Regulating the Repo Market: Implications for Leverage Dynamics and Bubbles

Jean-Marc Bottazzi, Jaime Luque and Mario Pascoa
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Jean-Marc Bottazzi: Capula and Paris School of Economics
Jaime Luque: University of Wisconsin - Madison
Mario Pascoa: University of Surrey

No 417, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: We examine the impact of regulation on repo, leverage, Ponzi schemes and bub- bles. Repo Ponzi schemes can be done by creditors who collect haircut and then reuse the collateral that was pledged to them. In bilateral repo, only dealers have such hair- cut bene t and regulation consists in limiting dealers' positions. In exchanges, the segregation of the haircut avoids Ponzi schemes. However, as we illustrate, both cases allow for bubbles when agents are not uniformly impatient. We also show that all agents may be worse o if repo markets were absent and that bubbles are robust to the endogenous issuance of the securities.

Pages: 37 pages
Date: 2017-03
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0417

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