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The importance of being special: Repo markets during the crisis

Stefano Corradin and Angela Maddaloni ()

Journal of Financial Economics, 2020, vol. 137, issue 2, 392-429

Abstract: We study how the Italian sovereign bond scarcity premia, specialness, in the repo market were affected by the European Central Bank (ECB)’s purchases during the euro area sovereign debt crisis. We propose and calibrate a search-based dynamic model with a central bank acting as a buy-and-hold investor. Consistent with model predictions, ECB purchases drive specialness of targeted securities in combination with short-selling. Special benchmark bonds entail a positive cash premium, but their market liquidity decreases when purchased by the ECB. Short-sellers were more likely to fail-to-deliver very special bonds, while holders of these bonds were less inclined to pledge them as collateral to the ECB liquidity operations.

Keywords: Repo; Specialness; Central bank asset purchases; Short-selling; Market liquidity and credit risk (search for similar items in EconPapers)
JEL-codes: E43 E51 G01 G12 G23 (search for similar items in EconPapers)
Date: 2020
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Working Paper: The importance of being special: repo markets during the crisis (2017) Downloads
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DOI: 10.1016/j.jfineco.2020.02.006

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Handle: RePEc:eee:jfinec:v:137:y:2020:i:2:p:392-429