Date: 2017
Type: Working Paper
A theory of repurchase agreements, collateral re-use, and repo intermediation
Working Paper, EUI ECO, 2017/03
GOTTARDI, Piero, MAURIN, Vincent, MONNET, Cyril, A theory of repurchase agreements, collateral re-use, and repo intermediation, EUI ECO, 2017/03 - https://hdl.handle.net/1814/45725
Retrieved from Cadmus, EUI Research Repository
We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier" effect. Finally, we show that intermediation by
dealers may endogenously arise in equilibrium, with chains of repos among traders
Cadmus permanent link: https://hdl.handle.net/1814/45725
ISSN: 1725-6704
Series/Number: EUI ECO; 2017/03
Keyword(s): Repos Collateral re-use Intermediation Haircuts G10 G21 G23