The Importance of Being Special: Repo Markets During the Crisis

74 Pages Posted: 18 Oct 2019

See all articles by Stefano Corradin

Stefano Corradin

European Central Bank (ECB)

Angela Maddaloni

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2019

Abstract

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

Corradin, Stefano and Maddaloni, Angela, The Importance of Being Special: Repo Markets During the Crisis (October 15, 2019). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3466197 or http://dx.doi.org/10.2139/ssrn.3466197

Stefano Corradin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Angela Maddaloni (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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