Repo Rates and the Collateral Spread Puzzle

Kjell Nyborg

No 19-04, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.

Keywords: collateral spread; constrained-arbitrage; liquidity; market linkages; repo rate; unsecured rate; general collateral (search for similar items in EconPapers)
JEL-codes: G01 G12 G21 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ban and nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Repo rates and the collateral spread puzzle (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1904

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