Collateral reuse as a direct funding mechanism in repo markets

George Issa and Elvis Jarnecic

Pacific-Basin Finance Journal, 2024, vol. 86, issue C

Abstract: We perform the first transaction-level empirical study on collateral reuse as a direct funding mechanism for dealers. We show that dealers surprisingly set a negative spread between the haircuts of the initial versus reuse repos, rejecting the conjecture that dealers derive an immediate cash injection. In the primary analysis, however, our findings are broadly consistent with theoretical models: haircut spreads are negatively related to interest rate spreads and positively related to interbank funding costs; as default risk increased during the 2007–09 Crisis, haircut spreads decreased for higher-affected foreign dealers.

Keywords: Collateral; Rehypothecation; Repo markets; Debt markets; Banking (search for similar items in EconPapers)
JEL-codes: G01 G12 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:86:y:2024:i:c:s0927538x24002002

DOI: 10.1016/j.pacfin.2024.102449

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