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Determinants of Repo Haircuts and Bankruptcy

Jean-Marc Bottazzi, Mario R. Pascoa and Guillermo Ramírez

FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia

Abstract: Variations in repo haircuts play a crucial role in leveraging (or deleveraging) in security markets, as observed in the two major economic events that happened so far in this century, the US housing bubble that burst into the great recession and the European sovereign debts episode. Repo trades are secured but recourse loans. Default triggers insolvency. Collateral may be temporarily exempt from automatic stay but creditors' final reimbursement depends on the bankruptcy outcome. We show examples of bankruptcy equilibria. We infer how haircuts are related to asset or counterparty risks whenever a bankruptcy equilibrium exists. JEL codes:

New Economics Papers: this item is included in nep-ban and nep-ure
Date: 2017
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