 Bond market intermediation and the Role of RepoYesol Huh and Sebastian Infante Journal of Banking & Finance, 2021, vol. 122, issue C Abstract: We model the role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also enable dealers to source assets without taking ownership. When the asset trades with repo specialness, i.e, when the associated repo rate is significantly below prevailing market rates, borrowing the asset is more expensive, resulting in higher bid-ask spreads. Limiting a single dealer’s leverage decreases its market-making abilities, so the dealer charges a higher bid-ask spread. However, limiting all dealers’ leverage reduces pressure on repo specialness, thus decreasing bid-ask spreads. More generally, this paper characterizes the importance of collateralized borrowing and lending for bond market intermediation, shows how frictions in repo markets can affect the underlying cash market liquidity, and underscores the importance of securities lending. Keywords: Market liquidity; Repo; Intermediation; Regulation; Treasury market (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:122:y:2021:i:c:s0378426620302612 DOI: 10.1016/j.jbankfin.2020.105999 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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