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Repos in Over-the-Counter Markets

Author

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  • Hajime Tomura

    (Graduate School of Economics and Business Administration,Hokkaido University)

Abstract

This paper presents a dynamic matching model featuring dealers and short-term investors in an over-the-counter bond market. The model illustrates that bilateral bar- gaining in an over-the-counter market results in an endogenous bond-liquidation cost for short-term investors. This cost makes short-term investors need repurchase agree- ments to buy long-term bonds. The cost also explains the existence of a margin specific to repurchase agreements held by short-term investors, if repurchase agreements must be renegotiation-proof. Without repurchase agreements, short-term investors do not buy long-term bonds. In this case, the bond yield rises unless dealers have enough capital to buy and hold bonds.

Suggested Citation

  • Hajime Tomura, 2013. "Repos in Over-the-Counter Markets," UTokyo Price Project Working Paper Series 005, University of Tokyo, Graduate School of Economics.
  • Handle: RePEc:upd:utppwp:005
    as

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    File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp005.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Repo; Over-the-counter market; Securities broker-dealer; Short-term in-vestor; Margin.;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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