Repo Rates and the Collateral Spread: Evidence
48 Pages Posted: 19 Feb 2019 Last revised: 22 Feb 2019
Date Written: February 15, 2019
The spread between unsecured and repo rates (collateral spread) fluctuates substantially and is negative on a significant portion of days. Recent theoretical work argues that collateral spreads are determined by a constrained-arbitrage relation between the unsecured rate, the repo rates, and the expected rate of return of the underlying security. Negative collateral spreads arise in equilibrium if unsecured markets are sufficiently tight, unsecured rates spike down, or security markets are sufficiently depressed in terms of prices, liquidity, and volatility. The objective of this paper is to examine the determinants of collateral spreads by testing the constrained-arbitrage theory. The findings are supportive.
Keywords: collateral spread, liquidity, unsecured rate, repo rate, general collateral, Eurex Repo
JEL Classification: G01, G12, G21
Suggested Citation: Suggested Citation