Haircut, Interest Rate, and Collateral Quality in the Tri-Party Repo Market: Evidence and Theory

67 Pages Posted: 9 Jan 2025

See all articles by Sangyup Choi

Sangyup Choi

Yonsei University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Inkee Jang

Hanyang University - School of Business

Kee-Youn Kang

University of Liverpool Management School

Hyunpyung Kim

Yonsei University

Abstract

Leveraging transaction-level data from the Korean tri-party repo market, we analyze how contract terms interact with collateral quality. Both haircuts and interest rates rise with collateral risk, consistent with existing research. However, conditioning on collateral quality, we find a trade-off: a 1% point increase in the interest rate is associated with a 1.3% point reduction in the haircut. The same interest rate increase corresponds to a smaller reduction in the haircut under heightened market uncertainty, indicating that insurance instruments become more crucial as default risk increases. We demonstrate that the interaction between information acquisition incentives and borrowers' opportunistic default risk explains the positive (negative) unconditional (conditional) relationship between haircuts and interest rates.

Keywords: Repo market, Collateralized debt, Haircut, Collateral quality, Costly Information acquisition, Uncertainty

Suggested Citation

Choi, Sangyup and Jang, Inkee and Kang, Kee-Youn and Kim, Hyunpyung, Haircut, Interest Rate, and Collateral Quality in the Tri-Party Repo Market: Evidence and Theory. Available at SSRN: https://ssrn.com/abstract=5090518 or http://dx.doi.org/10.2139/ssrn.5090518

Sangyup Choi (Contact Author)

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Inkee Jang

Hanyang University - School of Business ( email )

222, Wangsimni-ro
Seongdong-gu
Seoul
Korea
+82-2-2220-0114 (Phone)

HOME PAGE: http://www.inkeejang.com

Kee-Youn Kang

University of Liverpool Management School ( email )

Hyunpyung Kim

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
82
Abstract Views
419
Rank
642,840
PlumX Metrics