A Dealer Illiquidity Risk Premium in the Money Markets

32 Pages Posted: 17 Jun 2019

See all articles by Christoph Becker

Christoph Becker

University of Applied Sciences Darmstadt

Date Written: June 5, 2019

Abstract

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

Becker, Christoph, A Dealer Illiquidity Risk Premium in the Money Markets (June 5, 2019). Available at SSRN: https://ssrn.com/abstract=3399176 or http://dx.doi.org/10.2139/ssrn.3399176

Christoph Becker (Contact Author)

University of Applied Sciences Darmstadt ( email )

Schöfferstrasse 3
Darmstadt, 64295
Germany

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