Collateral choice

Benedikt Fabian Ballensiefen

No 25-05, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: I provide the first systematic analysis of collateral choices in one of the main short-term funding markets, the repurchase agreement (repo) market. In repos, long-term bonds serve as collateral connecting short-term and long-term funding markets. In general collateral repos, banks can choose from a list of eligible bonds. Surprisingly, they often deliver more expensive on-the-run bonds rather than cheapest-to-post securities. I rationalize this behaviour using a theoretical model linking the repo and bond markets. My results are relevant for explaining bond market patterns that are different in the euro area compared to the United States.

Keywords: Funding; Liquidity; Collateral; Repo; Bond; On-the-run (search for similar items in EconPapers)
JEL-codes: E40 E41 E43 G00 G01 G10 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:319642

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