Special Repo Rates and the Cross-Section of Bond Prices

39 Pages Posted: 5 Jun 2018

See all articles by Stefania D'Amico

Stefania D'Amico

Federal Reserve Bank of Chicago

N. Aaron Pancost

University of Texas at Austin McCombs School of Business

Date Written: May 14, 2018

Abstract

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.

Suggested Citation

D'Amico, Stefania and Pancost, N. Aaron, Special Repo Rates and the Cross-Section of Bond Prices (May 14, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3190606 or http://dx.doi.org/10.2139/ssrn.3190606

Stefania D'Amico

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

N. Aaron Pancost (Contact Author)

University of Texas at Austin McCombs School of Business ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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