Clogged pipes in the repo market

Jungkyu Ahn and Yongkil Ahn

Finance Research Letters, 2023, vol. 57, issue C

Abstract: A repurchase agreement (repo) transaction has a dual nature: collateralized loans and, conversely, loaned collateral. Cash and collateral flows through the repo market are occasionally clogged with runs or squeezes. We find that the tension between cash funding (incurring upward surges) and collateral sourcing (incurring downward spikes) is associated with excess deviations in repo rates. The need for collateral sourcing intermittently surges, whereas the effect of secured cash funding is relatively stable. Our results suggest that the strategic interactions between cash lenders and collateral providers in the repo market may aggravate the robustness of transaction-based repo rates.

Keywords: Repurchase agreement; Financial plumbing; Cash funding; Collateral sourcing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:57:y:2023:i:c:s1544612323006566

DOI: 10.1016/j.frl.2023.104284

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