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Re-hypotecation of securities

Author

Listed:
  • Jean-Marc Bottazzi

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Jaime Luque

    (UC3M - Universidad Carlos III de Madrid [Madrid])

  • Mário Páscoa

    (NOVA SBE - NOVA - School of Business and Economics - NOVA - Universidade Nova de Lisboa = NOVA University Lisbon)

Abstract

By introducing repro markets we understand how agents need to borrow issued securities before shorting them : (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium : the repro rate becomes special, the security price higher than expected discounted cash-flows. Existence of equilibrium is granted under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.

Suggested Citation

  • Jean-Marc Bottazzi & Jaime Luque & Mário Páscoa, 2010. "Re-hypotecation of securities," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00476004, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00476004
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00476004
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    Keywords

    Re-hypothecation; repro; box; leverage; repo collateral multiplier; short sale; issuing; collateral; pledge; specialness; equilibrium security pricing.; Pensions; possession; titres effet de levier; caution; vente à découvert; émission; nantissement; spécial; évaluation.;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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