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Why Rent When You Can Buy? A Theory of Repurchase Agreements

  • Borghan Nezami Narajabad

    (Rice University)

  • Cyril Monnet

    (Universitat Bern)

In a model with matching frictions, we provide conditions under which repurchase agreements (or repos) co-exist with asset sales. In a repo, the seller agrees to repurchase the asset at a later date at the agreed price. Absent bilateral trading frictions, repos have no role despite uncertainty about future valuations. Introducing pairwise meetings, we show that agents prefer to sell (or buy) assets whenever they face little uncertainty regarding the future use of the asset. As agents become more uncertain of the value of holding the asset, repos become more prevalent. We show that while the total volume of repos is always increasing with the uncertainty, the total sales volume is hump-shaped. In other words, pairwise matching alone is sufficient to explain why repo markets exist and there is no need to introduce random matching, search frictions, information asymmetries or other market frictions.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 647.

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Date of creation: 2012
Date of revision:
Handle: RePEc:red:sed012:647
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Gavazza, Alessandro, 2010. "Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft," MPRA Paper 28821, University Library of Munich, Germany.
  2. Pierre-Olivier Weill & Dimitri Vayanos, 2005. "A Search-Based Theory of the On-the-Run Phenomenon," 2005 Meeting Papers 701, Society for Economic Dynamics.
  3. Guillaume Rocheteau & Ricardo Lagos, 2008. "Liquidity in asset markets with search frictions," Working Paper 0804, Federal Reserve Bank of Cleveland.
  4. Koeppl, Thorsten V. & Monnet, Cyril, 2008. "Central counterparties," CFS Working Paper Series 2008/42, Center for Financial Studies (CFS).
  5. Jeffrey M. Lacker, 1998. "Collateralized debt as the optimal contract," Working Paper 98-04, Federal Reserve Bank of Richmond.
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  8. Adriano Rampini & Andrea Eisfeldt, 2007. "Leasing, Ability to Repossess, and Debt Capacity," Working Papers 07-19, Center for Economic Studies, U.S. Census Bureau.
  9. Ferraris, Leo & Watanabe, Makoto, 2008. "Collateral secured loans in a monetary economy," Journal of Economic Theory, Elsevier, vol. 143(1), pages 405-424, November.
  10. Jeffrey Lacker, 2001. "Online Appendix to Collateralized Debt as the Optimal Contract," Technical Appendices lacker01, Review of Economic Dynamics.
  11. Ricardo Lagos & Guillaume Rocheteau, 2006. "Money and capital as competing media of exchange," Working Paper 0608, Federal Reserve Bank of Cleveland.
  12. David Mills & Francesca Carapella, 2012. "Information insensitive securities: the benefits of central counterparties," 2012 Meeting Papers 1032, Society for Economic Dynamics.
  13. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 204-228, April.
  14. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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