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The impact of margin policies on the Italian repo market

Arianna Miglietta, Cristina Picillo and Mario Pietrunti

The North American Journal of Economics and Finance, 2019, vol. 50, issue C

Abstract: In this paper we investigate the impact of changes in initial margins on the cost of funding in the Italian repo market using a unique data-set that covers the Sovereign debt crisis (between January 2011 and February 2012) and the subsequent phase of abundant central bank liquidity. The analysis shows that in stressed times an increase in the level of initial margins had a positive and significant effect on the cost of short-term funding; on average, for each 1 percentage point variation in the margin, a 10 basis points increase in repo rates followed. We also find that liquidity and credit risk, as well as variables capturing idiosyncratic pressures in funding needs, exerted a significant and upward impact on the cost of short-term funding. On the other hand, in the period between March and December 2012, when liquidity was abundant due to monetary policy easing, the relationship between initial margins and the cost of short-term funding became negative as liquidity takers were less in need of funds.

Keywords: E43; G01; G10; Repurchase agreements; Interbank markets; Central counterparties; Margin policies; Financial crises (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.najef.2019.100998

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