Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium

Stefania D'Amico and N. Aaron Pancost

No WP-2018-21, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%?90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, explicitly linked to the SC value of the highest-quality securities?recently-issued U.S. nominal Treasuries.

Keywords: Bond prices; collateral; interest rates; risk premia (search for similar items in EconPapers)
JEL-codes: E42 G12 G14 G32 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2018-12-03
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:wp-2018-21

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DOI: 10.21033/wp-2018-21

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