Asset scarcity and collateral rehypothecation

Vincent Maurin

Journal of Financial Intermediation, 2022, vol. 52, issue C

Abstract: This paper introduces collateral rehypothecation, a widespread practice in derivatives, swaps, and repo markets, in a general equilibrium model with default. Rehypothecation frees up collateral because it allows lenders to resell or repledge assets pledged by borrowers. The risk that lenders will not return the asset, however, limits gains from rehypothecation. Still, when markets are contractually incomplete or decentralized, rehypothecation can achieve a superior use of scarce collateral. These results have implications for the repo market and suggest that limits to rehypothecation can cause price fragmentation.

Keywords: Rehypothecation; Collateral constraints; Market incompleteness; Repo; GE (search for similar items in EconPapers)
JEL-codes: D53 G10 G23 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:52:y:2022:i:c:s1042957322000456

DOI: 10.1016/j.jfi.2022.100992

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