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Collateral choice

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  • Ballensiefen, Benedikt Fabian

Abstract

I provide the first systematic analysis of collateral choices in one of the main short-term funding markets, the repurchase agreement (repo) market. In repos, long-term bonds serve as collateral connecting short-term and long-term funding markets. In general collateral repos, banks can choose from a list of eligible bonds. Surprisingly, they often deliver more expensive on-the-run bonds rather than cheapest-to-post securities. I rationalize this behaviour using a theoretical model linking the repo and bond markets. My results are relevant for explaining bond market patterns that are different in the euro area compared to the United States.

Suggested Citation

  • Ballensiefen, Benedikt Fabian, 2025. "Collateral choice," CFR Working Papers 25-05, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:319642
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    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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