Repo Rates and the Collateral Spread: Evidence

48 Pages Posted: 19 Feb 2019 Last revised: 22 Feb 2019

See all articles by Kjell G. Nyborg

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Cornelia Rösler

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2019

Abstract

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

Nyborg, Kjell G. and Rösler, Cornelia, Repo Rates and the Collateral Spread: Evidence (February 15, 2019). Swiss Finance Institute Research Paper No. 19-05, Available at SSRN: https://ssrn.com/abstract=3335201 or http://dx.doi.org/10.2139/ssrn.3335201

Kjell G. Nyborg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Cornelia Rösler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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