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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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    Cited by:

    1. Makoto Watanabe & Vyacheslav Arbuzov & Yu Awaya & Hiroki Fukai, "undated". "Endogenous Repo Cycles," Tinbergen Institute Discussion Papers 19-019/VII, Tinbergen Institute.
    2. Kee-Youn Kang, 2019. "Central Bank purchases of private assets: An evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 326-346, January.
    3. Cyril Monnet & Borghan N. Narajabad, 2017. "Why Rent When You Can Buy?," Finance and Economics Discussion Series 2017-094, Board of Governors of the Federal Reserve System (US).
    4. Ozdenoren, Emre & Yuan, Kathy & Zhang, Shengxing, 2018. "Dynamic Liquidity-Based Security Design," CEPR Discussion Papers 13069, C.E.P.R. Discussion Papers.

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    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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