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A Theory of Repurchase Agreement, Collateral Re-use, and Repo Intermediation

Author

Listed:
  • Vincent Maurin

    (European University Institute)

  • Cyril Monnet

    (Universitat Bern)

  • Piero Gottardi

    (European University Institute)

Abstract

We study repurchase agreements starting from first principles. We show that repo contracts trade-off the borrower’s desire to augment its consumption today with the lender’s desire to hedge against future market risk. As a result, safer assets will command a lower haircut and a higher liquidity premium relative to riskier assets. Haircuts can also be negative. We extend the basic model with the possibility to re-use collateral and we show that, absent default, re-use is always desirable. We show that haircuts decrease with re-use. Finally, chains of repos, where some agents are repos intermediaries, can endogenously arise.

Suggested Citation

  • Vincent Maurin & Cyril Monnet & Piero Gottardi, 2016. "A Theory of Repurchase Agreement, Collateral Re-use, and Repo Intermediation," 2016 Meeting Papers 417, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:417
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    References listed on IDEAS

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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