A Dealer Illiquidity Risk Premium in the Money Markets
32 Pages Posted: 17 Jun 2019
Date Written: June 5, 2019
Safe and liquid assets like Treasuries are not a cash substitute. However, dealer banks may transform Treasuries into a money-like financial asset, i.e., a repurchase agreement collateralized with Treasuries. The ratio of Treasuries useable as repo collateral by dealer banks over demand for money-like financial assets by institutional investors is a statistically and economically significant determinant of spreads in both money and bond markets beyond conventional determinants. The ratio captures a risk premium for the illiquidity of the dealer system that is due to the time-varying market liquidity of repo collateral.
Keywords: Treasury supply, liquidity, financial stability, interest rates, banking
JEL Classification: G12, G2, E4
Suggested Citation: Suggested Citation