Economics at your fingertips  

Securities market theory: Possession, repo and rehypothecation

Jean-Marc Bottazzi, Jaime Luque and Mario Pascoa

Journal of Economic Theory, 2012, vol. 147, issue 2, 477-500

Abstract: By introducing repo markets we understand how agents need to borrow issued securities before shorting them: (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium: the repo rate becomes special and the security price higher than expected discounted cash-flows. Existence of equilibrium is guaranteed under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.

Keywords: Re-hypothecation; Repo; Leverage; Repo collateral multiplier; Short sale; Issuing; Collateral; Specialness; Security pricing (search for similar items in EconPapers)
JEL-codes: D52 D53 G12 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Securities market theory: Possession, repo and rehypothecation (2012)
Working Paper: Securities market theory: possession, repo and rehypothecation (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jet.2010.11.004

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-12-26
Handle: RePEc:eee:jetheo:v:147:y:2012:i:2:p:477-500