Repo rates and the collateral spread puzzle

Kjell Nyborg

No 13546, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.

Keywords: Collateral spread; Constrained-arbitrage; Liquidity; Market linkages; Repo rate; Unsecured rate; General collateral (search for similar items in EconPapers)
JEL-codes: G01 G12 G21 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://cepr.org/publications/DP13546 (application/pdf)

Related works:
Working Paper: Repo Rates and the Collateral Spread Puzzle (2019)
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: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13546

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13546

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().