What Drives Repo Haircuts? Evidence from the UK Market

50 Pages Posted: 22 Aug 2019

See all articles by Christian Julliard

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Zijun Liu

Bank of England

Seyed Esmaeil Seyedan

Pacific Investment Management Company (PIMCO)

Karamfil Todorov

London School of Economics & Political Science, Department of Finance

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: January 30, 2019

Abstract

Using a regulatory transaction-level dataset of the UK repo market, we examine the determinants of haircuts. We find that transaction maturity and collateral quality is of a first order importance in determining haircuts. We also find that counterparties matter in determining haircuts. Hedge funds as borrowers receive a significantly higher haircut even after controlling for observable measures of counterparty risk. We find that larger borrowers with higher ratings receive lower haircuts, but this effect can be overshadowed by collateral quality. Bilateral relationships are also important: Banks charge higher haircuts when they transact with non-bank institutions; and some borrowers receive consistently lower haircuts when interacting with certain counterparties. We find evidence in favour of an adverse selection explanation of haircuts, but little evidence in support of lenders’ liquidity position or default probabilities affecting haircuts. Finally, we observe that banks with higher network centrality measures charge and pay lower haircuts.

Keywords: repurchase agreement, systemic risk, repo market, margin, haircut, network analysis

JEL Classification: G12, G21, G23, E43, E58

Suggested Citation

Julliard, Christian and Liu, Zijun and Seyedan, Seyed Esmaeil and Todorov, Karamfil and Yuan, Kathy Zhichao, What Drives Repo Haircuts? Evidence from the UK Market (January 30, 2019). Available at SSRN: https://ssrn.com/abstract=3374969 or http://dx.doi.org/10.2139/ssrn.3374969

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Zijun Liu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Seyed Esmaeil Seyedan

Pacific Investment Management Company (PIMCO) ( email )

United States

Karamfil Todorov (Contact Author)

London School of Economics & Political Science, Department of Finance ( email )

London
Great Britain

HOME PAGE: http://ktodorov.com

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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