A Theory of Repurchase Agreement, Collateral Re-use, and Repo Intermediation

Vincent Maurin, Cyril Monnet and Piero Gottardi
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Vincent Maurin: European University Institute

No 417, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study repurchase agreements starting from first principles. We show that repo contracts trade-off the borrower’s desire to augment its consumption today with the lender’s desire to hedge against future market risk. As a result, safer assets will command a lower haircut and a higher liquidity premium relative to riskier assets. Haircuts can also be negative. We extend the basic model with the possibility to re-use collateral and we show that, absent default, re-use is always desirable. We show that haircuts decrease with re-use. Finally, chains of repos, where some agents are repos intermediaries, can endogenously arise.

Date: 2016
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: A theory of repurchase agreements, collateral re-use, and repo intermediation (2019)
Working Paper: A Theory of Repurchase Agreements, Collateral Re-use, and Repo Intermediation (2017)
Working Paper: A theory of repurchase agreements, collateral re-use, and repo intermediation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:417

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