based Solution to Price Externalities: A Generalized Framework," NBER Working Papers 20275, National Bureau of Economic Research, Inc.
    2. Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, 2015. "Repos, Fire Sales, and Bankruptcy Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 21-31, January.
    3. Marc Dobler & Simon T Gray & Diarmuid Murphy & Bozena Radzewicz-Bak, 2016. "The Lender of Last Resort Function after the Global Financial Crisis," IMF Working Papers 16/10, International Monetary Fund.
    4. Agueci, Paul & Alkan, Leyla & Copeland, Adam & Pingitore, Kate & Prugar, Caroline & Rivas, Tyisha, 2015. "The financial plumbing of the GCF Repo® Service," Economic Policy Review, Federal Reserve Bank of New York, issue 2, pages 7-24.
    5. Baklanova, Viktoria & Caglio, Cecilia & Cipriani, Marco & Copeland, Adam, 2016. "The use of collateral in bilateral repurchase and securities lending agreements," Staff Reports 758, Federal Reserve Bank of New York, revised 01 Oct 2017.
    6. Sung-guan Yun & Ronald Heijmans, 2013. "Analysis of Risk Factors in the Korean Repo Market: Based on the US and European Repo Market Experiences," Working Papers 2013-29, Economic Research Institute, Bank of Korea.
    7. Office of Financial Research (ed.), 2013. "Office of Financial Research 2013 Annual Report," Reports, Office of Financial Research, US Department of the Treasury, number 13-2, March.

    More about this item

    Keywords

    Repurchase agreements ; Securities ; Liquidity (Economics) ; Default (Finance);

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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