(In)efficient repo markets
Tobias Dieler and
Authors registered in the RePEc Author Service: Norman Schuerhoff
No 15782, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Repo markets trade off the efficient allocation of liquidity in the financial sector with resilience to funding shocks. The repo trading and clearing mechanisms are crucial determinants of the allocation-resilience tradeoff. The two common mechanisms, anonymous central-counterparty (CCP) and non-anonymous over-the-counter (OTC) markets, are inefficient and their welfare rankings depend on funding tightness. CCP (OTC) markets inefficiently liquidate high (low) quality assets for large (small) funding shocks. Two innovations to repo market design contribute to maximize welfare: a liquidity-contingent trading mechanism and a two-tiered guarantee fund.
Keywords: Repo market; Funding run; Financial stability; Asymmetric information; Central clearing; Novation; Guarantee fund; Collateral (search for similar items in EconPapers)
JEL-codes: G01 G14 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
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Working Paper: (In)efficient repo markets (2021)
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