Special Repo Rates and the Cross-Section of Bond Prices
39 Pages Posted: 5 Jun 2018
Date Written: May 14, 2018
We estimate a dynamic no-arbitrage term structure model that jointly prices the cross-section of Treasury bonds and special repo rates. We show that special repo rates on on-the-run Treasuries can explain almost 80% of the on-the-run premium, but only after incorporating a time-varying risk premium on the special spreads of both on- and off-the-run bonds. We show that the repo risk premium is priced in the cross-section of off-the-run bonds with very low special spreads.
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