Haircut, Interest Rate, and Collateral Quality in the Tri-Party Repo Market

Sangyup Choi, Inkee Jang, Kee-Youn Kang and Hyunpyung Kim
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Inkee Jang: Hanyang University
Hyunpyung Kim: University of Texas at Austin

Review of Economic Dynamics, 2026, vol. 61

Abstract: Using transaction-level data from the Korean tri-party repo market, we study how repo contract terms interact with collateral quality. Both haircuts and interest rates rise with collateral risk, consistent with existing evidence. Conditional on collateral quality, however, we find a trade-off: a one-percentage-point increase in the spread is associated with a 1.3-percentage-point reduction in the haircut. The same increase in the interest rate is associated with a smaller reduction in the haircut under heightened market uncertainty, indicating that insurance against default becomes more valuable as default risk rises. We show that the interaction between lenders’ incentives to acquire information and borrowers’ opportunistic default risk explains both the positive unconditional relationship and the negative conditional relationship between haircuts and interest rates. (Copyright: Elsevier)

Keywords: Repo market; Collateralized debt; Haircut; Collateral quality; Costly information acquisition; Uncertainty (search for similar items in EconPapers)
JEL-codes: D53 D8 E44 G23 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1016/j.red.2026.101351

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