We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier” effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.

A theory of repurchase agreements, collateral re-use, and repo intermediation

Gottardi P.;
2019

Abstract

We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier” effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.
File in questo prodotto:
File Dimensione Formato  
GMM_Feb19_Rev2.pdf

embargo fino al 30/01/2023

Tipologia: Documento in Post-print
Licenza: Accesso gratuito (solo visione)
Dimensione 525.3 kB
Formato Adobe PDF
525.3 kB Adobe PDF   Visualizza/Apri

I documenti in ARCA sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10278/3722528
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 14
  • ???jsp.display-item.citation.isi??? 14
social impact