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Investment Horizon and Repo in the Over‐the‐Counter Market

Hajime Tomura

Journal of Money, Credit and Banking, 2016, vol. 48, issue 1, 145-164

Abstract: This paper presents a three‐period model featuring a short‐term investor in the over‐the‐counter bond market. A short‐term investor stores cash because of a need to pay cash at some future date. If a short‐term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex‐ante, this hold‐up problem explains the use of a repo by a short‐term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.

Date: 2016
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Citations: View citations in EconPapers (6)

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https://doi.org/10.1111/jmcb.12293

Related works:
Working Paper: Investment Horizon and Repo in the Over-the-Counter Market (2014) Downloads
Working Paper: Investment Horizon and Repo in the Over-the-Counter Market (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:48:y:2016:i:1:p:145-164

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