(In)efficient repo markets

74 Pages Posted: 8 Feb 2021 Last revised: 18 Aug 2022

See all articles by Tobias Dieler

Tobias Dieler

University of Bristol - Department of Finance and Accounting

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Norman Schuerhoff

Swiss Finance Institute - HEC Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: February 4, 2021

Abstract

Repo markets suffer from funding misallocations and funding runs. In a rollover risk model with collateral, we show how repo trading and clearing mechanisms can resolve these inefficiencies. In over-the-counter markets, non-anonymous trading prevents asset liquidations but causes runs on low-quality borrowers. In central-counterparty markets, anonymous trading provides insurance against small funding shocks but causes inefficient asset liquidations for intermediate funding shocks. The privately optimal market structure requires central clearing with a novel two-tiered guarantee fund to insure against illiquidity and insolvency. Our findings inform the policy debate on funding crises and explain empirical patterns of collateral premia.

Keywords: repo market, funding run, financial stability, asymmetric information, central clearing, novation, guarantee fund, collateral

JEL Classification: G01, G14, G21, G28

Suggested Citation

Dieler, Tobias and Mancini, Loriano and Schuerhoff, Norman, (In)efficient repo markets (February 4, 2021). Swiss Finance Institute Research Paper No. 21-10, Available at SSRN: https://ssrn.com/abstract=3779987 or http://dx.doi.org/10.2139/ssrn.3779987

Tobias Dieler

University of Bristol - Department of Finance and Accounting ( email )

Tyndalls Park Road 15-19
Bristol, BS8 1PY
United Kingdom

HOME PAGE: http://sites.google.com/site/tobiasdieler/

Loriano Mancini

USI Lugano - Institute of Finance ( email )

Via Giuseppe Buffi 6
6904 Lugano, CH-6904
Switzerland
+41 (0)91 912 46 47 (Fax)

HOME PAGE: http://www.people.usi.ch/mancil/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Norman Schuerhoff (Contact Author)

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens
Switzerland

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