A Theory of Repurchase Agreements, Collateral Re-use, and Repo Intermediation
Event details
| Date | 23.09.2016 |
| Hour | 10:30 › 12:00 |
| Speaker | Piero GOTTARDI (European University Institute) |
| Location | |
| Category | Conferences - Seminars |
This paper characterizes repurchase agreements (repos) as equilibrium contracts starting from first principles. We show that a repo allows the borrower to augment its consumption today while hedging both agents against future market price risk. As a result, safer assets will command a lower haircut and a higher liquidity premium relative to riskier assets. Haircuts may also be negative. When lenders can re-use the asset they receive in a repo, we show that there exists a collateral multiplier effect and borrowing increases. In addition, with collateral re-use, lenders might also re-pledge the asset to third parties. In the model, intermediation arises as an equilibrium choice of traders and trustworthy agents play a role as intermediary. These findings are helpful to rationalize chains of trades observed on the repo market.
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