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Investment Horizon and Repo in the Over-the-Counter Market

  • Hajime Tomura

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

This paper presents a three-period model featuring a short-term investor and dealers in an over-the-counter bond market. A short-term investor invests cash in the short term because of a need to pay cash soon. This time constraint lowers the resale price of bonds held by a short-term investor through bilateral bargaining in an over-the-counter market. Ex-ante, this hold-up problem explains the use of a repo by a short-term investor, a positive haircut due to counterparty risk, and the fragility of a repo market. This result holds without any risk to the dividends and principals of underlying bonds or asymmetric information.

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File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp027.pdf
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Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 013.

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Length: 32 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:upd:utppwp:013
Contact details of provider: Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
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Web page: http://www.e.u-tokyo.ac.jp/
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