The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors

Posted: 9 Jul 2021

See all articles by Stefania D'Amico

Stefania D'Amico

Federal Reserve Bank of Chicago

Roger Fan

Federal Reserve Bank of Chicago

Yuriy Kitsul

affiliation not provided to SSRN

Multiple version iconThere are 4 versions of this paper

Date Written: November, 2013

Abstract

In the repo market, forward agreements are security-specific (i.e., there are no deliverable substitutes), which makes it an ideal place to measure the value of fluctuations in a security's available supply. In this study, we quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all the outstanding U.S. Treasury securities. Our results indicate the existence of an economically and statistically significant scarcity premium, especially for shorter-term securities. The estimated scarcity effect is quite persistent, seems to be reflected in the Treasury market prices, and could in part explain the flow-effects of the Fed's asset purchase programs. More generally, it provides additional evidence in favor of the scarcity channel of quantitative easing. These findings also suggest that, through the same mechanism, the Fed's reverse repo operations could help alleviate potential shortages of high-quality collateral.

JEL Classification: C23, G1, G12, G19

Suggested Citation

D'Amico, Stefania and Fan, Roger and Kitsul, Yuriy, The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors (November, 2013). FRB of Chicago Working Paper No. WP-2013-22, Available at SSRN: https://ssrn.com/abstract=3876986

Stefania D'Amico (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Roger Fan

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Yuriy Kitsul

affiliation not provided to SSRN

No Address Available

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