A Theory of Repurchase Agreements, Collateral Re-Use, and Repo Intermediation

65 Pages Posted: 22 Aug 2017

See all articles by Piero Gottardi

Piero Gottardi

University of Essex - Department of Economics; European University Institute - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia; CESifo (Center for Economic Studies and Ifo Institute)

Vincent Maurin

Swedish House of Finance

Cyril Monnet

University of Bern

Date Written: July 26, 2017

Abstract

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.

Keywords: Repos, Collateral Multiplier, Limited Commitment, Intermediation

JEL Classification: G190

Suggested Citation

Gottardi, Piero and Maurin, Vincent and Monnet, Cyril, A Theory of Repurchase Agreements, Collateral Re-Use, and Repo Intermediation (July 26, 2017). CESifo Working Paper Series No. 6579, Available at SSRN: https://ssrn.com/abstract=3023225 or http://dx.doi.org/10.2139/ssrn.3023225

Piero Gottardi (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

European University Institute - Department of Economics ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy
+39 041 257 4192 (Phone)
+39 041 257 4176 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Vincent Maurin

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Cyril Monnet

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
94
Abstract Views
763
rank
383,478
PlumX Metrics