Investment Horizon and Repo in the Over-the-Counter Market

Hajime Tomura

No 37, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: This paper presents a three-period model featuring a short-term investor in the over-the-counter bond market. A short-term investor stores cash because of a need to pay cash at some future date. If a short-term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex-ante, this hold-up problem explains the use of a repo by a short-term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.

Keywords: Repo; Over-the-counter market; Securities broker-dealer; Short-term investor; Haircut. (search for similar items in EconPapers)
JEL-codes: G24 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-11
New Economics Papers: this item is included in nep-fmk
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Related works:
Journal Article: Investment Horizon and Repo in the Over‐the‐Counter Market (2016)
Working Paper: Investment Horizon and Repo in the Over-the-Counter Market (2013)
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