Repos in Over-the-Counter Markets

Hajime Tomura

No 5, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: This paper presents a dynamic matching model featuring dealers and short-term investors in an over-the-counter bond market. The model illustrates that bilateral bar- gaining in an over-the-counter market results in an endogenous bond-liquidation cost for short-term investors. This cost makes short-term investors need repurchase agree- ments to buy long-term bonds. The cost also explains the existence of a margin specific to repurchase agreements held by short-term investors, if repurchase agreements must be renegotiation-proof. Without repurchase agreements, short-term investors do not buy long-term bonds. In this case, the bond yield rises unless dealers have enough capital to buy and hold bonds.

Keywords: Repo; Over-the-counter market; Securities broker-dealer; Short-term in-vestor; Margin. (search for similar items in EconPapers)
JEL-codes: G24 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-02
New Economics Papers: this item is included in nep-dge
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