The Importance of Being Special: Repo Markets During the Crisis
74 Pages Posted: 18 Oct 2019
Date Written: October 15, 2019
We study how the Italian sovereign bond scarcity premia, specialness, in the repo market were affected by the European Central Bank (ECB)'s purchases during the euro area sovereign debt crisis. We propose and calibrate a search-based dynamic model with a central bank acting as a buy-and-hold investor. Consistent with model predictions, ECB purchases drive specialness of targeted securities in combination with short-selling. Special benchmark bonds entail a positive cash premium, but their market liquidity decreases when purchased by the ECB. Short-sellers were more likely to fail-to-deliver very special bonds, while holders of these bonds were less inclined to pledge them as collateral to the ECB liquidity operations.
Keywords: repo, specialness, central bank asset purchases, short-selling, market liquidity and credit risk
JEL Classification: E43, E51, G01, G12, G23
Suggested Citation: Suggested Citation