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Re-hypotecation of securities

Jean-Marc Bottazzi, Jaime Luque () and Mario Pascoa
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Jaime Luque: UC3M - Universidad Carlos III de Madrid [Madrid]

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: By introducing repro markets we understand how agents need to borrow issued securities before shorting them : (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium : the repro rate becomes special, the security price higher than expected discounted cash-flows. Existence of equilibrium is granted under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.

Keywords: Re-hypothecation; repro; box; leverage; repo collateral multiplier; short sale; issuing; collateral; pledge; specialness; equilibrium security pricing.; Pensions; possession; titres effet de levier; caution; vente à découvert; émission; nantissement; spécial; évaluation. (search for similar items in EconPapers)
Date: 2010-03
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Published in 2010

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