(In)efficient repo markets

68 Pages Posted: 8 Feb 2021 Last revised: 9 Feb 2021

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 Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 4, 2021

Abstract

Repo markets trade off the efficient allocation of liquidity in the financial sector with resilience to funding shocks. The repo trading and clearing mechanisms are crucial determinants of the allocation-resilience tradeoff. The two common mechanisms, anonymous central-counterparty (CCP) and non-anonymous over-the-counter (OTC) markets, are inefficient and their welfare rankings depend on funding tightness. CCP (OTC) markets inefficiently liquidate high (low) quality assets for large (small) funding shocks. Two innovations to repo market design contribute to maximize welfare: a liquidity-contingent trading mechanism and a two-tiered guarantee fund.

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 Schürhoff, 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 Schürhoff (Contact Author)

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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